LUCKNOW UNIVERSITY

BANKING OPERATIONS

TOPIC- OPERATIONAL ASPECT OF

COMMERCIAL BANKS IN INDIA, Bank
guarantee

SUBMITTED TO, SUBMITTED BY,

MR. PRADEEP ABHISHEK SINGH
MBA 5 YEARS
6th SEM
ROLL NO.-
180010760001
 OPERATIONAL ASPECT OF
COMMERCIAL BANKS IN INDIA
Economic growth of any country depends on the savings and investment made by
its people. This growth is reflected through rise in per capita income. Economic
growth is associated with so many factors like technology, socio-cultural factors,
psychological factors and attitudes of the people. Economic growth implies a long
term rise in per capita national output and whatever the pattern of growth, the basic
conditions determining the rate of growth are three, viz., Effort, Capital and
knowledge. Capital is an essential input for production and it is a means of
development.

The capital formation involves three distinct interdependent activities viz., savings,
finance and investment. Financial System is an organized mechanism which
performs the activities of savings, finance and investment in a systematic way.
They are important organs of the Indian financial system whose role is
commendable in capital formation. Financial Institutions perform the
intermediation between savers and investors by arranging excess funds from the
savers to the investors.

Commercial Banks are those profit making institutions which accept deposits from
general public and gives money (loan) to individuals like household, entrepreneurs,
businessmen etc. The prime objective of these banks is to earn profit in the form of
interest, commission etc. The operations of all these commercial banks are
regulated by the Reserve Bank of India, which is the central bank and supreme
financial authority in India.

The main source of income of a commercial bank is the difference between these
two rates which they charge to borrowers and pay to depositors. Some commercial
banks in India are – ICICI Bank, State Bank of India, Axis Bank, and HDFC Bank,
Punjab national bank, Central bank of India.
  CLASSIFICATION OF FINANCIAL INSTITUTIONS-

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Scheduled Banks:- Banks which have been included in the Second Schedule of RBI Act 1934.
They are categorized as follows:

Public Sector Banks:- The term “Public Sector Banks” refers to a situation where the majority
equity stake in the banks is held by the government. The Indian Government keeps default
holdings of a minimum 51% shareholding, but management control is only with the Central
Government, thereby classifying them as Public Sector Banks.

Public Sector Banks:- It include the State Bank of India and its Associates, Nationalized Banks
(including Industrial Development Bank of India Ltd (IDBI) since December 2004), and
Regional Rural Banks. These are those banks in which majority of stake is held by the
government. Ex- SBI, PNB, Syndicate Bank, Union Bank of India etc.

Private Sector Banks:- They are the banks in which individuals and corporations are the
majority shareholders. In India, banks were nationalized in two phases, in 1969 and 1980. In
1993, the Reserve Bank of India (RBI), the regulating body for all the country’s banking
organizations, allowed many new commercial banks in India to start operations. Some of the
major commercial banks in India that were given licenses are ICICI Bank, HDFC Bank, Axis
Bank, Yes Bank, and Kotak Mahindra Bank. Private sector banks are recognized as the banks for
the new generation, providing innovative products, better IT support systems, and competitive
pricing for their products. As of the end of March 2017, there are 21 private sector banks in
India. Besides these, four local areas banks are also categorized as private banks. These are those
banks in which majority of stake is held by private individuals i.e. ICICI Bank, IDBI Bank,
HDFC Bank, AXIS Bank etc.
Foreign Banks:- They are the final category of banks that serve as an important segment of the
commercial banking sector. They are headquartered outside India and they operate from their
wholly-owned subsidiaries or branches in the country.  These are the banks with Head office
outside the country in which they are located. Ex- Citi Bank, Standard Chartered Bank, Bank of
Tokyo Ltd. etc.

Non scheduled commercial Banks:- Those banks which are not added in the Second Schedule
of RBI Act 1934.

 OPERATIONS IN COMMERCIAL BANKS-

The most important supporting activities performed by banking institutions. The
key operational activities are listed below:

1. Acceptance of Deposits:

Deposits are the basis of the loan operations since banks are both
borrowers and lenders of money. As borrowers they pay interest and as lenders they grant loans
and get interest. These deposits are generally taken through current account, savings account and
fixed deposits. Current account deposits can be withdrawn to the extent of the balance at any
time without any prior notice. Savings accounts are for encouraging savings by individuals.
Banks pay rate of interest as decided by central banks on the deposits. Withdrawal from these
accounts has some restrictions in relation to the amount as well as number of times in a given
period. Fixed accounts are time deposits with higher rate of interest as compared to the savings
accounts. A premature withdrawal is permissible with a percentage of interest being forfeited.

2. Lending of Funds:

Second major activity of banks is to provide loans and advances

out of the money received through deposits. These advances can be made in the form of
overdrafts, cash credits, discounting trade bills, term loans, consumer credits and other
miscellaneous advances. The funds lent out by banks contribute a great deal to trade, industry,
transport and other business activities. 
 3. Clearing of Cheques:

Cheques books are issued to the holders of accounts in banks.

Cheque is a negotiable instrument and most convenient and widely used credit instrument.
Cheques are used to facilitate trade and business by endorsements and withdrawal of deposits.
Banks render a very important service to their customers by collecting their cheques drawn on
other banks. It is the most convenient and an inexpensive medium of exchange that does not
require actual movement of cash from one transacting party to another. Mainly, two types of
cheques are often used bearer and crossed. Bearer cheques can be encashed immediately at bank
counters whereas crossed cheques can only be deposited in the payees account.  

4. Remittance of Funds:

Banks also facilitate fund transfer from one place to

another, leveraging the vast network of branches that are interconnected to each other. Many
banking instruments are in usage for enabling transfer of funds from one account to another like
bank drafts, pay orders, wire or mail transfers. Bank earns nominal commission by way of bank
charges on some of the transfers. The bank issues a draft for the amount at its own branch which
can be credited to another account which might be with different branch or different bank. Banks
collect the amount on behalf of the depositor which is known as clearing process. 

5. Lockers & Safe Deposits:

Bank safe deposit lockers are a good option for safeguarding

valuables and important documents. Each locker is operated by combination of two sets of keys,
one for the customer, and the other with the bank. The locker can only be operated if both the
keys are used. Banks charge nominal fees to provide the locker facility.  
 6. Bill Payment Services:

Banks also provide services related to bill payments, payment

of insurance premium, collection of dividend etc. Recurring payments can be automated for
payment using the facilities extended by modern banks. Account holders can directly pay from
their account or using credit/debit cards for their electricity, gas, landline and mobile phone
billers and many more.

7. Online Banking:

The growth of Internet and e-commerce has transformed

banking industry and customers are fast moving from branch banking to virtual banking. Users
with internet on PC or Mobile can get connected to the banks website and avail a variety of
banking services and functions. These services lower the transaction costs and add to the ease
and speed of the transaction flow.

8. Credit & Debit Cards:

Credit cards issued by banks are another form of lending, and they
are not only good business for the bank, they help the economy. Offering Credit Card is a
profitable form of lending for banks that has greatly expanded in the last few years. Banks
compete fiercely for this business and offer varying forms and types of credit-card accounts.
Many banks change or negotiate rates with consumers, and special low-rate promotions and
various types of discounts are being offered as an incentive to use card and do purchasing.
People buy things with credit, and keep merchandise moving and manufacturing producing at a
more rapid rate than if transactions had to take place in cash. Although there is risk in the unwise
use of credit cards by consumers, the judicious use of credit stimulates the economy.
 9. Overseas Banking Services:

Banks offer financial services, such as payment accounts and lending

opportunities, to foreign clients. These foreign clients can be individuals and companies, though
every international bank has its own policies, most of them offer various products and services to
cater to the needs of their international clientele.
Banking products for this sector includes offshore banking, savings, investments, and mortgages
clubbed with a broad range of FX services including forward and spot transactions.

10. Fulfillment of Social Objectives:

In the recent past there has been a concerted effort by the

policy makers in reorienting banking towards achieving social objectives. There has been a
major shift in the banking policy to support more and more financial inclusion. Some trends in
the recent past has been a shift from urban orientation to rural orientation by opening more rural
branches, from class banking to mass banking by allowing zero balance account for poorer
sections of society using innovative practices.

BANK GUARENTEE
A bank guarantee is a type of guarantee from a lending institution. The bank guarantee means a
lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor
fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to
acquire goods, buy equipment or draw down a loan.

 Understanding Bank Guarantees:-

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on
a loan. The guarantee lets a company buy what it otherwise could not, helping business growth
and promoting entrepreneurial activity.

There are different kinds of bank guarantees, including direct and indirect guarantees. Banks
typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary.
Direct guarantees apply when the bank’s security does not rely on the existence, validity, and
enforceability of the main obligation.

Individuals often choose direct guarantees for international and cross-border transactions, which
can be more easily adapted to foreign legal systems and practices since they don't have form
requirements.

Indirect guarantees occur most often in the export business, especially when government
agencies or public entities are the beneficiaries of the guarantee. Many countries do not accept
foreign banks and guarantors because of legal issues or other form requirements. With an
indirect guarantee, one uses a second bank, typically a foreign bank with a head office in the
beneficiary’s country of domicile.

 Advantages and Disadvantages of Bank Guarantees:-

The advantages are as follows:

 Bank guarantee reduces the financial risk involved in the business transaction.
 Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit
basis.
 Banks generally charge low fees for guarantees, which is beneficial to even small-scale
business.
 When banks analyze and certify the financial stability of the business, its credibility
increases and this, in turn, increase business opportunities.
 Mostly, the guarantee requires fewer documents and is processed quickly by the banks (if
all the documents are submitted).

The disadvantages are as follows:

 Sometimes, the banks are so rigid in assessing the financial position of the business. This
makes the process complicated and time-consuming.
 With the strict assessment of banks, it is very difficult to obtain a bank guarantee by loss-
making entities.
 For certain guarantees involving high-value or high-risk transactions, banks will require
collateral security to process the guarantee.

 Types of Bank Guarantee:-

There are two major types of bank guarantee used in businesses, which are as follows:

 Financial Guarantee – These guarantees are generally issued in lieu of security deposits.
Some contracts may require a financial commitment from the buyer such as a security
deposit. In such cases, instead of depositing the money, the buyer can provide the seller
with a financial bank guarantee using which the seller can be compensated in case of any
loss.
  Performance Guarantee – These guarantees are issued for the performance of a contract
or an obligation. In case, there is a default in the performance, non-performance or short
performance of a contract, the beneficiary’s loss will be made good by the bank. For
example, A enters into a contract with B for completion of a certain project and the
contract is supported by a bank guarantee. If A does not complete the project on time and
does not compensate B for the loss, B can claim the loss from the bank with the bank
guarantee provided.

 Bank Guarantee Eligibility and Process:-

Any person who has a good financial record is eligible to apply for Bank Guarantee. Bank
Guarantee can be applied by a business in his bank or any other bank offering such services.
Before approving the Bank Guarantee, the bank will analyze the previous banking history,
creditworthiness, liquidity, CIBIL rating of the applicant. The bank would also examine the Bank
Guarantee period, value, beneficiary details, and currency as required for the approval. In certain
cases, banks will require security to be provided by the applicant to cover the Bank Guarantee
value. Once the banking officials are satisfied with all the criteria, they will provide the
necessary approvals required for the Bank Guarantee processing.