Contents 1.About commercial Banking 2.Role of commercial banks. 3.Types of loan granted by commercial banks 4.

Planning and Advice 5.Depository Functions 6.Difference of job nature between investment bank and commercial banking 6.1.Fundamental difference 6.1.1.Job nature of commercial banking 6.1.2.Job nature of investment banking 6.1.3.Prevailing trend of commercial and investment banking industry. 7.Structure of commercial banks 8.Types of commercial banks

9.Major assets and liabilities of commercial banks 10.Risk managed by commercial banks 11.Techniques management. of assets/liabilities

12.Investment management. 13.Electronic management. 11.Commercial banking overview 12.Bibliography/References Aim-

Objectives-

EXECUTIVE SUMMARY

About Commercial banking

A commercial bank is a financial institution which accepts deposits, makes business loans, and offers related services. Commercial banking is usually associated with business banking. Commercial banks offer a wide range of services including deposit accounts, such as checking, savings, and time deposit. Usually the commercial banks are supposed to deal with deposits and loans from corporations or large businesses while the normal banks deal with retail banking and provide financial services to common customers. Commercial banks also offer services to individuals, businesses, and not-forprofit organizations.

The term commercial bank is, therefore, used for a normal bank. A commercial bank is, however, different from investment bank because the latter limits itself primarily to the capital markets. Sometimes the banks divide their functions. The division of the bank that deals with deposits and loans from corporations and large business is called commercial banking. A commercial bank collects deposits from the general public and businesses in form of checkable deposits, savings deposits and fixed term or time deposits. It provides loans both to the general consumers and the business companies. It also buys corporate bonds and government bonds. While the deposits in the bank are its liabilities, the loans and bonds given to the customers are its assets.

The role of commercial banks

Commercial banks engages in the following activities:

processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means issuing bank drafts and bank cheques accepting money on term deposit lending money by overdraft, installment loan, or other means providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures safekeeping of documents and other items in safe deposit boxes sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a financial supermarket traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

Types of loans granted by commercial banks

Secured loans-A secured loan is one that is given when a borrower pledges some asset such as car, house etc as collateral. Unsecured loans -The banks also give unsecured loans. An unsecured loan is one which does not require a borrower to pledge any asset as collateral. Unsecured loans include overdrafts, corporate bonds and credit card loans.

Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial banks, however, are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing. Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers.

In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.

Planning and advice

Setting up a new business involves lots hard work and thinking. If you want to manufacture a product, you need to have a premises, plant, equipment, skilled operational staff, suppliers of raw material, sanctions from various government departments and much more. The same may apply for trading though at a different scale. No matter what you decide one thing is for sure and that is you would require finance to set the ball rolling. If you do not have that much cash in hand, you can borrow from a commercial bank. Commercial banks provide an array of financial services loans, checking, cash management, retirement planning, financial advice, security planning etc. To go forward with the above example, you may need to raise funds to finance your business. You can approach a commercial bank for a loan. The financial management experts of the bank will review you business plan and advise you on the best course of action. Most commercial banks provide business planning software and business structure guide to help you plan your business. The business planning software includes interactive templates for your business plan, cash flow forecast, profit

and loss forecast and a break-even point calculator. The software also provides help notes on how to complete the templates. Commercial banks also aim to provide financial guidelines to the customers, when they need most at the time of crisis period. Their latest technological tools can enable customers to access their business banking information with pace, ease and flexibility.

Personal finance planning: The commercial banks provide a wide array of some beneficial services, including deposits, checking, loans etc.

Wealth management: Commercial banks cover some specific services like investment planning, employee benefits planning, employee assistance programs, estate planning etc.

Commercial services: This commercial business banking services comprise of commercial banking, commercial loans, cash flow management, real estate planning etc.

Business start-up services: The financial experts will provide you all the essential guidance on many of the issues your new business - from defining business objectives and researching your market, to drawing up a business plan and dealing with tax and legal matters. They can help you plan your business structure and advice on marketing strategy, industry updates, legal issues etc.

Depository functions of commercial banks

Commercial banks run on public deposits. Some of the common deposits are:

Current Account or Demand Deposits

A current account is an unrestrained form of account. You can withdraw any amount by cheque any time from your current account without giving any notice to the bank. People open current accounts not only for safekeeping of their money but also for using them where cash transactions are not possible. The transactions are, therefore, carried out through cheques, drafts or electronic transfers. Banks do not offer any interest on this type of account as the deposits in these accounts are repayable on demand without any notice. These accounts are usually used by business class people.

Savings Account
People can use saving accounts to meet their day-to-day spending needs. Savings accounts are normally not very large as they are usually based on personal savings. There are some restrictions on withdrawals from this account. Depositors are allowed to use cheque books and drafts. A savings account carries a lower rate of interest.

Fixed Deposits
As the name suggests, fixed deposits are time bound deposits. You are allowed to decide the term of the deposit from various term options and the rates of interest payable on each type of term. You cannot withdraw money from your fixed deposit account till the date of the maturity of the deposit. The banks pay higher rates of interest on fixed deposit accounts. The longer the term the higher is the rate of interest. Commercial banks take particular interest in fixed deposits because these are their most reliable resource for funding loans to the

borrowers. This is because the bankers can lend out this money secure in the knowledge that the borrowers can not demand it back till the agreed period of time. They charge higher rates of interest on loans drawn from this source.

Loans and Advances

Banks make money by giving loans and advances to individuals and businesses. While the banks offer lower rates of interest on deposits, they charge higher rates of interest on loans. The interest rates on loans depend upon the purpose, term and the mode of repayment. Loans are sanctioned for specific period or term. There are short term, medium term and long term loans. Short-term loans are usually given for six months to one year. The borrower may withdraw the entire amount in one lump sum or in smaller amounts as and when he needs the amount. Banks charge higher rates of interest on short-term loans. Medium term loans are available for one to five years while long-term loans are offered for longer periods, usually over ten years.

Difference of job nature between investment bank and commercial bank

The aim of this report is to let readers how the fundamental differences between investment banks and commercial banks and different job nature of each.

To begin with, we will start first define the fundamental difference that differentiate an investment bank from a commercial bank. Then, we will illustrate job natures of the former and the latter. Finally, we will cite an example, Citigroup, to show the prevailing trend of commercial and investment banking industry.

Fundamental difference between investment bank and commercial bank

Commercial bank is a financial intermediary which accepts deposits from retail depositors while investment bank does not. Investment bank erects an entry barrier for investor by requiring the minimum capital amount for a prospective investor to open an account.

Job nature of commercial bank

Most commercial banks provide three main types of banking services: personal banking, business banking and corporate banking.

Personal banking
Personal banking services provide financial services individuals, but excluding individuals managed by Private Banking. to

The following are the range of services which commercial banks provide to personal customers:

a) Foreign currency exchange services

Commercial banks not only provide foreign currency exchange services, they also offer deposit accounts on foreign currencies.

b) Account and deposit services

Commercial banks offer different types of deposit accounts for their clients, such as current accounts, savings accounts, time deposits and foreign currency deposits.

c) Card services
Commercial banks offer a wide range of credit cards to their customers.

d) Personal credit services

Customers can borrow personal Instalment Loan, which allows the customer to repay the loan in fixed monthly instalments or secured or unsecured overdraft from commercial banks.

e) Mortgage services
Commercial banks provide mortgage advice services and offer different types of mortgage loans to their customers.

f) Insurance services
They usually act as insurance brokers. They also provide financial planning services to their customers Commercial banks provide insurance services to their clients and

g) Investment services
Commercial banks offer investment services to their customers. Clients can approach them for investment advice. The types of investment services provided by commercial banks include: portfolio management, unit trust management, financial instruments administration, commodities arrangement and custodian services.

h) Payment services
Customers can use the auto-pay system through the internet banking service offered by commercial banks to pay monthly

expenses. Commercial overseas transfer.

banks

can

assist

their

clients

in

Business Banking

Commercial banks offer a wide range of services to business clients. They include:

Trade services
Commercial banks offer a wide variety of trade finance products and services to meet the business development needs of business clients in trade payment and trade services. They include:

Documentary credit
Exporters and importers can settle their trade debts via documentary credits. A documentary credit is a bank's undertaking to pay funds to the exporter within a prescribed time limit and against stipulated documents covering the goods shipped. The importer is only required to pay exporters who have fulfilled the necessary credit requirements while the

exporters can look to the issuing bank for payment, instead of relying on the importer's ability or willingness to pay.

Loan against import

When goods are imported, most buyers need time to turn these goods into manufactured and saleable items. A Loan against Import provides the financing to enable a company to pay for the imported goods and covers the period up to the point of sale. By setting up a LAI as payment for the Documentary Credit, goods are released to the company under trust receipts for the manufacturing period. A trust receipt basically means that while the company can use the goods, they still belong to the Bank until the company settle the loan.

Factoring
Factoring service is a special type of bank financing, in that the bank not only take over the account receivables of their clients but provide other additional services. The bank acts as a factor and offers the following services:

a) Management of clients accounts: taking over of account receivables, sending invoices, making collections from debtors and keeping up the cash position of the clients operations.

b) Servicing of the cash flow of the clients business: the factor will normally provide its clients up to a certain percentage, say 80% of the value of the sales invoices and the remainder will be financed via the factoring services.

c) Insurance services for the protection of bad and doubtful debts.

Other services include: -documentary collections against payment or acceptance -shipping guarantee -marine cargo insurance -invoice discounting

Loans services
Commercial banks offer different types of short term or long term business loans to their clients. These include:

Overdraft
An overdraft is a revolving credit line with flexible principal repayments. It provides flexibility as cash can be drawn without the need for special documentation and allows clients to avoid

returned cheques due to an insufficient Overdraft can be secured or unsecured.

credit balance.

Leasing and hire purchase

Leasing is a financial arrangement in which the commercial bank buys equipments and leases them at a rental for an agreed period of time. With hire purchase, the asset is purchased by the bank and hired to the customer. Ownership is passed on to the customer when the last instalment has been paid

Insurance and Mandatory Provident Fund schemes

Commercial banks offer a wide range of insurance and employee benefit products for clients, their business and their staff. They also provide a choice of comprehensive Mandatory Provident Fund schemes to businesses in any industry and of all sizes.

Payment services

Commercial banks offer various payment methods to their customers. This includes: Real-time inter-bank payment is an electronic payment method on real-time basis. Telegraphic Transfer can be used to remit money overseas . Demand draft is a secured cheque that can only be credited to a specific payee's account, and a customer can only be reimbursed under indemnity if the cheque is lost or stolen.

Corporate banking

Corporate banking services are aimed at large corporations. The following are the types of services commercial banks provide:

Custody and clearing services

Commercial banks take the role of safekeeping of clients assets, providing custody, settlement and clearing services to custodians, fund managers, brokers and dealers.

Payment and cash management services

Commercial banks offer a range of services covering account, liquidity, and transaction management

Treasury management services

Commercial banks assist clients in collections, disbursements, information flow, and investments

Institutional fund services

Commercial banks provide trust, custody and fund administration services to a wide range of mutual funds, unit trusts, pension funds, hedge funds, retirement schemes and insurance companies. They also offer fund administration services in that they act as the as the administrator of funds' assets by maintaining books and records of the funds, arranging settlement of fund transactions, calculating net asset value and ensuring that the fund manager complies with the funds' investment guidelines.

Securities lending and borrowing

Commercial banks assist client in generating returns on assets that would otherwise remain idle. Clients can retain full beneficial ownership of loaned securities throughout the term of a loan. Clients can also recall the loan at any time if they wish to sell the securities, exercise voting rights or participate

in corporate actions. Investors also use income from securities lending to offset their custody costs. They assist clients in arbitrage and short selling.

Issuer services
Commercial banks act as professional trustee for debt issues. They also act as an agent and perform the role in effecting and expediting the movement of securities and funds between the issuers and investors, as well as providing other associated services. They also service different kinds of structured products, such as asset-backed commercial paper programmes, mortgage-backed securities and equity linked notes

Job Nature Of Investment Banking

Investment bank, in general, provides 4 types of services being investment banking, securities, institutional investment management, and research. And each service is provided by a separate department.

Investment banking
Investment banking department is responsible for underwriting securities such as fixed income securities and equities and selling them by initial public offering and private placement. It

also provides corporate advisory services as well as securities underwriting.

Securities underwriting Debt Capital Markets

Investment bank is responsible for soliciting, structuring and executing investment grade debt and related product businesses, including new issues of both public and private debt. Other product areas include liability management, assetbacked finance, project finance, equipment finance, foreign bonds, Eurobond and global bonds.

Leveraged Finance Capital Markets Services Investment bank originates, structures and executes public and private placements of high yield debt securities for noninvestment grade domestic and emerging market corporations and sovereign entities. Moreover, it also structures and underwrites floating-rate syndicated loans, primarily for non-

investment grade borrowers in North America, Europe and the emerging markets

Equity Capital Markets Services

Investment bank undertakes the origination, structuring, marketing and pricing of public offerings and private placements of equity and equity-related securities.

Corporate advisory services Mergers & Acquisitions

The Mergers & Acquisitions Department (M&A) is responsible for structuring and executing a wide range of complex domestic and international transactions including acquisitions, divestitures, mergers, joint ventures, corporate restructurings, shareholder relations, recapitalizations, spin-offs, exchange offers, leveraged buyouts and defences against unsolicited takeover attempts. Merger and acquisitions department also establishes and maintains strategic dialogues with existing and potential clients, provides financial advice and solutions to strategic problems and assists clients in achieving short- and long-term strategic objectives.

Securitized Products
The Securitized Products department includes the finance, capital markets, trading and research activities of our commercial mortgage financing business within one group. The department provides expedient and attractively priced fixed and floating rate mortgage financing through its Large Loan and Conduit origination programs to borrowers on a broad range of commercial property types worldwide.

As an underwriter, the department provides institutional users of commercial mortgage-backed securities. Securitized products department activities include commercial mortgage backed securities structuring and underwriting, direct/conduit mortgage origination, acquisition/interim principal financing,

mortgage portfolio acquisition, and CMBS and whole loan sales and trading.

Securities
Investment bank participates in trading of fixed income securities, foreign exchange, derivatives and equity.

Fixed

Income

Investment bank plays an integral role in trading fixed income securities in floor-based exchanges and 24-hour OTC market where billions of dollars in debt securities change hands every day. Investment bank also deals in interest rate, currency swaps and bond futures and options.

Foreign Exchange
Investment bank is also one of the major participants of 24hour service for spot, forward, option and futures trades in both major and emerging market currencies.

Commodities
In addition to financial derivatives, investment bank also participates in commodities trading for physical commodities and related derivatives for oil, natural gas, electricity, metals and precious metals.

Prime brokerage
Investment bank acts as institutional investors prime broker as well as trading securities.

Prime brokerage services include securities lending and borrowing, custody and clearance. Prime brokerage clients include institutional investors such as insurance company and hedge fund.

As far as custody and clearance are concerned, insurance company, fund and hedge manager have to rely on investment bank as custodian for their securities investment. Whenever they buy and sell securities, investment bank will act as their prime broker and execute their orders through executing broker. Any function of prime broker is to ensure orders are executed stealthily lest investment strategies should be followed by other investors. Orders are executed by prime broker. As a result, fund managers activities can remain stealth.

In addition to custody and clearing, investment bank also arranges securities lending and borrowing for its clients such as insurance companies and hedge funds.

Institutional investment management

Institutional investment management is also called asset management. The work of it is to allocate assets such as cash and securities in order to minimize risk or maximize investment returns by setting up various funds. There are a variety of funds offered by investment banks which mainly target to institutional investors. Such as fixed income, equity, and hedge fund investing in the US, European countries and emerging market such as Asian countries and East-European countries.

Research
Research department is the most controversial department of investment bank. In early 90s investment bank analyst was considered as nobody. However, tech bubble and bullish market in late 90s made analyst an attention grabber. Analyst participated in roadshow of Stock IPO, describing prospect of company. Since the start of bearish market in early 2000, analyst has been accused of inflating stock rating and earning prospect of listing companies, bringing in huge losses for investors.

Research area can be categorized in equity, fixed income securities and derivatives.

Research team will look at economic, market, industry and company data and issue research reports advising clients investment strategies in different markets and securities such as fixed income securities including investment grade, noninvestment grade debt, asset-backed, commercial mortgage backed securities, equities and derivatives. In general, research

department advises particular securities.

investors

to

hold,

buy

and

reduce

Prevailing trend of commercial and investment banking industry

We will illustrate recent trend commercial banking investment banking trend by a case study, Citigroup.

and

Citigroup is the large financial group in the world in terms of market capitalization. Solomon Smith Barney, ex-investment banking division of Citigroup not longer existed on April 30, 2003. Investment banking activities are now under the name of Citigroup. A new division, Smith Barney, is solely responsible for independent research and securities trading for its private clients. Now Citigroups business comprises commercial banking and investment banking.

Wealth management

Bear equity market started in 2000 is one of the longest bear market in our history. Securities underwriting is no longer the major revenue source for investment bank. Recently investment banks have had more presence in wealth management or the so-called the private banking sector.

Conclusion
As competition between banks is stiffer in this century, merger of investment banks and commercial bank will be frequent. To conclude, distinction between investment bank and commercial bank is becoming blurred.

Structure

of

commercial

banks

The commercial banking structure in India consists of: Scheduled Unscheduled Banks Commercial Banks

Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934.

RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some cooperative banks are scheduled commercial banks albeit not all cooperative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI.

For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

This 1. 2. 3.

sub

sector

can

broadly Public

be

classified sector

into: sector banks

Private Foreign

Public sector banks have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of: State Other Bank of India (SBI)and its Subsidiaries Banks

Nationalized

Types of commercial banking

Commercial banks are banks that are in classic business of acce deposits and making loans. As against merchant banking where pr responsibility is to help people find money. Thus they help compan raise capital through issue of equity or bonds etc

In few countries like US and Japan commercial banking is separate investment banking by law. Few countries like UK we find commercial banks carry out investment activities through a subsi Only in countries like Germany where we find Universal Banks Deutsche that is both a commercial and I-bank. The legislation that banks and investment banks separateGlass Steagallwas s down by Congress in 1999. So banks are now moving into highly v