Commercial banks

Commercial banks
• Commercial banks are commercial concerns who collect money
from those who have it to spare or who are saving in out of their
income and lend to those who require it. i.e commercial bank is an
organization that accepts deposits for the purpose of lending.

• According to The Banking Companies (Regulation) Act of

India,1949- “The accepting of deposits for the purpose of lending
or investment, from the public, repayable on demand or otherwise,
and withdrawable by cheque, draft and otherwise”.

• ‘ The one who in the ordinary course of his business honours

cheques drawn upon by persons from and for whom he receives
money on current account”– ( chequable nature of banks) -- HL Hart
 Commercial banks
• “ Nobody can be a banker who does not i) take deposits, ii)
take current accounts, iii) issue and pay cheques, iv)collect
cheques- crossed and uncrossed for its customers”. --- John
paget
• Prof Sayers defines Bank as “ an institution whose debts
• ( deposits) are widely accepted in settlement of other
people’s to each other”
• Also defined banking as “ Ordinary banking business
consists of changing cash for bank deposits and bank
deposits for cash; transferring bank deposits from one
person or corporation to another, giving bank deposits in
exchange for bills of exchange, government bonds, are
secured promises of business to repay and so forth”
 functions
• Primary functions
• Modern functions
• Agency function or Services
• General utility services or functions
 Primary functions
• 1.Accepting Deposits –
• Demand deposits: Refer to kind of deposits that can be easily withdrawn
by individuals without any prior notice to the bank.
• (2) Time Deposits: Refer to deposits that are for certain period of time.
 Primary functions
• 2.Lending or advancing loans
• Term Loans
• Overdraft
• Cash credit
• Discounting of Bills
 Primary functions

• Types of loans
• On the basis of Security:
• On the basis of Repayment:
• On the basis of Purpose:
 Agency function or Services
• Collection and payment of credit and other
instruments
• Sale and purchase of stock securities
• Administration of Wills and trusteeship
• Remittance of funds-
• Representation and correspondence
• Bullion trading
 General utility services or functions
• Receiving of valuables for safe custody- locker system
• Acting as a referee
• Issuing letters of credit
• Acting as underwriters
• Acting as information banks
• Issuing of travellers cheques and credit cards
• Issuing of gift cheques
• Dealing in foreign exchange.
• Merchant banking services
 Modern functions
1. Automatic teller machines cum debit cards
2. Credit cards
3. Mail transfer and telegraphic transfer
4. Tele banking
5. Internet banking
6. Round the clock banking
 ROLE OF COMMERCIAL BANKS IN
ECONOMIC DEVELOPMENT
1. Helpful in mobilisation of savings
2. Role in implementation of monetary policy
3. Directing funds into desired channels
4. Implementation of the policies of the govt
5. Channelizing savings into productive channels
6. Extension of financial services to rural areas
7. Making credit to weaker sections of society.
Reserve bank role and functions
 Objectives
• Maintain monetary and financial stability
• Stable payment system
• Credit allocation based on national economic
priorities and social concerns
• Regulate the overall volume of money and
credit
Role of RBI
 Promotional functions
• Promotion of commercial banking
• Promotion of Co- operative banking
• Promotion of Agricultural and rural credit
• Promotion of Industrial Finance
• Promotion of finance for exports-
 Prohibitory functions
• Reserve bank can neither participate nor provide any
direct financial assistance to any industry, trade and
commerce .
• Cannot purchase its own shares
• Cannot purchase shares of any commercial or
industrial undertaking and any other banking
company.
• Cannot purchase immovable property except for the
establishment of its offices
• Cannot give interest on deposits held by it
• Cannot give loans on security of shares and
immovable property
• Cannot draw or accept bills not payable on demand
•REQUIREMENTS TO BE
CALLED A BANK
• Se5(b)of BRA” Banking means accepting for
the purpose of lending or investment of
deposits of money received from the public ,
repayable on demand or othewise and
withdrawable by cheque or draft,order or
otherwise.
 Essentials to satisfy
• Acceptance of deposits for the purpose
of lending and investment

• The deposit should be accepted from

the public( co-opves, nidhis not
considered)

• Acceptance of deposit should be in the

form of cash.
•Deposit products
 Deposit products
• Demand
• Time
 Demand
• If the funds deposited can be withdrawn by
the customer at any time without any
advanced notice to banks--- demand
deposits
• Types of Demand deposits
• Current Account
• Saving Accounts
 Differences b/w current and savings
Savings
objective of a Savings Bank Account is
to enable the customer save his / her
liquid assets and also earn money
low transactions
Low interest
have no overdraft facility,
a minimum balance
Current
to provide flexible payment methods to
the business people and entities.
High transactions
don’t earn interests
The money can be borrowed for short
term and to be paid back with interest
no minimum balance requirements
 CASA Ratio
• refers to Current Account Saving Account
Deposits to total deposits
• The Bank is High CASA ratio (CASA deposits as
% of total deposits) are in a more comfortable
position than the Banks with low CASA ratios ,
 Time
• money is deposited with a “tenure”
• On the basis of their nature, time deposits
may be of three types as follows:
• Fixed deposits
• Re-investment deposits:
• Recurring deposits
 NRI Accounts
• A Non-Resident Indian is often faced with the
situation of maintaining a Rupee account in
India. Primarily there are two reasons for
opening such account:
• NRI wants to repatriate overseas earned money
back to India and/or
• NRI wants to keep India based earnings in India.
• NRI has the option of opening
• a Non Resident External (NRE) account
• a Non Resident Ordinary Rupee (NRO) account.
• Foreign Currency Non-Resident Account
Differences between demand & Time
Demand
Payable on demand
Low interest or no interest
It includes current, savings
Int is paid on half yearly basis in
savings
Time
Repaid after expiry of deposit
period
High int rates which vary
according to period
Deposits from 7 days to 120
months period with or without
reinvt.plans
Int is paid on quarterly rests and
cumulative every quarter.
•Loan products
• Loan is a debt
provided by an
entity to another
needy people or
entity at an interest
rate for a specific
period time.
• largest single source of bank income depends
on the amount of its loans.
• Loans and deposits complement each other,
as the amount of loans a bank could extend
will depend largely on its ability to attract and
retain large deposits.
• The earning capacity of a bank will be
enhanced when it has a large available
loanable fund.
 Types of loans

• more money
withdraws than
deposit in account.
• It is one type of
advance made by
banks to its
borrowers.
• banks provide
different loans for
building a house is
known as housing
loans.
• Intended to meet
any kind of personal
expenses.
• Vehicle Loans
• Term loans –
• Bill Discounting
• Letter of credit
 Education loan

• provided to students
who want to pursue
higher education in
resident country or
abroad.
 Gold Loan

• Gold loan is
imparted only on
providing gold
 Agricultural loans

• Purchase of farm
machinery, bullocks,
sheep etc
• Poultry, dairy
development
• Horticulture
• Plantation
• Animal husbandry
• Fisheries
 Loan against Insurance Policy

• Any individual having

an insurance policy
can take loan against
it from the insurance
company.
Loan against PPF Loan
• Fund based lending
versus
• Non- fund based lending
 Fund based lending versus Non- fund
based lending
• Fund based lending results in physical outflow of funds
(cash ) from bank to borrower. The Fund based lending
is direct form of loans on which actual cash is given to
the borrower by the bank. Such loan is backed by
primary and / or a collateral security.

• In Non-fund based lending, bank does not make any

funds outlay but only gives assurance. The “letter of
credit” and “bank guarantees” fall into the category of
non-funding loans.
• In banking language, the non-funding advances are
called Contingent Liability of the banks.
Fund based lending for individuals

• Credit card
• Personal loans
• ST & LT loans etc for working capital
finance and project finance
• Housing loans etc
Non- Fund based lending for Business
• Letter of credit
• Bank guarantee
 Principles of lending

Profita
Safety liquidity purpose
bility

security risk
Principles
of lending
 off balance Sheet Activities

• 1. full risk ( credit substitutes, L/C ,

money guarantees
• 2. Medium risk( not direct credit
substitutes)-- bid bonds, L/C,
indemnities and warranties
• 3 low risk– reverse repos. Currency
swaps, options, futures etc.
 off balance Sheet Activities
• 1.Sale and repurchase agreement and asset sales with recourse
• 2.Note issuance facilities and revolving under writing facilities
• 3.Aggregate outstanding foreign exchange contacts
• 4.Transactions related to contingent items( performance bonds,
bid bonds, warranties and stand by L/C
• 5.Short term self liquidating trade related contingencies
• 6.Direct credit substitutes and acceptances
• 7.Take – out finance in the books of taking over institution
– Unconditional take-out finance
– conditional take-out finance
– Non funded exposures to commercial real estate.
• 8.Guarantees issued on behalf of stock brokers and market traders.
• 9.Commitment to provide liquidity facility for securitisation of
standard asset transactions
• 10.Foreign exchange open position
• 11.Open position in gold
• 12. forward rate agreement
• BANCASSURANCE
 BANCASSURANCE
• It is an arrangement of banks to act
as agents and distribute insurance
products developed by insurance
companies.
 BANCASSURANCE
• Various Models

• . (a) Strategic Alliance Model

• (b) Full Integration Model
• (c) Mixed Models
 BANCASSURANCE
• Joint venture model where an insurance com
and bank share the equity capital of their joint
venture subject to local govt. regulations
• Merger between a bank and insurer
• Build or buy own insurance operation.
 Advantages of Bankassurance
• (i) Pressure on banks' profit margins.
• (ii) A desire to provide one-stop customer service. ne roof.
• (iii) Opportunities for sophisticated product offerings.
• (iv) Opportunities for greater customer lifecycle
management.
• (v) Diversify and grow revenue base from existing
relationships.
• (vi) Diversify risks by tapping another area of profitability.
• (vii) The realisation that insurance is a necessary consumer
need.
• Vii) Bank aims to increase percentage of non-interest fee
income
• (ix) Cost effective use of premises
 Bankassurance
Insurance co Bank
Birla sun life insurance co AB, Bank of Rajasthan,development credit bank

HDFC std Life Insu co.ltd Canara bank, lakshmi vilas bank, American
express bank and ABN AMRO Bank

ICICI Prudential Life insurance ICICI bank, Bank of Inda, Citi Bank, Allahabad
bank, Federal bank, South Indian bank

LIC of India Corporation bank, IOB, Centurion bank, vijaya

bank, oriental bank of commerce

Met life India insurance Karnataka bank, Dhanalakshmi bank, J & K

SBI Lifa insurnce State bank of India

 bankassurance
Bajaj Allianz insurance Karur vysya bank and lord Krishna bank
National insurance co City union bankl
Royal sundaram general insurance co std chartered bank, ABN AMRO Bank, Citi
bank
United India Insurance co south Indian bank/.
 Types of charges
• Assignment- transfer of right
• Lien- right of banker to retain the possession of goods until the due is paid
• Set-off– merging of a claim of one person with another in a counter
claim– i.e combining accounts of debtor and creditor

• Hypothecation– charge on movable property created by

borrower in favour of a secured creditor without delivery of movable
property to creditor

• Pledge--- bailment of goods for the purpose of providing security for

payment of debt

• Mortgage– transfer of interest in immovable

property to secure an advanced loan.
 Types of securities-
• Immovable security –
• movable security –
• Debts-
• While taking any security banker has to
ensure that---
• They are saleable
• value is ascertainable at any time
• Value is not subject to heavy fluctuations
• Easily transferable.
 Types of securities
• L&B– court or DRT, primary or secondary, title, documents, valuation, advices, leasehold property
• Goods– loan, key cash cr, (ple)open cash cr(hy), storage, valaution, margin, inspection and audit
• gold ornaments– mkt value, purity, int rate, repayment period, default, appraiser, percentage of
amount
• Advances against LIC policies– free from restrictions, surrender value, force, premium, admitted,
original,

• Advances against shares- recognised SE, no pvt, demat, fully

paid, 30% margin 50 and 25%
• Loan against book debts– old, disputed, integrity, hypothecation, factoring, forfeiting, OD, verification
• Loan against term deposits – 90%, 1 or 2% above, repayment, pledge
• vehicles,
• furniture,
• machineries
 Basic accounting for Banking
• requirements of banking companies for
accounts:
1. preparation of financial
statements(sec29)
• 2. Audit(sec30)
• Submission of accounts (sec31&32)
• Publication of accounts( rule 15 of BRA
1949)
 Basic accounting for Banking
• Significant features of accounting system
of banks:
• Mercantile system
• Recording, classifying and summarising the
transactions’
• Less emphasis on books of prime entry
• Follows the procedure of voucher posting
(Slip System)under which the vouchers
straightaway posted to individual accounts
in the subsidiary ledgers.
 Slip system
• Under this entries in the personal ledgers are
made directly from vouchers instead of being
posted from day book.
• pay in slips and cheques are used as slips which
form basis for directly recording into customers
accounts
• The vouchers entered into different ledgers are
summarised on summery sheets everyday, totals
which are posted in to different control accounts
which are maintained in the general ledger.
• Vouchers:
Debit vouchers
– Cheques issued by customers
– Withdrawal forms from account holders
– Drafts issued by other banks on the branch

• Credit vouchers
• Pay in slips filled by depositors for deposits
• Challans for deposits
• Payment of collection from other banks

• Composite vouchers
• Bills received for collection
• Letters of credit, bank guarantees issued by branch
Sources of funds & Uses of funds
 Sources of Funds
• Sources of funds appear in the balance sheet
as either liabilities or shareholders’ funds

• Banks offer a range of deposit and investment

products with different mixes of liquidity,
return, maturity and cash flow structure to
attract the savings of surplus entities

2-65
 Sources of Funds (cont.)
• Current deposits
– Funds held in a cheque account
– Highly liquid
– May be interest or non-interest bearing
• Call or demand deposits
– Funds held in savings accounts that can be
withdrawn on demand
– e.g. passbook account, electronic statement
account with ATM and EFTPOS

2-66
 Sources of Funds (cont.)
• Term deposits
– Funds lodged in an account for a predetermined
period at a specified interest rate
• Term: one month to five years
• Loss of liquidity due to fixed maturity
• Higher interest rate than current or call accounts
• Generally fixed interest rate

2-67
 Sources of Funds (cont.)
• Negotiable certificates of deposit (CDs)
– Paper issued by a bank in its own name
– Issued at a discount to face value
– Specifies repayment of the face value of the CD at
maturity
– Highly negotiable security
– Short term (30 to 180 days)

2-68
 Sources of Funds (cont.)
• Bill acceptance liabilities
– Bill of exchange
• A security issued into the money market at a discount to the
face value. The face value is repaid to the holder at maturity
– Acceptance
• Bank accepts primary liability to repay face value of bill to
holder
• Issuer of bill agrees to pay bank face value of bill, plus a fee,
at maturity date
• Acceptance by bank guarantees flow of funds to its
customers without using its own funds

2-69
 Sources of Funds (cont.)
• Debt liabilities
– Medium- to-longer-term debt instruments issued
by a bank
• Debenture
– A bond supported by a form of security, being a charge over
the assets of the issuer (e.g. collateralised floating charge)
• Unsecured note
– A bond issued with no supporting security

2-70
 2.2 Sources of Funds (cont.)
• Foreign currency liabilities
– Debt instruments issued into the international
capital markets that are denominated in a foreign
currency
• Allows diversification of funding sources into
international markets
• Facilitates matching of foreign exchange denominated
assets
• Meets demand of corporate customers for foreign
exchange products

2-71
 Sources of Funds (cont.)
• Loan capital and shareholders’ equity
– Sources of funds that have the characteristic of
both debt and equity (e.g. subordinated
debentures and subordinated notes)
• Subordinated means the holder of the security has a
claim on interest payments or the assets of the issuer,
after all other creditors have been paid (excluding
ordinary shareholders)

2-72
 Uses of Funds
• Uses of funds appear in the balance sheet as
assets
• The majority of bank assets are loans that give
rise to an entitlement to future cash flows, i.e.
interest and repayment of principal
– Personal and housing finance
– Commercial lending
– Lending to government

2-73
 Uses of Funds (cont.)
• Personal and housing finance
– Housing finance
• Mortgage
• Amortised loan
– Investment property
– Fixed-term loan
– Credit card

2-74
 Uses of Funds (cont.)
• Commercial lending (business sector and
other financial intermediaries)
– Fixed-term loan
• A loan with negotiated terms and conditions
– Period of the loan
– Interest rates
» Fixed or variable rates set to a specified reference rate
(e.g. BBSW)
– Timing of interest payment
– Repayment of principal

2-75
 Uses of Funds (cont.)
• Commercial lending (business sector and other
financial intermediaries) (cont.)
– Overdraft
• A facility allowing a business to take its operating account into
debit up to an agreed limit
– Bank bills held
• Bills of exchange (see slide 11) accepted and discounted by a bank
and held as assets
• A rollover facility is where a bank agrees to discount new bills over
a specified period as existing bills mature
– Leasing

2-76
 Uses of Funds (cont.)

• Lending to government
• Short-term discount securities issued by the Commonwealth
Government
– Treasury bonds
• Medium- to-longer-term securities issued by the
Commonwealth Government that pay a specified interest
coupon stream
– State government debt securities
– Low risk and low return
• Other bank assets (e.g. electronic network
infrastructure and shares
2-77 in controlled entities)
 Bankers’ books
• Cash book– receiving cashier, paying cashier
• Ledgers:
• General ledger
• Current accounts ledger
• FD accounts ledger
• RD accounts ledger
• Loan ledger
• Investment ledger
• Bills discounted and purchased ledger

• Other books
• Clearing register
• Securities register
• Draft register
• Bills for collection register
• Safe deposit vault register
• Dishonoured cheques register
• Letter of credit register
 Balance sheet
• The Balance Sheet contains 12 Schedules which are:
Capital and Liabilities:
• 1. Schedule I — Capital
• Capital is shown under the head “Capital and Liabilities” as first item.
• 2. Schedule II — Reserves and Surplus:
• These includes:
• (1) Statutory Reserve;
• (2) Capital Reserves;
• (3) Securities Premium;
• (4) Reserve and other Reserves (including Profit and Loss Accounts). It is
the second item under the head “Capital and Liabilities”.
• 3. Schedule III — Deposits:
• These include:
• (1) Demand Deposits;
• (2) Savings Bank Deposits;
• (3) Term Deposits. It is the third items under the head “Capital and
Liabilities”.
•
• 4. Schedule IV — Borrowings:
• These includes:
• (1) Borrowings in India (RBI, other banks, other
institutions and agencies);
• (2) Borrowings outside India. It is the fourth item
under the head “Capital and Liabilities”.
• 5. Schedule V — Other Liabilities & Provisions:
• These include:
• (1) Bills Payable;
• (2) Inter office Adjustment (Net);
• (3) Accrued Interest;
• (4) Others (including provisions).
• It is the fifth item under the head “Capital and
Liabilities”.
• Assets:
• 6. Schedule VI — Cash and Balance with RBI:
• These include:
• (1) Cash in hand;
• (2) Balances with RBI (in Current Account, in other
accounts). It is the first item under the head “Assets”.
• 7. Schedule VII — Balance with Banks and Money at Call &
Short Notice:
• These include:
• (1) In India Balance with Banks (a) Current Account (b) Other
Deposit Accounts; (c) Money at call and Short notice: ((i)
With Banks; (ii) With other institutions).
• It is the second item under the head “Assets”.
• 8. Schedule VIII — Investments:
• These include:
• (1) Investment in India in Govt. Securities and others;
• (2) Investments outside India in Govt. Securities and others.
• It is the third item under the head “Assets”.
• 9. Schedule IX — Advances:
• These include:
• (1) Bills purchased and discounted, Cash Credits, Overdrafts, and Term
Loans;
• (2) Secured by tangible assets;
• (3) Advances in India.
• (4) Advances outside India.
• It is the fourth item under the head “Assets”.
• 10. Schedule X — Fixed Assets:
• These include:
• (1) Premises;
• (2) Other fixed assets.
• It is the fifth item under the head “Assets”.
• 11. Schedule XI — Other Assets:
• These include:
• (1) Inter-office Adjustment (Net);
• (2) Accrued Interest;
• (3) Tax paid in Advance;
• (4) Stationery and stamps;
• 12. Schedule XII — Contingent Liabilities:
• These include:
• (1) Claims against the bank not
acknowledged as draft;
• (2) Liability for partially paid investment;
• (3) Liability against forward outstanding
contract;
• (4) Guarantee given on behalf of
constituents;
• (5) Acceptances, endorsements and other
obligations;
• (6) Other items.
• The Profit and Loss Account of a banking company must be prepared as per Form B of the Act in vertical
form like Balance Sheet.
• It is divided into:
• (1) Income;
• (2) Expenditure;
• (3) Profit and Loss;
•
• A bank’s Profit and loss Account,
(4) Appropriation viz. Schedule 13, Schedule 14, Schedule 15, and Schedule 16, respectively. They are:
13. Schedule XIII — Income:
• These includes:
• (1) Interest Earned: (i) Interest, Discounts on advance and bills; (ii) Income on investment; (iii) Interest on
balance with RBI.
• (2) Others. It is the first item under this head.
• 14. Schedule XIV — Other Incomes:
• These include:
• (1) Commission, Exchange and Brokerage
• (2) Profit on Sale of Investment;
• (3) Profit on Revaluation of Investments;
• (4) Profit on Sale of Land etc.
• (5) Profit on exchange transactions.
• (6) Income from dividend.
• 15. Schedule XV — Interest Expended:
• These include:
• (1) Interest on Deposits;
• (2) Interest on RBI deposit;
• (3) Others. It is the second item.
• 16. Schedule XVI — Operating Expenses:
• These include: All revenue expenditures and provisions, viz. Rent, Taxes and Lighting, Salaries, Wages,
Depreciation, Law charges etc. Provision for Bad Debt, Provision for Contingences, etc.
• Profit and Loss Account:
• Thus, Profit and Loss Account will present the net result of the
operation. This accounts deals with the expenses and incomes of
the current year, i.e. if incomes exceed expense, this is profit, and
vice versa in the opposite case. The same is brought forward.

• Appropriation:
• Only appropriation items will appear in this account viz, amount
transferred to General Reserve or Statutory Reserve or Proposed
Dividend etc. and the balance will appear in the Liability side of the
Balance Sheet.
•