Commercial Banks in India

COMMERCIAL BANKS

• Meaning:
  Commercial Banks are financial intermediaries which perform the dual functions of mobilisation of deposits and deployment of surplus funds to the various sectors of the economy.
• In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises.
• These banks perform all kinds of banking business.
• The main objective of commercial bank is to earn profits.
• Commercial Banks also render many other useful services viz., collection of bills, cheques , safe keeping of jewellery and other useful items,certifying the credit worthiness of business and so on.
• It also helps in national development by providing credit to farmers, small scale industries and self employed people as well as large business houses which lead to balanced economic development in the country.

• Classification/Types :
  As per the Reserve Bank of India Act, 1934, Commercial Banks in India are classified into two broad categories. They are :
• 1) Scheduled Commercial Banks.
• 2) Non- Scheduled Commercial Banks.
• (A) Scheduled banks are categorised into five groups according to their ownership and/or nature of operation.
  These bank groups are as under:

1)Public Sector Banks
2)Private Banks
3) Foreign Banks
4) Scheduled Co-operative Banks
5) Regional Rural Banks.

Public Sector Banks :

>These banks are owned and controlled by the government .
>Majority of the shares are held by the Government or RBI.
>These banks  consists of nationalised banks and State Bank of India and its six associates.
>Eg PNB, Central Bank of India , Canara Bank , Bank of Baroda etc.

Private Sector Banks:

>These are banks owned and controlled by private individuals or corporations. Majority of the share capital is held by private individuals.
>These banks are registered as companies with limited liabilities.
>Federal Bank,Development Credit Bank Ltd., Axis Bank, ING Vysya Bank, HDFC Bank are examples of private banks.

Foreign Banks:

>These banks are foreign in origin and have their registered office in foreign country but operate their branches in other countries.
>Some examples of foreign banks are HSBC, American Express Bank, Standard& Chartered Bank, Grindlays Banks etc.

Scheduled Co-operative Banks :

>State Co-operative Banks and Urban co-operative Banks which are included in the Second Schedule of the RBI Act, 1934 and are called scheduled co-operative banks.

Regional Rural Banks :

>Regional Rural Banks are banks which provides credit and other facilities to small farmers, agricultural labourers, small entrepreneurs and artisans of the rural areas.

(B) Non- scheduled Commercial Banks :

>These are banks not included in the second schedule of the RBI Act of 1934 are called non-scheduled banks.

>These type of banks are almost non- existent and are not important.

Balance Sheet of a Commercial Bank:

• Balance sheet of a bank is a statement of liabilities and assets of a bank at a point of time.
• It reflects the policies, size and soundness of the operations of a bank.
• The liabilities indicate the sources of its funds.
• The assets show the nature of its investments.
• To understand the conflict between liquidity and profitability and how it is resolved, the study of balance sheet of a bank is necessary.

It is pertinent to note that commercial banks has to satisfy the interest of three distinct groups:

• 1) Depositors whose withdrawal needs it must meet without delay.
• Shareholders for whom it must earn profits.
• Central bank under the control and supervision of which it has to work and abide by its various directives.
• It is indeed a tightrope walking for the bank. How it tries to satisfy the three masters simultaneously will become clear with an understanding of its balance sheet.

Liabilities of a Bank :

• The liabilities of a Bank are mainly composed of items :
• 1) Paid up Capital and Reserves :
• Paid up capital means the amount of share capital actually contributed by the share holders.
• Reserves are retained earnings or undistributed profits of banks.
• These two items put together constitute the owned funds of the banks.
• 2) Deposits :
• Deposits from the public are the main source of funds for the commercial banks.
• Therefore, these deposits constitute the liability of a bank.
• These deposits are various types like current, savings and fixed deposits.
• 3) Borrowings :
• Commercial Banks borrow from each other as well as from non-banking financial institutions like LIC, GIC,UTI.
• 4) Miscellaneous :
• Liabilities like bills payable.

Assets of a Bank :

The asset portfolio of a bank is of crucial importance.
>It strikes a balance between liquidity and profitability of a bank.
>The Commercial Bank has to earn profit  for its shareholders and at the same time satisfy the withdrawal needs of its customers.
>Thus, a bank tries to achieve the twin objectives by selecting a diversified and balance asset portfolio within the framework of the regulations of the central bank.
>The various items of its asset s described below will show that some assets are more liquid than others. The more liquid the asset, the less profitable it is.

a) Cash :

> Cash-in-hand (also called vault cash) is held to meet the withdrawal needs of the depositors.
>Commercial Banks also hold cash balances with the RBI.
>These balance are held with the RBI under the statutory cash reserves ratio.

b) Money at Call/ Short Notice: >Commercial banks lend their surplus cash to each other and also to other financial institutions for short periods of time.
>This type of lending earns interest rate for the banks while maintaining liquidity at the same time.

c) Investment in Securities:>Banks are required statutorily to invest a part of their assets in Government securities.
>These securities carry a low rate of interest but banks can borrow from the reserve bank against securities.
>Thus, they provide return as well as liquidity to the bank.