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Banking in India - Part 5 (Scheduled Commercial Banks)

Bankers Corner

Scheduled Commercial Banks

  • Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949.
  • All banks which are mentioned in the Second Schedule of RBI Act, 1934 are known as Scheduled Banks.
  • The Banking Companies Act was passed in February 1949, which was subsequently amended to read as Banking Regulation Act, 1949. This Act provided the legal framework for regulation of the banking system in India.
  • The Scheduled bank comprises Scheduled Commercial Banks and Scheduled Cooperative Banks.
  • Scheduled Commercial Banks can be further divided into four groups:
    1. Public Sector Banks. This includes:
      1. State Bank of India
      2. Nationalized Banks
      3. Other Public Sector Banks
    2. Private Banks
      1. Old private-sector banks
      2. New private-sector banks
    3. Private-sector Foreign banks
    4. Regional Rural Banks
  • At present, there are 21 Public Sector Banks in India including SBI and 19 nationalized banks. Further, there is one banks which have been categorized by RBI as “Other Public Sector Banks”. IDBI come under this category.
  • 19 nationalised banks in India are as follows:
    1. Allahabad Bank
    2. Andhra Bank
    3. Bank of Baroda
    4. Bank of India
    5. Bank of Maharashtra
    6. Canara Bank
    7. Central Bank of India
    8. Corporation Bank
    9. Dena Bank
    10. Indian Bank
    11. Indian Overseas Bank
    12. Oriental Bank of Commerce
    13. Punjab & Sind Bank
    14. Punjab National Bank
    15. Syndicate Bank
    16. UCO Bank
    17. Union Bank of India
    18. United Bank of India
    19. Vijaya Bank

 Functions of Banks

Primary Functions of Banks

  • The primary functions of a bank are also known as banking functions. They are the main functions of a bank. These primary functions of banks are explained below.
  1. Accepting Deposits: The bank collects deposits from the public. These deposits can be of different types, such as:-
    1. Saving Deposits
    2. Fixed Deposits
    3. Current Deposits
    4. Recurring Deposits
      1. Saving Deposits: This type of deposits encourages saving habit among the public. The rate of interest is low. At present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain restrictions. This account is suitable to salary and wage earners. This account can be opened in single name or in joint names.
      2. Fixed Deposits: Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry of the period. Those who have surplus funds go for fixed deposit.
      3. Current Deposits: This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact, there are service charges. The account holders can get the benefit of overdraft facility.
      4. Recurring Deposits: This type of account is operated by salaried persons and petty traders. A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid.
  2. Granting of Loans and Advances: The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit.The types of bank loans and advances are:-
    1. Overdraft
    2. Cash Credits
    3. Loans
    4. Discounting of Bill of Exchange

Overdraft

  • This type of advances is given to current account holders. No separate account is maintained. All entries are made in the current account. A certain amount is sanctioned as overdrafts which can be withdrawn within a certain period of time say three months or so. Interest is charged on the actual amount withdrawn. An overdraft facility is granted against a collateral security. It is sanctioned to businessman and firms.

 Cash Credits

  • The client is allowed cash credit upto a specific limit fixed in advance. It can be given to current account holders as well as to others who do not have an account with bank. Separate cash credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The cash credit is given against the security of tangible assets and/or guarantees. The advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.

 Loans

  • It is normally for short term say a period of one year or medium term say a period of five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form of installments spread over a period of time or in a lumpsum amount. Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower than what is charged on overdrafts and cash credits. Loans are normally secured against tangible assets of the company.

 Discounting of Bill of Exchange

  • The bank can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected.

 Credit Creation

  • Another function of banks is to create credit. Creation of credit is the natural outcome of the process of advancing loans that we have discussed above. In advancing loan to the borrower, the bank opens an account in his name and credits the loan amount to that account instead of giving cash to him. The borrower can withdraw the money from the account. Thus, in the process of advancing loans, the bank creates bank deposits which results in increasing the money supply in the economy. This is known as credit creation function of commercial banks.

Secondary Functions of Banks

  • The bank performs a number of secondary functions, also called as non-banking functions.  These important secondary functions of banks are explained below.
    1. Agency Functions: The bank acts as an agent of its customers. The bank performs a number of agency functions which includes:-
      1. Transfer of Funds
      2. Collection of Cheques
      3. Periodic Payments
      4. Portfolio Management
      5. Periodic Collections
      6. Other Agency Functions
    2. General Utility Services: The banks provide general utility services not only to the customers but also to the general public against a fee. Some of these services are –
      1. Providing locker facility
      2. Providing business information
      3. Issuing travelers’ cheques
      4. Issuing letter of credit
      5. Issuing credit cards

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