Handbook of Commercial Banking is the first book to comprehensively address The Need for a Commercial Banking Strategy. Front Matter. Pages PDF. and product names used in this book are trade names, service marks, trademarks or .. Bankers Trust: From a Commercial/Investment Bank to Takeover by. The Economics of Money, Banking, and Financial Markets (7th Ed).pdf Commercial Banking Vs. Investment Banking 29 The Investment Banking Manual .
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engaged in commercial work in which a knowledge of banking is necessary, as intended to be an advanced banking text-book,neither does it deal with the. FUNCTIONS OF A COMMERCIAL BANK Special Nature of Banks Characteristics of The banking book groups and records all commercial banking activities. Check our section of free e-books and guides on Banks and Banking now! E- Banking System, Commercial Banking System, Merchant Banking System.
Suppose a businessman has only Rs. The bank allows the The second primary function of a commercial bank is to make loans and advances to all types of persons. The most common way of lending is by Overdraft Facilities: In this case. These deposits cannot be withdrawn before the expiry of the period for which they are deposited or without giving a prior notice for withdrawal. In India. The holder of a bill can get it discounted by the bank. The bank. This type of loan is very popular with the Indian businessmen.
After deducting its commission. These bills are safe and secured bills. The borrower is required to pay interest only on the amount of credit availed to him.
Money at Call: Cash Credit: Under this account. But the entire loan is not given at one particular time. The bank can recall such loans at its option. When the bill matures the bank can secure its payment from the party which had accepted the bill.
He will be allowed to withdraw small sums of money according to his requirements through cheques. The commercial banks can rediscount the discounted bills with the central banks when they are in need of money. Discounting Bills of Exchange: This is another type of lending which is very popular with the modern banks. Such consumer credit is made in a lump sum and is repayable in installments in a short time. Term loans are socalled because their maturity period varies between 1 to 10 years.
Consumer Credit: Banks also grant credit to households in a limited amount to download some durable consumer goods such as television sets. Such loans are called participation loans or consortium finance. Under the point programme.
Term loans. Miscellaneous Advances: Among other forms of bank advances there are packing credits given to exporters for a short duration. Such advances are repayable immediately at short notice hence. Bank also grant loans for a very short period. Term Loans: Banks give term loans to traders.
The reason is they can be used for the download of goods and services and also in payment of debts. Banks supply money to traders and manufacturers. It is found much more convenient to settle debts through cheques rather than through the use of cash. He can withdraw the amount whenever he wants by a cheque.
They also create or manufacture money. A unique function of the bank is to create credit. The commercial banks render an important service by providing to their customers a cheap medium of exchange like cheques. When a bank grants a loan to its customer. Bank deposits are regarded as money. They are as good as cash. It simply credits the account of the borrower.
That is. Financing Internal and Foreign Trade: The cheque is the most developed type of credit instrument in the money market. This discounting business greatly facilitates the movement of internal and external trade.
Remittance of Funds: The bank finances internal and foreign trade through discounting of exchange bills. As compared to the postal money orders or other instruments.
The various agency services rendered by banks are as follows: Collection and Payment of Credit Instruments: Banks collect and pay various credit instruments like cheques. Banks also perform certain agency functions for and on behalf of their customers. Acts as Correspondent: Collection of Dividends on Shares: Banks collect dividends and interest on shares and debentures of their customers and credit them to their accounts..
The agency services are of immense value to the people at large. download and Sale of Securities: Banks download and sell various securities like shares. Locker Facility: Bank provides locker facility to their customers. They pay subscriptions. The customers can keep their valuables..
Execution of Standing Orders: Banks execute the standing instructions of their customers for making various periodic payments. Sometimes banks act as representative and correspondents of their customers.
Acts as Trustee and Executor: With this facility. In addition to agency services. Income-tax Consultancy: Banks may also employ income tax experts to prepare income tax returns for their customers and to help them to get refund of income tax.
They get passports. Underwriting Securities: Banks underwrite the shares and debentures issued by the Government. They also publish valuable journals and bulletins containing articles on economic and financial matters. Collection of Statistics: Banks collect statistics giving important information relating to trade.
It enables customers to import goods. Acting Referee: Banks may act as referees with respect to the financial standing. Merchant Banking: Some commercial banks have opened merchant banking divisions to provide merchant banking services. Letter of Credit: Letters of credit are issued by the banks to their customers certifying their credit worthiness. Accepting Bills of Exchange on Behalf of Customers: Letters of credit are very useful in foreign trade.
Gift Cheques: Some banks issue cheques of various denominations to be used on auspicious occasions. Amount of Deposit The most important factor which decides credit creation is the amount of deposits made by the depositors. Banking Habits of People If the banking habits of the people are well-developed. Certain points affect the process of credit creation. Higher is the amount of deposits. Higher is the Cash Reserve Ratio CRR more will be the reserves to be maintained and less credit will be created by banks.
They are termed as limitations to credit creation by commercial banks. Willingness of people to borrow Commercial banks may have enough money to lend. Customers should be willing to borrow from the banks to facilitate credit creation. Monetary Policy of Central Bank While credit is created by commercial banks. If some banks follow liberal and others follow a conservative one.
In contrast to investment banks. It lowers the reserves of the banks and limits the credit creation. If securities are available then the credit creation will be more and vice-versa.
Credit control is one important function of the central bank. Supply of Securities Loans are sanctioned on the basis of the securities provided to the banks.
External Drain External Drain refers to withdrawal of cash from the banking system by the public. If they are willing to borrow. Central Bank uses various methods of Credit Control from time to time and thus influences the banks to expand or contract credit.
They provide factoring services to their clients. A bank cannot survive without performing the following nonbanking activities: They perform merchant banking for their customers.
Some of the different services available from commercial banks to its customers are: These include investment advisory services. Commercial banks also provide other services to businesses and consumers for which they earn various fees. ATM networks. They give hire-download services to owners of various goods. They provide funds capital for starting new ventures.
One major advantage that Indian banks have is the availability of major IT companies in India who are the world leaders in IT applications. Mobile Banking: Some banks have started offering mobile banking and tele-banking to customers. They are now allowed to offer insurance services. In a number of areas. The huge number of bank customers and their myriad needs are being met in increasingly sophisticated ways.
The expansion in the use and geographical reach of mobile phones has created new opportunities for banks to use this mode for banking transactions and also provide an opportunity to extend banking facilities to the hitherto excluded sections of the society. They offer credit and debit cards facility. Banks in India have started using technology in a proactive manner. They also offer leasing services. The services provided through internet banking are: Electronic banking services provided by commercial banks include: Internet Banking: Through its website.
Internet banking is changing the banking industry and affecting banking relationships in a major way. The range of services offered differs from bank to bank depending mainly on the type and size of the bank. Banking websites that allow consumers and business to obtain account information. Wire transfers.
They are discussed below: In the context of the balance sheet of a bank the term liquidity has two interpretations. In fact. If the depositors lose confidence in the integrity of their bank.
The balance sheet is a statement of the assets and liabilities of the bank. Among the various items on the Bill payments. More Details Original Title. Other Editions 6. Friend Reviews. To see what your friends thought of this book, please sign up. To ask other readers questions about Commercial Bank Management , please sign up.
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View 1 comment. Aug 28, June05 marked it as to-read. Jun 08, Mehedi Hasan added it Shelves: Three Tier Structure The restructured banking system in the wider sense would have three tiers as envisaged by the Committee on Financial System First tier would consist of the large ones who could be potential global banks, like the one that would emerge by merging State Bank and its seven associates.
The first tier would have to be restructured to provide multiple financial services including banking, securities market related services, asset management and insurance at least the sale of annuity and variable life policies.
Such convergence is in consonance with global trends and help in augmenting non-fund based income of banks. In the second tier would be about 10 large banks of a national or regional character. They would be specialised and niche players. Such institutions will specialise only in a few areas and meet particular customer demand. Finally, in the third tier would be local banks consisting of cooperative banks, regional rural banks and NBFCs.
In regard to capital adequacy, a more flexible approach has to be adopted depending on the quality of assets. Further the capital raised abroad by banks may be allowed to be kept in foreign securities to render the banks acceptable to their counterparts abroad. If the banks are allowed to reduce the public ownership to 30 per cent level as suggested by CBSR, , through adoption of necessary legislation autonomy would automatically follow and market discipline would be brought to bear on the banks.
In February , banks were given autonomy to raise rupee denominated subordinated debt as Tier II capital. CBSR, recommended issue of bonds guaranteed by government to bolster capital adequacy. In USA capital of banks includes long-term debt of seven years.
In the context of regulatory capital long-term debt only serves to absorb operating losses in the event of bank failure. The Basle Committee on Banking Supervision has issued in June a new capital adequacy framework to replace the Capital Accord of The Reserve Bank of India Act does not assure autonomy to the bank. It is true that the Central Bank can only be independent within the government but not from the government.
In USA, there are adequate safeguards to ensure that the Federal Reserve is not compelled to act against its own judgment. In India, there have been historic accords limiting the access of government to RBI but they are breached in practice. RBI should not be involved in under-writing government securities. It acts as a principal and as an agent in the securities market. The dual role of RBI as an issuer and regulator of debt gives rise to conflict of policies of debt management and monetary policy.
The advisory group on monetary and financial policies headed by M. Narasimhan suggested September, the separation of debt management and monetary policy functions and the setting up of an independent debt management office by the government.
Further the fiscal profligacy of the government is abetted by the system of pre-emption of large portion of net accrual of banks deposits through the prescription of statutory liquidity ratio.
The Indian banking system was operating for a long time with a high level of reserve requirements in the form of statutory liquidity ratio SLR and cash reserve ratio. Progressive reduction since has brought down the effective SLR from The additional resources will also increase the profitability of banks since CRR is not adequately remunerated. Reduction in statutory pre-emption is constrained as long as fiscal deficit remains high. The Report of the Committee on the Financial System, has pointed at that SLR should not be used to mobilise resources for financing budgetary deficits but as a prudential measure.
It has also stated that CRR should be used for pursuing monetary policy objectives. In the context of globalisation of the financial system, Reserve Bank needs autonomy to define benchmarks or anchors such as inflation and money supply to guide policy and use its judgment to assess the impact of the ever changing financial environment on the design and implementation of policy.
Reform of the banking system is not complete unless it includes the Central Bank. The emphasis on market as a source of financial discipline requires an autonomous Central Bank which can strike a right balance with the operation of market forces. The responses would be quick and effective only if the Central Bank is autonomous.
Central banks which are mandated to pursue monetary and financial stability should enjoy autonomy in the execution of policy and be accountable for the achievement of the objective2. The profound transformation of the financial environment had a major effect both on the relationship between the monetary policies across countries and on their design within the countries.
Central banks while defining benchmarks or anchors to guide policy to achieve monetary and financial stability have to take into account the increasing constraints that result from the growing power of markets to arbitrage across currencies, instruments and institutions as well as across legal, regulatory and tax jurisdictions. The increasing power of markets put a premium on transparency to guide market expectations, market incentives and credibility of policies. Further the effectiveness of market forces depends on fostering ownership structures through privatisation which are more responsive to market and removing obstacles to the adjustment of capital and labor.
The systemic orientation has to be sharpened by upgrading payment and settlement systems to contain the knockon effects of failures of institutions. A right balance between the market and the central bank as a source of financial discipline has to be struck. They may be erased and where possible collateral may be sold and the curtain drawn on the issue. In future priority sector lending may be confined to lending by third tier local banks with the help of NGOs.
Banking Supervision An independent Board for Financial Supervision under the aegis of the RBI is set up with focus on off-site surveillance based on prudential supervision framework covering capital adequacy, asset quality, loan concentration, operational results and connected lending and control system internal to banks.
In regard to on-site inspection the focus is on the evaluation of total operations and performance of the banks under the CAMELs system i. The Committee on Banking Sector Reforms CBSR , recommended an integrated system of regulation and supervision be put in place to regulate and supervise the activities of banks, financial institutions and non-bank finance companies. It should be given statutory powers and be composed of professionals. This is in accord with the holistic approach to the banking system suggested here.
Banking in the New Millennium 11 Settlement Indian banking system has to migrate to real time gross settlement RTGS to put in place an integrated payment system. A gross settlement system is one in which both processing and final settlement of funds transfer instructions can take place continuously in real time. Gross settlement reduces the settlement risk, principal credit risk and systemic risk.
In gross settlement knock-on or domino effect on the system is avoided. RTGS is critical for an effective risk control strategy. It helps in distinguishing temporary liquidity problems from insolvency which could have helped in averting South Asian Crisis. We have convertibility for current international transactions but restrictions exist for international capital movements.
In a number of countries elimination of exchange controls for capital movements has been slower than for current account.
In the s, the pace of reforms in several countries quickened and by , industrial countries eliminated virtually all exchange restrictions with respect to capital movements, making their currencies fully convertible. However, a large number of developing countries still retain capital controls.
The case for capital account convertibility is based on three arguments. First, exchange restrictions are an inefficient and ineffective method to protect balance of payments. Secondly viability of balance of payments is achieved by flexibility and realism in exchange rate and macroeconomic policies.
Finally, empirical evidence suggests that elimination of exchange restrictions increases capital inflows in the short run and promotes efficiency in the allocation of these inflows, if liberalisation is carried out as a part of structural adjustment package designed by the International Monetary Fund IMF. These conditions are low fiscal deficit 3. Several aspects of the functioning of the Indian economy suggest that time is not ripe for full convertibility. Finally all is not well with the banking system.
It is quite fragile. Additional instruments to hedge risk and help reduce exchange rate volatility consist of forward cover for some participants and the development of the rupee forex swap markets. The pace of liberalisation of capital account depends on domestic and international developments. However, the process of liberalisation of capital account will depend on progress of financial sector reforms.
While global consensus exists on meeting the preconditions convertibility depends in the Indian context not only on financial factors but also on real factors which influence the competitive strength of the economy. The veil of money has to be lifted and assessment of real economic variables has to be made. Ever since deregulation was initiated the emphasis is on financial factors, encouraging foreign capital inflows, rise in market capitalisation, mobilisation by Indian corporates of funds abroad, reduction of tariffs and tax rates.
The form of protection which does not promote competitiveness is the highest among the developing countries. Indian industry scores poorly in regard to innovation, costs, labour quality, infrastructure and management practices. Capital account convertibility renders an economy susceptible to financial contagion especially where the banking systems are fragile. Liberalisation by changing the rules of the game increases the riskiness of the traditional behaviour. Further the increased globalisation of financial markets affects the capital account more than in the past.
Financial liberalisation requires strict bank regulation and supervision to prevent a reversal in capital flows or a sharp rise in interest rates from breaking banks. A rock solid banking system is one reason why Hong Kong with the most open financial market in East Asia has weathered the storm better than many of its neighbours.
An adequate capital base and a satisfactory system of prudential regulation, income recognition, provisioning and supervision as well as disclosure and auditing requirements of banks to achieve greater transparency are being built into the Indian banking system.
But there are significant structural problems which have been discussed above. The banking system, however, was not adversely affected by the contagion effect due to limited exposure of Indian banks to exchange rate movements and the economies of the rest of Asia.
It would help foster a regional capital market which enlarges the flow of foreign capital to raise the level of domestic investment. The Expert Group on Foreign Exchange Markets in India set up by Reserve Bank of India also suggested the setting up of the off-shore centre within India to encourage off-shore transactions towards development of a financial centre particularly for a country which has not adopted capital account convertibility.
Any future plans of full convertibility of the Indian rupee according to the Group are greatly dependent on narrowing the gap between international financial markets and domestic markets.
Off-shore banking units offer the benefit of providing Indian financial institutions global know-how, human skills, technology and infrastructure in a relatively controlled environments prior to opening up of the foreign exchange markets to full impact of convertibility. Banking system in India which is yet to adopt modern technology would be exposed to international finance and business based on electronic data processing and telecommunications networks, if we set up an off-shore banking centre.
They remain outside any market oriented economic activity. Various provisions in the central budget amounting annually to about Rs. They add to demand without augmenting supply of goods and services. Concept of Development The approaches to rural development so far have been emphasizing employment generation. The concept of employment is really not relevant because the poor do not posses any skills to avail of the opportunities created by investment in industry or if they do not posses property land to avail of the benefits from investment in irrigation projects.
The antipoverty programs emphasize the involvement of poor during the budget cycle, in creating assets like roads which do not endure. Actually, they have become a big source for building vote banks since only 20 percent reaches the poor. Finally, all the efforts add only to demand without generating goods or services. The supply side or the sigma effect of investment is ignored. The vision of Gandhiji of a self-sufficient village is highly relevant. The traits of the poor are that they are not capable of working 8 hrs a day for 5 or 6 days a week, because they are undernourished and physically not fit to put forth the effort.
They do not have any skills and are not even 3R literate. If we approach the problem of rural development from the view point of bringing the poor into income generating activity by making them directly productive, we can make their life meaningful. Labour earns a wage when it contributes to production for market or exchange. That is what we have to ensure. Poverty can be alleviated only if the poor are integrated into the national economic framework by involving them in income generating activities on a continuous basis.
However, the poor are by nature apathetic and fatalistic and cannot come forth with viable projects. These projects could be resource based, footloose no resource or traditional craft-based. The barefoot managers can undertake like an entrepreneur IPIP themselves or join the existing institutional mechanism and help in the integration of the poor into market-oriented activities.
Public distribution of food-grains can be integrated with it. The integration of the poor into market oriented activity would turn them from persons with zero marginal productivity to producers of surplus.
The savings of the poor would also enlarge the total pool and help step up savings rate. Social Agenda An essential component of making the poor directly productive is the implementation of a social agenda for the poor. Fuel, lighting and drinking Banking in the New Millennium 15 water requirements of the village can be met from power through setting up biogas plants.
Biogas as an energy source is ignored in a country with the largest livestock population.
Construction of a community hall to serve several purposes: as a market place, school for imparting 3Rs, provide primary healthcare and meetings for village governance. Personal computers with the local language software may be installed. Tap and learn may be encouraged. Along with spread of literacy, use of computers would spread for downloading information about development and communication in rural and tribal areas.
Open schools should have only one agenda, impart 3Rs to adults or children in a flexible manner. A literacy programme based on imparting 3Rs is an integral part of social agenda.
The results would be immediate and help in delinking education from job expectations as happens under a formal system. Implementing Development Regional rural banks may be made dynamic agents of social and economic development if they are entrusted with integration of rural poor into national economic framework by undertaking productive economic activities.
Credit is helpful only if a viable activity is identified, financed and dues recovered out of the cash flows the project generates. According to All India Debt and Investment Survey the access of the poor to organised banking was only In , formal sources accounted for only 7 percent and informal sources 93 percent.
The programme needs at each location a group of 5 young persons, call them a Techno-Economic Group, to act as catalysts for integration of rural poor and tribals into the main stream of economic activity.
They can survey rural areas, identify activities and markets, organize production adopting appropriate technology and arrange credit for viable projects involving poor. An honorarium of Rs. Universities may be encouraged to consider the programme as practice school for six months with a project report at the end of postgraduate programme and preference for employment.
The expenditure may be met from reappropriation of funds from some of the existing antipoverty programmes in the budget. Local RRB may be refinanced for the project loans by sponsor bank. The third tier of banking can be revitalised by making regional rural banks as agents for rural change. They can be supported by Techno-Economic Teams at branch level. They would act as an intermediary between the group undertaking the project and RRB.
They would help in monitoring and timely recovery of dues. RRBs with the techno-economic team and NGOs to identify, monitor and ensure repayment of dues can been entrusted with the execution of poverty alleviation programmes. These three groups would constitute the checks and balances. CBSR suggested that banking policy should facilitate the evolution and growth of micro-credit institutions which focus on agriculture, tiny and smallscale industrial units including such specialist institutions as may be promoted by NGOs for meeting the banking needs of the poor.
Microcredit Microcredit institutions and self-help groups are voluntary, decentralized and of non-bureaucratic nature in rural and semi-urban areas. They constitute important vehicles for credit delivery to self- employed persons. A SHG is a registered or unregistered group of micro entrepreneurs with a homogeneous social and economic backgrounds. The group voluntarily puts together savings to organize economic activity.
The group uses peer pressure to ensure proper end use of credit and timely repayment. Peer pressure is a good substitute for collateral and financing through SHG reduces transaction costs.
As at end of March , the total number of credit linked SHGs stood at 2,81,, total bank loans Rs. The SHGs are regularly monitored and their quality is maintained with adequate support from the state government. Credit Linkage Credit linkage of self-finance groups with the banking system has emerged as a major micro finance programme. The Union Budget has proposed an annual target of 2. Improvement of Efficiency of Microcredit While SHGs are taken as a role model for credit delivery, their composition bears closer scrutiny.
The Indian society has not yet emerged from the feudal system where power is captured by dynasties and families and inherited by their progeny. The entire governance structure is dominated by feudal order. Power is passed on from generation to generation and the constant attention and exposure to media helps to sustain the system. The graduation from cinema to politics illustrates the importance of exposure. Democracy and elections cannot eliminate the link between the feudal social order and governance structure.
Feudal order is all pervasive and perpetuates it by patronage and cronyism. A candidate standing for election even with a criminal record has an edge over the opponent if he is related or is a crony of the families in power.