Commercial Banking in India

28/04/2020 5 By indiafreenotes

Commercial banks are the most important components of the whole banking system.

A commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds.

According to Culbertson,

“Commercial Banks are the institutions that make short make short term bans to business and in the process create money.”

In other words, commercial banks are financial institutions that accept demand deposits from the general public, transfer funds from the bank to another, and earn profit.

Commercial banks play a significant role in fulfilling the short-term and medium- term financial requirements of industries. They do not provide, long-term credit, so that liquidity of assets should be maintained. The funds of commercial banks belong to the general public and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for a short period of time backed by tangible and easily marketable securities. Commercial banks, while providing loans to businesses, consider various factors, such as nature and size of business, financial status and profitability of the business, and its ability to repay loans.

Classification of Commercial banks

Commercial banks are of three types, which are as follows:

  1. Public Sector Banks

Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government. In India, public sector banks operate under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank.

  1. Private Sector Banks

Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals. These banks are registered as companies with limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank.

  1. Foreign Banks

Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the number of foreign banks. Commercial banks mark significant importance in the economic development of a country as well as serving the financial requirements of the general public.

Primary Functions of Commercial Banks:

  • Accepting Deposits from the public in savings account, current account, fixed deposits, recurring deposits, deposits from NRIs.
  • Lending money to the public for their various purposes like personal loans, housing loans, vehicular loans, etc.
  • Providing overdraft facility to the credit card holders and under any schemes by the government like in Pradhan Mantri Jan Dhan Yojana Scheme.

Secondary Functions or Para banking Activities of the Commercial Banks:

  • Issue debit, credit and prepaid cards.
  • Issue Letter of Credit and Bank Guarantee.
  • Collect amounts through cheques and other instruments.
  • Sale and purchase of shares and debentures.
  • Act as investment bank for Initial Public Offering (IPO) by a private company.
  • Help in anti-money laundering through KYC process.
  • Become an intermediary between its customers and other institutions, like payment of insurance premium, payment of various bills, direct benefit transfer (DBT) scheme of government, etc.
  • Provide facilities such as Electronic Clearing Service, transfer of funds domestically and internationally, locker facilities, foreign exchange, etc.

With the advances in technology, the commercial banks are also making advancement and providing the citizens of India with the best facilities and they are also easing the lives of people by providing many good facilities.

2019 recent news:

In August, 2019 Jana Small Finance Bank Ltd, which commenced banking operations in March 2018, has got the status of a Scheduled Bank.