Tag: Mobile Banking

Commercial Banking in India refers to the system of financial institutions that accept deposits from the public and provide loans for consumption, trade, agriculture, and industry. These banks operate under the regulation of the Reserve Bank of India (RBI) and play a vital role in the country’s economic development. Indian commercial banks are classified into public sector banks, private sector banks, foreign banks, and regional rural banks. They offer a wide range of services, including deposit accounts, credit facilities, remittances, and digital banking. By mobilizing savings and allocating credit efficiently, commercial banks support entrepreneurship, employment generation, and financial inclusion. Their functions also include implementing monetary policy, promoting trade, and maintaining financial stability, making them integral to India’s banking and financial system.

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 The funds of commercial banks belong to the general public and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for a short period of time backed by tangible and easily marketable securities.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:

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.

2. 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.

3. 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

The foremost function of commercial banks is to accept deposits from the public. These deposits come in various forms such as savings accounts, current accounts, fixed deposits, and recurring deposits. Banks offer interest on savings and fixed deposits to attract customers. This service provides a safe place for individuals and businesses to store their money. It also ensures liquidity and encourages financial discipline among people by promoting the habit of saving. These deposits are later used for lending purposes.

• Providing Loans and Advances

Commercial banks lend money to individuals, businesses, and institutions in the form of loans and advances. These may include personal loans, business loans, education loans, and home loans. Banks charge interest on the borrowed amount, which becomes a major source of their income. The terms of repayment vary depending on the nature and amount of the loan. This function promotes entrepreneurship, supports business activities, and contributes to the economic growth and development of the country.

• Credit Creation

Commercial banks create credit through the process of lending. When a bank gives out a loan, it does not always hand over cash; instead, it credits the borrower’s account with the amount. This process increases the money supply in the economy. The actual cash reserves remain with the bank while the borrower can use the deposited amount. This credit creation function plays a vital role in expanding economic activities and facilitates investment and consumption in the market.

• Agency Functions

Commercial banks perform several agency functions on behalf of their customers. These include collecting cheques, dividends, interest, and making payments such as insurance premiums and utility bills. Banks also act as agents in the purchase and sale of securities. Additionally, they provide services like standing instructions and acting as trustees or executors. These services offer convenience to customers and enhance their trust in the banking system. Banks usually charge a nominal fee for such agency services.

• Utility Functions

Apart from core banking services, commercial banks offer various utility functions to customers. These include issuing demand drafts, traveller’s cheques, locker facilities, credit and debit cards, and internet banking. Banks also assist in foreign exchange transactions and provide financial consultancy services. These functions improve customer convenience, promote secure transactions, and support business and personal needs. Utility services help banks generate additional income and maintain customer satisfaction in a competitive financial market.

• Maintaining Liquidity and Ensuring Safety

Commercial banks ensure the safety of depositors’ money by adopting strict regulatory practices and maintaining adequate cash reserves. They are required to maintain a portion of their total deposits as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) with the central bank. This ensures that they have enough liquidity to meet withdrawal demands. Moreover, banks follow sound financial practices and insurance coverage under schemes like DICGC to protect depositor interests and boost confidence in the banking system.

Secondary Functions of the Commercial Banks:

• Agency Functions

Commercial banks perform several agency functions on behalf of their customers. They collect cheques, dividends, interest, rent, and other payments on behalf of account holders. Banks also make routine payments such as insurance premiums, utility bills, or subscriptions through standing instructions. They act as agents for buying and selling securities and sometimes serve as trustees, attorneys, or executors of wills. These services provide convenience, save time, and add value for customers, who rely on banks to handle their financial affairs efficiently and securely.

• General Utility Services

Banks offer various utility services beyond deposit and credit facilities. These include issuing demand drafts, pay orders, and traveller’s cheques, and providing safe deposit lockers for storing valuables. Banks also issue letters of credit and credit/debit cards, facilitating national and international trade. Online and mobile banking services are now part of this function, offering real-time account access, fund transfers, and bill payments. These utility services improve banking experience, increase customer satisfaction, and support modern lifestyles by making financial services more accessible and user-friendly.

• Foreign Exchange Services

Commercial banks play a significant role in facilitating foreign exchange transactions. They are authorized by the Reserve Bank of India (RBI) to deal in foreign currencies and provide services like buying and selling foreign currencies, remitting money abroad, and handling export/import payments. These services are crucial for individuals and businesses engaged in international trade or travel. Banks also assist in currency conversion and help customers manage foreign currency accounts. Their foreign exchange operations ensure smoother cross-border transactions and support globalization and international business operations.

• Credit Creation

Though part of their primary function, credit creation is also a broader financial service banks provide. When banks issue loans, they do so by creating demand deposits in the borrower’s account instead of giving cash. This increases the money supply in the economy. The process allows customers to use funds for investments or expenses while actual cash remains largely with the bank. This function supports business expansion, personal finance needs, and economic development by increasing liquidity and boosting purchasing power in the market.

• Safe Custody and Locker Facility

Commercial banks offer locker or safe deposit services to customers for storing valuables such as jewellery, documents, and other important items. These lockers are housed in highly secure areas within bank premises and are accessible only to the locker holder. This service provides safety from theft, fire, and natural disasters. Additionally, banks sometimes keep valuables in safe custody on behalf of customers, including title deeds or share certificates. These services help customers ensure the security of their assets beyond simple monetary deposits.

• Underwriting and Financial Advisory

Many commercial banks offer underwriting services, particularly in the case of new stock or bond issues. They guarantee the subscription of securities by purchasing unsold shares, thus reducing the issuer’s risk. Banks also provide financial advisory services to individuals and companies, guiding them on investments, tax planning, mergers, and acquisitions. These services help clients make informed financial decisions. As financial intermediaries, banks are trusted partners in strategic financial planning, helping clients manage wealth and achieve long-term financial goals effectively and professionally.

Role of the Commercial Banks:

• Financial Intermediation

Commercial banks act as intermediaries between savers and borrowers. They collect deposits from the public and provide loans to individuals, businesses, and governments. This function facilitates the smooth flow of money within the economy. Banks ensure that idle savings are transformed into productive investments, thus supporting economic development. By evaluating credit risk and allocating funds efficiently, they minimize financial uncertainty. Their intermediation helps maintain liquidity in the financial system and supports consumption, investment, and growth, making them a crucial pillar of modern economic infrastructure.

• Credit Allocation

Commercial banks play a key role in allocating credit to different sectors of the economy. They assess the creditworthiness of borrowers and distribute funds accordingly to promote balanced economic growth. Priority sectors like agriculture, small businesses, and infrastructure often receive targeted loans. Through this role, banks support social objectives such as employment, poverty reduction, and regional development. By providing customized credit solutions, banks encourage entrepreneurship and industrialization. Their credit allocation policies influence national economic priorities and help in managing inflation, liquidity, and fiscal stability.

• Promotion of Entrepreneurship

Commercial banks support entrepreneurship by providing the necessary financial resources for starting and expanding businesses. Through term loans, working capital finance, and credit guarantees, banks reduce financial barriers for entrepreneurs. They also offer guidance, project appraisal, and risk management services. By supporting micro, small, and medium enterprises (MSMEs), banks contribute to innovation, job creation, and self-employment. In rural areas, banks promote financial inclusion by funding small-scale industries and self-help groups. Thus, commercial banks serve as a catalyst in building a vibrant entrepreneurial ecosystem.

• Implementation of Monetary Policy

Commercial banks assist central banks in implementing monetary policy by regulating credit and interest rates. They follow guidelines related to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and reverse repo rate. These tools help control inflation, manage liquidity, and stabilize the currency. When central banks adjust policy rates, commercial banks correspondingly change their lending and deposit rates, influencing the overall money supply in the economy. Through these mechanisms, commercial banks ensure the effectiveness of monetary policy and maintain financial discipline.

• Development of Trade and Industry

Commercial banks play a significant role in the development of trade and industry by providing finance, banking services, and infrastructure support. They offer trade credit, bill discounting, letters of credit, and foreign exchange services that enable smooth business operations. Banks also invest in infrastructure projects, industrial ventures, and supply chain financing. By facilitating both domestic and international trade transactions, they boost production, export competitiveness, and economic integration. Their financial support is critical in helping industries scale, modernize, and remain globally competitive.

The relationship between a banker and a customer is central to the functioning of the banking system. It forms the foundation for all transactions and interactions that take place between the two parties. This relationship is primarily based on mutual trust and adherence to legal and ethical standards. Banks provide financial services and products, while customers entrust them with their money, expecting these services to be performed in a manner that ensures security, reliability, and convenience.

Nature of Relationship

• Contractual Relationship

The relationship between a banker and a customer is primarily contractual. When a customer opens an account with a bank, they enter into an agreement with the bank. The customer agrees to deposit funds, while the bank agrees to provide services such as withdrawals, transfers, and loan facilities. This contract is governed by the terms and conditions outlined by the bank, which both parties must abide by. The contractual nature means that both the banker and customer have specific rights and obligations.

• Debtor-Creditor Relationship

The banker-customer relationship is commonly described as one of debtor and creditor. When a customer deposits money in the bank, the bank assumes the role of the debtor, owing the money to the customer. Conversely, when the bank provides loans or credit facilities to the customer, the customer becomes the debtor, owing money to the bank. The banker holds the funds of the customer in trust, and in return, the customer has the right to claim the deposit amount at any time, subject to the conditions of the agreement.

• Fiduciary Relationship

In certain cases, the banker-customer relationship can also be fiduciary. This means that the banker has a legal obligation to act in the best interests of the customer. For instance, when the bank manages the customer’s assets or provides investment advice, it must do so with care and loyalty, placing the customer’s interests ahead of its own.

• Bailment Relationship

Bailment relationship exists when a customer deposits valuables like jewelry or documents in a safety locker provided by the bank. In this case, the bank acts as a bailee, responsible for the safekeeping of the items until they are returned to the customer. The bank has a duty to ensure the safety and protection of the deposited items.

Rights of the Banker:

• Right to Charge Interest

Banker has the right to charge interest on loans, credit facilities, and overdrafts provided to the customer. The rate of interest is usually predetermined and disclosed at the time of granting the loan.

• Right to Set-Off

Bank has the right to set off or adjust any amounts owed by the customer to the bank against the customer’s balance in another account. This is known as the banker’s right of set-off. It allows the bank to recover dues from the customer by utilizing any credit balance the customer has in other accounts with the bank.

• Right to Close Accounts

Bank has the right to close a customer’s account if it becomes inactive or if the customer violates the terms and conditions of the agreement, such as non-compliance with minimum balance requirements. However, the bank must inform the customer before taking this action.

• Right to Receive Payments

The banker has the right to demand payment for services rendered, such as fees for account maintenance, ATM usage, and other banking products or services.

Duties of the Banker:

• Duty of Confidentiality

One of the primary duties of a banker is to maintain the confidentiality of customer information. The bank must not disclose any personal, financial, or transactional details to third parties unless authorized by the customer or required by law. This confidentiality extends to the customer’s account details and any other private information related to the customer’s banking relationship.

• Duty of Care

Bank is obligated to exercise reasonable care in managing the customer’s accounts and transactions. This includes ensuring that there are no errors in processing payments, withdrawals, or deposits. The bank must also ensure the security of the customer’s funds and prevent unauthorized access.

• Duty to Provide Services

Banks are obligated to provide the services they offer as per the agreement with the customer. This includes services like providing access to deposits, issuing checks, facilitating fund transfers, and offering loans. The bank must ensure that these services are rendered efficiently and timely.

• Duty to Honor Cheques

Bank is required to honor the customer’s cheques, provided that the customer has sufficient funds in the account to cover the payment. If a cheque is dishonored due to insufficient funds, the bank must notify the customer. The bank also has the right to refuse payment if the cheque is post-dated, altered, or lacks a signature.

Rights of the Customer:

• Right to Access Funds

The customer has the right to access their funds in the bank accounts at any time, subject to the terms and conditions of the account. This includes making withdrawals, using checks, and conducting other financial transactions.

• Right to Receive Interest

Customers have the right to receive interest on their deposits, provided that the deposit account type entitles them to such benefits. The rate of interest is typically agreed upon when the account is opened.

• Right to Protection Against Fraud

Customers are entitled to protection against unauthorized transactions or fraud. Banks are responsible for safeguarding the customer’s account against fraud and must take steps to prevent such occurrences.

• Right to Closure of Account

The customer has the right to close their account at any time. However, the bank may impose certain charges or conditions for closing the account, depending on the terms of the agreement.

Duties of the Customer:

• Duty to Provide Accurate Information

Customer must provide the bank with accurate and up-to-date information. This includes personal details, financial status, and changes in the customer’s circumstances, such as change of address, employment, etc.

• Duty to Maintain Account Minimums

Depending on the type of account, the customer may have a duty to maintain a minimum balance. Failure to do so may result in penalties or even account closure.

• Duty to Protect Bank Assets

Customers must take reasonable precautions to protect their bank cards, checks, and account details from unauthorized access. This includes safeguarding PINs, passwords, and reporting lost or stolen items promptly.

• Duty to Honor Debts

Customers have the duty to repay any loans or credit extended to them by the bank, including credit card bills, loans, and overdraft facilities. The customer must ensure that payments are made on time to avoid penalties and a negative impact on credit scores.

Legal Considerations in Banker-Customer Relationship

Banker-customer relationship is governed by both contract law and specific banking regulations. In India, for instance, the Banking Regulation Act, 1949 provides the legal framework within which the banking sector operates. Similarly, the Indian Contract Act, 1872 governs the contractual aspects of the relationship. In case of disputes, both parties may seek resolution through legal means, including the consumer protection mechanisms provided by the Consumer Protection Act, 2019.