Commercial Banks in INDIA

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.

(i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.

(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.

(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Functions of Commercial Banks

The functions of commercial banks are of two types.

(A) Primary functions; and

(B) Secondary functions.

(I) Primary Functions

The primary functions of a commercial bank include:

a) Accepting deposits; and

b) Granting loans and advances.

a) Accepting deposits

The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.

b) Grant of loans and advances

The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment.

i) Loans

A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.

ii) Advances

An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

Ii) Secondary Functions

Ø Issuing letters of credit, travellers cheque, etc.

Ø Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers.

Ø Providing customers with facilities of foreign exchange dealings.

Ø Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.

Ø Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc.

Ø Collecting and supplying business information.

Ø Providing reports on the credit worthiness of customers.

Ø Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc.

Ø Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

Activities of Commercial Banks

The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise:

Ø  Transfer of funds

Ø  Acceptance of deposits

Ø  Offering those deposits as loans for the establishment of industries

Ø  Purchase of houses, equipments, capital investment purposes etc.

Ø  The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture.

Ø  The Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc.

List of Commercial Banks in India

SBI & Associates: State Bank of India , State Bank of Hyderabad , State Bank of Mysore

Nationalised Banks: Bank of Baroda , Bank of India, Canara Bank , Central Bank of India , Indian Bank , Indian Overseas Bank

Foreign Banks: Bank of America , Bank of Ceylon , Citibank

Co-Operative Credit Institutions in INDIA

Rural credit cooperatives in India were originally envisaged as a mechanism for pooling the resources of people with small means and providing them with access to different financial services. Democratic in features, the movement was also an effective instrument for development of degraded waste lands, increasing productivity, providing food security, generating employment opportunities in rural areas and ensuring social and economic justice to the poor and vulnerable.

The short-term cooperative credit structure consists of 31 State Cooperative Banks (SCBs),  District Central Cooperative Banks (DCCBs) and 1,05,735 Primary Agriculture Credit Societies (PACS) as on 31 March 2004. 16 States are having a three-tier structure, 13 States have a two-tier structure and two States have a mixed structure. Jharkhand SCB is yet to become operational.

Co-operation means voluntary association on the basis of equality and for some common purpose. The basic principle of co-operation is ‘each for all and all for each’.

A co-operative bank is an institution established on co-operative basis and deals in ordinary banking business. They are different from commercial banks. Commercial banks have been constituted by an Act passed by parliament while cooperative banks have been constituted by different states under various Acts related to cooperative societies of various states. Cooperative banks are generally concerned with the rural and development credit and provide financial assistance for agricultural and rural activities.

A commercial bank can establish its branches in any district / state of the country, while cooperative bank can operate its activities only within limited area. Cooperative banks cannot open their branches in foreign countries while commercial banks can operate in foreign countries.

In India, the cooperative bank organization has a three tier set up. State Co-operative Bank is the apex co-operative bank at the state level. Central or District Cooperative Bank functions at district level. Primary Agricultural Co-operative Credit Society is at the village level.

1. Primary Agricultural Cooperative Credit Society (PACCS):

It is a village level institution which directly deals with rural people. It provides short term credit facilities to the agriculture sector. Minimum 10 persons of a village can form a primary credit society. The management of the society is under the control of an elected body. The working capital of the primary credit societies, comes from their own funds, deposits, borrowings and other sources. 

Borrowings are mainly from central cooperative banks. Borrowings form the chief source of working capital of the societies. Only the members of the societies are entitled to get loans from them. Low interest rates are charged on the loans. The various reconstruction and revival programmes for PACCSs adopted by Indian government and RBI have considerably reduced the number of primary credit societies over the past three decades. There were 1,61,000 societies in 1970-71. But as on March 31, 2001 there are about 1 lakh primary agricultural credit societies in India with approximately 10 crore members. A large number of societies face severe financial problems due to low recovery rates.

2. Central Cooperative Banks (CCBs):

The working area of these banks is limited to one district only.CCBs are of two types:

(a) Cooperative Banking Unions whose membership is open only to cooperative societies. This exists in Punjab, Haryana, Rajasthan, Orissa and Kerala.

(b) Mixed Central Cooperative Banks whose membership is open to both individuals and cooperative societies. CCBs get loans from the state cooperative banks and give loans to primary credit societies. The duration of such loans vary from one year to three years. In this way CCB plays a bridge role between the state cooperative banks and primary credit societies.

At the end of March 2004 there were 366 CCBs in India. The most distressing feature of the functions of the central cooperative banks is the heavy and increasing burden of overdue loans. The main causes of these overdue are (i) natural calamities such as floods, droughts, etc. affecting the repaying capacity of the borrowers and (ii) inadequate and inefficient supervision exercised by the banks.

3. State Cooperative Banks (SCBs): SCBs are the apex institutions in the three-tier cooperative credit structure, operating at the state level. Every state has a state cooperative bank. SCB grants loans to central cooperative banks and regulates their activities. SCB gets loans from RBI. SCB acts as a link between RBI and Central Cooperative Banks. Borrowings of SCBs are mainly from the Reserve Bank of India and the rest from state governments.

Advantages of co-operative credit institutions:

1. It provides an effective alternative to the traditional defective credit system of the village money-lender.

2. Co-operative societies charge comparatively low interest rates vis-a-vis the money-lenders.

3. Earlier, the cultivators used to borrow for consumption and other unproductive purposes. But now, they mostly borrow for productive purposes. Co-operative societies discourage unproductive borrowing.

4. Co-operatives help develop the habits of thrift among the agriculturists by encouraging savings and investments.

5. Co-operative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc. This has helped in the introduction of better agricultural methods.

Reserve Bank Of India

The Reserve Bank of India is the central bank of India, was established on April 1, 1935 during the British-Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937. Though originally privately owned, the RBI has been fully owned by the Government of India since nationalization in 1949.

The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years.

RBI is the banker to banks—whether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934.

Main objectives

Monetary Authority

• Formulates implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system

• Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redresses of complaints by bank customers.

Manager of exchange control

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency

• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: the main objective is to give the public adequate supply of currency of good quality and to provide loans to commercial bank to maintain or improve the GDP (Gross Domestic Product).

Developmental role      

• Performs a wide range of promotional functions to support national objectives.

Related functions

• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
• Bank to banks: maintains banking accounts of all scheduled banks

Main Functions of RBI

Reserve Bank of India is the main monetary authority of the country. It formulates implements and monitors the monetary policy and thereby plays a key role in maintaining price stability and ensuring adequate flow of credit to productive sectors. RBI is the regulator and supervisor of the financial system in the country. 


It prescribes broad parameters of banking operations within which the country's banking and financial system functions. It manages the foreign exchange of the country. Performs merchant banking function for the central and the state governments; also acts as their banker. Maintains banking accounts of all scheduled banks. Issues and exchanges or destroys currency and coins not fit for circulation.

Role  Of Reserve Bank Of India

The reserve Bank of India is the central bank of India. Therefore, it performs all those functions which are essentially being performed by the central bank of a country. The important functions of the reserve Bank of India are as follows:

1.Issue of notes: The Reserve Bank of India enjoys monopoly in the issue of currency notes as central Bank of the country. All the currency notes except one rupee note are issued by RBI. One rupee note and all coins of small magnitude are issued by the Government of India and are circulated through the Reserve Bank of India.

2.Banker, Agent and advisor to the Government:  The reserve bank of India acts as the banker, agent and advisor to the Government of India. It accepts payments for the account of the union and state governments and also makes payments on behalf of the Government.

3.Banker’s Bank: As an apex bank the RBI acts as banker of the banks and lender of the last resort. Under the RBI Act, the bank has been vested with extensive powers of supervision and control over all scheduled commercial and cooperative banks.

4.Custodian of Foreign Exchange Reserves: One of the important functions performed by the Reserve Bank is that of external value of the rupee. Apart from adopting appropriate monetary policies for the economic stability in the country and thereby exchange stability in the long-term, the Reserve Bank has to ensure that the normal short-term fluctuations in trade do not affect the exchange rate.

5.Regulation of Banking System: The prime duty of the reserve Bank is to regulate the banking system of our country in such a way that the people of the country can have trust in the-banking.

6. Clearing House Functions: The RBI operates clearing houses to settle banking transactions. The RBI manages 14 major clearing houses of the country situated in different major cities.

7.Credit Control: Credit control is a very important function of RBI as the Central Bank of India. The methods of credit control aim at influencing the quality of use of credit with respect to a particular area or field of activity.

Role of RBI in Agricultural Finance

Establishment of Agricultural Credit Department in 1935

Development of Co-operative Movement

Funding LDBs

Setting up ARDC in 1963

Encouragement of RRBs

Establishing NABARD in 1982

CRR ( cash reserve ratio): refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI.

SLR: Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.

BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Structure of Commercial Banks in India

The commercial banking system in India now consists of public sector scheduled banks and private sector scheduled as well as non-scheduled bank. In terms of business, the public sector banks now have a dominant position. They account for more than 80 percent of the entire banking business in the country. Under the Reserve Bank of India Act, 1934, banks were classified as scheduled and non-scheduled banks. The scheduled banks are those which are entered in the second schedule of RBI Act, 1934. All commercial banks, Indian and foreign, regional rural banks, and state co-operative banks are scheduled banks. 

Non – scheduled banks are those, which have not been included in the second schedule of RBI Act, 1934. At present, there are only five non- scheduled banks in the country. To be included in the second schedule, a bank (a) must have paid up capital and reserves of not less than Rs.5 lakhs. (b) It must also satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of depositors. Scheduled banks are required to maintain a certain amount of reserves with the RBI.

i. SBI and its Associate Banks: On the recommendations of the Rural Credit Survey Committee, the Imperial Bank of India was converted into the State Bank of India on July 1, 1955. 92 per cent of its shares were acquired by the RBI, and thus it had the distinction of becoming the first state owned commercial bank in the country. In 1959, the State Bank of India (Associate Banks) Act was passed and this paved the way for creating the State Bank Group. Now State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore consists of the State Bank Group. These were the banks of the erstwhile prince by states. The State Bank Group comprising the State Bank of India, and its associates has increased the number of branches from 2,462 on June 30, 1969 to 13, 684 in June, 2009. (Now State Bank of Saurashtra has merged with State Bank of India). The State Bank of India and its Associate Banks together account for around 20 per cent of the total branches of all commercial banks in the country. The share of the banking business of the State Bank Group is roughly 29 percent. In 1933, the State Bank of India Act was amended to enable it to have access to the capital markets. The SBI thus raised over Rs.2,400 crore through public issue. The RBI stake in SBI is now 55 per cent against 99 per cent earlier. (In March 2010, Pranab Mukherjee moved the SBI Bill in the Lok Sabha, which seeks to reduce the Union Government’s shareholding in the State Bank of India from 55 per cent to 51 per cent, to allow the SBI to raise more capital from the market)

ii. Other Nationalised Banks: A second category of public sector banks is of nineteen commercial banks, of which fourteen were nationalised on July 19, 1969. Each one of these fourteen banks had deposits of Rs.50 crore or more at that time. After nationalisation of 14 banks there was a rapid expansion of branch network. On April 15, 1980 six privately owned commercial banks were nationalised. With the nationalization of these six banks, the share of the private sector in the entire banking sector declined to just 9 percent. In 1993, New Bank of India merged with Punjab National Bank. As a result, the number of public sector banks other than the State Bank of India and its Associates declined to nineteen. The total number of branches of the nineteen nationalized banks was 38,046 as of 2008.

iii. Other Scheduled Commercial Banks: At present relatively small scheduled commercial banks and ten newly established banks with a network of 5,445 branches are the ones operating in the private sector. In terms of branches and also the business done by them, most of the private sector banks are much smaller than both nationalized banks and foreign banks. Their role in the financial system of the country is just marginal. So far ten new private sector banks have been set up and three more proposals for setting up banks in the private sector have been approved in principle. These private sector banks (both old and new) account for less than 15 per cent of both deposits and aggregate advances.

iv. Regional Rural Banks: Under the chairmanship of U. Narsimham, the Working Group on Rural Banks recommended the setting up of these banks as part of a multi – agency approach to rural credit. The first bank was set up on October 2, 1975. The regional rural banks meet the credit requirement of weaker sections, small and marginal farmers landless labours, artisans and small entrepreneurs. As of June 2008, there were 196 regional rural banks with a network of 14,832 branches in the country. Ninety per cent of these have been opened in rural areas and unbanked.

v. Foreign Banks: As of June 30, 2009 the country had 29 foreign banks with 273 branches located mainly in big cities. Apart from financing of foreign trade, these banks had made significant contribution to the development of banking habits in the country as they have performed all the functions of a commercial bank, including acceptance of deposits and lending of funds for trade and commerce.

vi. Lead Bank Scheme: The idea of the Lead Bank Scheme was mooted by the Gadgil Study Group in 1969. It had the backing of Nariman Committee also. The Lead Bank had to formulate a plan for the banking structure in the districts where such facilities were lacking at the time of nationalization. The scheme now function as a way of monitoringcredit flow for social and economic development in a district

LOAN REPAYMENT PLANS

A borrower may have good repaying capacity but defective repayment plan proposed by the lender would render him to become defaulter. It is, therefore, essential to chalk out well thought repayment schedules/plans. The most commonly used repayment plans for repaying the medium and long-term loans are discussed below:

i) Straight end Lumpsum repayment plan:- The entire loan is repaid on the expiry of the term but interest amount is paid every year. This plan has advantage of using existing capital where the borrower feels high marginal productivity of capital. Furthermore, this plan assumes that the good year shall balance out the bad year and at the end sufficient repaying capacity would be available to repay the entire loan. However, it happens quite often that at the end sufficient repaying capacity is not left and chances of defaulting the loan become high.

ii) Partially amortized loan repayments:- An “amortized loan” is one which is repaid in a series of payments/instalments to cover both interest and principal amount. The term “amortization” means “killing by degrees”, i.e., the repayment of principal loan in a series of instalments. The partially amortized loan involves small principal payments every year of the repayment term and remaining unpaid principal balance become due at the end as a lump sum or balloon payment. This payment term is slightly better than the earlier one as entire principal loan is not left for repayment at the end.

iii) Amortized even/level repayment plan:- Here the equal total payments are made every year i.e. a larger proportion of each succeeding principal amount/instalment and a smaller amount representing the interest. As interest payment decreases, the principal payment increases over the life of the loan to make equal total payment. This repayment plan is more suitable where income flow is constant over the entire period of asset, e.g., tractor or pump set, etc. The following equation is used to calculate the annual repayment instalment on even/level repayment basis.

P=B 1 n ךi

         a

Where, “P” represents the amount of annual instalment i.e., principal plus interest, “B” is the face value of the loan, “n” is the number of years for which loan has been given and “i” the annual interest rate. The term “1/ a n ךi” is read as “1 divided by a sub n at rate i” and represents the annuity that “1” will buy/purchase for “n” years with an annual interest rate “i”.

iv) Amortized decreasing repayment plan:- It involves the constant principal payment and the declining interest payment on outstanding balance. Consequently, total instalments decline in every succeeding year till the loan is not repaid. The decreasing repayment plan is appropriate when borrower is able to pay the higher initial instalments. This plan is well suited for farm machinery and equipment loan as a nominal amount of money is needed in initial years for repair and maintenance which helps the borrower to pay the heavy instalments in the beginning.

v) Graduated loan amortization plans:- It assumes lower instalments for the repayment of loan during early years as compared to conventional level/even repayment plan. When borrower’s income increases, the repayment amount also increases.

Vi) Flexible or variable repayment plan: - Since amortized repayment plans do not account for income variability overtime, the borrower may become defaulter during the draught year. In variable repayment plan, the higher amounts are repaid in good years while small or no repayment is made in bad years. It is a flexible repayment plan and fits well into the variable nature of farm incomes.