Dec 14 2008
CLASSIFICATION OF BANKS OF INDIA
The importance of banks in the modern economy cannot be denied. Banks play a significant role in the economic development of a country. It is very difficult to have a classification of banks that can be applied to all countries, because the economic conditions and financial needs vary from country to country and, consequently, the banks that are developed to meet the financial needs also differ from one country to another.
Generally, banks are classified on the basis of their functions. Such classification of banks is called ‘functional classification of banks’. On the basis of the functions, banks are classified into the following categories:
Commercial banks are those financial institutions which accept deposits from the public, repayable on demand and lend them for short periods. They borrow money in the form of deposits at a lower rate of interest and lend it at a higher rate and thereby make a profit for themselves. They lend to traders and manufacturers for short periods. They provide the working capital to the business in the form of overdraft and cash credit. Besides, the banks render a number of agency services such as collection of cheques and bills and subsidiary services such as discounting bills of exchange, safe keeping the valuables, issue of letters of credit, remittance of funds etc. The services of banks are ever expanding with the change. in the needs and requirements of the society.
2. Industrial Banks or Investment Banks
Industrial banks are banks which provide block or fixed capital (i.e., long term finance) to industries. As they finance industries, they are called industrial banks. They are also called investment banks, as they invest their funds in subscribing to the shares and debentures of industrial concerns with the object of providing long term finance to industries. Therefore, an industrial bank is an institution established to provide long-term financial requirements of industry.
The main functions of industrial banks are:
1)They grant long term loans to industries. Loans are given to industries for periods ranging from 5 to 15 years for the construction or acquisition of factory buildings, purchases of machinery etc.
2)They subscribe to the share capital and debentures of industrial concerns.
3)They underwrite the shares and debentures issued by industrial concerns, and thereby assure the industrial undertakings of sufficient long term capital.
4)They provide technical assistance to industries.
5)They participate in the management of industrial concerns by having their representatives on the Board of Directors of the industries.
6)They advise the government on matters relating to industries.
Today almost all leading countries of the world have industrial banks to provide industrial finance. In India we have a number of financial institutions to finance industries.
Agricultural banks are the specialised institutions which are intended to provide agricultural credit. Agriculturists require both short term and long term loans for agricultural operations. Short term loans are required for the purposes of purchasing seeds, manure etc. and also for harvesting and marketing of agricultural products. Long term loans are needed to make permanent improvement to land and for the purchase of costly agricultural implements like pump-sets, tractors etc.
Agricultural banks are found in many countries, like India, England, Germany, France, U.S.A etc. In most of the countries, agricultural banks are organised on co-operative basis. Agricultural banks organised in India on the co-operative basis are of 2 types. They are:
1)Agricultural co-operative banks.
2)Land mortgage or land development banks. Agricultural co-operative banks provide short-term finance to the agriculturists. Land development banks provide long term finance to the farmers for the purchase of agricultural machinery, construction of minor irrigation works etc.
Exchange banks are banks which finance mainly the foreign exchange business (i.e., the export and import trade) of a country. As they finance mainly the foreign exchange business of a country, they are called exchange banks.
Special exchange banks are found only in some countries. In many countries, commercial banks themselves perform exchange business of a country.
In India, the major part of foreign exchange business is done by foreign exchange banks (i.e., foreign banks conducting the foreign exchange business of India through their branches in India) A small portion of India’s foreign exchange business is done by Indian commercial bank.
The chief functions of exchange banks are:
a. They purchase or discount export and import bills and thereby finance the foreign trade of a country.
b. They collect export bills of exchange on behalf of exporters. They accept bills of exchange on behalf of importers.
c. They provide necessary trade information to exporters and importers. They provide facilities for remittance of money from one country to another.
d. They issue letters of credit, circular notes, travellers cheques etc. to travellers who wish to go to foreign countries on business or private tours.
e. They purchase and sell foreign currencies.
f. Besides the above foreign exchange business, they also undertake ordinary commercial bankers business, such as the acceptance of deposits from the public and the financing of internal trade, commerce and industry.
Savings banks are specialised institutions to collect savings from the poor and middle income people of the society. These banks primarily intended to encourage habits of thrift and savings among people with small incomes. The depositors are allowed to withdraw the amount in tiI1,1es of need. But there are restrictions on the number of withdrawals to be made. Separate savings banks are organised in various countries. In India there are no special savings banks. The savings bank business is performed by commercial banks and post offices.
The principal functions of savings bank are:
1. They mobilise the small and scattered savings of the people.
2. By mobilising the small savings of the people, they promote the habit of thrift and saving among the poor sections of the community.
3. They keep only a small portion of their deposits in hand for meeting the withdrawals of the depositors and invest the major part of their deposits on government securities. Generally they do not lend their funds to the general public.
Today, every country in the world has a Central Bank. A Central Bank is the highest banking and monetary institution of a country. In other words: it is the leader of all other banking and monetary institutions found in country. As it occupies a central position in the banking structure of a country it is called the Central Bank. The Central Bank works for the promotion 0 the monetary and economic stability of the country. Unlike other banks does not work for profits.
The chief functions of a central bank are:
1. It has the monopoly of issuing currency notes. It issues currency not in accordance with the requirements of commerce, industry and other economic activities of the country.
2. It acts as a banker to the government.
3. It serves as a banker’s bank.
4. It acts as the controller of credit. It controls the credit created by commercial banks, with the help of various weapons of credit control with a view to direct the flow of credit to desirable economic activities.
5. It is the custodian of a nation’s gold and foreign exchange reserves.
The indigenous bankers are professional dealers in hundis and they are the true financial intermediaries, as they accept deposits or avail themselves of credit. They operate mainly in small towns, semi-urban areas and rural areas, though they are also found in bigger commercial and industrial centres. Though money lending is carried on by people belonging to all castes, indigenous banking is continued to certain castes which are known as banking castes. The important among them are Jains, Marwaris and Chettiars. It is purely a family business and it is hereditary, in nature.
The Central Banking Enquiry Committee of 1931 defines an indigenous banker as, “an individual or firm accepting deposits and dealing in hundis or lending money to the needy”. According to this definition, acceptance of deposits and dealing in hundis are the essential conditions for an indigenous banker. The Bengal Provincial Banking Enquiry Committee defined indigenous bankers as, “individuals or firms who deal in hundis, whether they accept deposits or not”‘. So acceptance of deposits cannot be considered to be an essential condition for calling one as indigenous banker. The only J essential feature that makes one an indigenous banker is dealing in hundis.
Indigenous bankers can be classified into three types on the basis of the functions. They are:
1. Whose principal business is banking and subsidiary business is trading.
2. Those for whom both banking and trading business are equally important.
3. Whose principal business is trading and subsidiary business is banking. However, the majority of indigenous bankers belong to the second type.
The functions of indigenous bankers may be classified into two categories viz (1) banking functions and (2) non-banking functions.
1. The main banking functions are
2. They accept deposits,
3. They grant loans to the needy borrowers,
4. They even provide long-term capital to the industrial concerns by subscribing to their debentures,
5. They arrange for the remittance of funds from one place to another through hundis.
The chief non-banking functions are
1. A good number of indigenous bankers carry on retail trading, in addition to their banking business.
2. A good majority of them act as bullion and jeweller’s merchants. They buy and sell bullion (i.e., gold and silver).
3. They also act as the commission agents of big commercial firms.
4. Sometimes they indulge even in speculative activities.
The indigenous bankers occupy a very important position in the credit structure of our country. The most important features which attract the borrowers towards the indigenous bankers are the flexibility and easy accessibility. Their operations are simple and free from formalities and delays. They do not have any fixed working hours. People who are in need of money can get it at any time they want. They maintain close personal touch with their clients and watch their financial position after giving the accommodation.
The customers of the indigenous bankers generally consist of the agriculturists, small industrialists and traders. Indigenous bankers charge higher rate of interest. There is unhealthy competition among the indigenous bankers themselves.
Co-operative banks are formed on the principle of co-operation to extend credit facilities to farmers and small-scale industrial concerns. Banks promote in general the habit of thrift and self help among the low and middle income groups of the society. The distinguishing feature of a co-operative bank is the absence of profit motive. Co-operative banks are very helpful to meet the requirements of small farmers, artisans etc. In India, co-operative banks have been the pioneers in mobilising rural deposits. Today, however, the cooperatives have been putting more weight on their lending activities than on deposit mobilisation.
Co-operative banking has three-tier structure. At the state level, there is State Co-operative Bank. This is the apex bank which governs all the cooperative banks in the state. At the intermediate level, there are Central Cooperative Banks. There is generally one central co-operative bank for each district. At the base of pyramid, there are primary credit societies at the village level.
Rural banks have been set up in backward rural areas where the coverage of commercial and co-operative banks is poor. The purpose of these banks is to finance agricultural operations and provide employment to rural educated youth. In order to avoid the weakness of commercial and co-operative banks, rural banks were established.
In India, Regional Rural Banks were established in 1975… The main objective of Regional Rural Bank is to increase the flow of credit and the availability of banking facilities in rural areas and move specifically to the poorer sections of the rural population. The Regional Rural Banks have been included in the second schedule to the Reserve Bank of India Act and therefore, - e enjoy the same privileges and facilities as the scheduled banks, including access to the Reserve Bank for financial accommodation. The depositors with these banks also enjoy the insurance facility granted by Deposit Insurance Credit Guarantee Corporation.
As the very name suggests, the International Bank for Reconstruction and Development is an international monetary institution formed for the · reconstruction of European countries destroyed by war and for the promotion; - the development of less developed countries all over the world. It is also the outcome of the Brittan Woods Conference held in July, 1944. It came in existence in December 1945 and began its operations in June 1946.
Objectives of IBRD
The objectives of the World Bank are as follows:
1. To help in the reconstruction of economics disrupted by the war and the development of backward countries by supplying them long term investment loans on reasonable terms.
2. To promote private foreign investment by guaranteeing the repayment of loans made by private foreign investors.
3. To guide international investment into productive channels.
4. To promote multilateralism in international trade by ~ranting united loans and permitting the borrowing countries to spend the loan proceeding in purchasing equipments and goods from any country they like.
5. To promote the long term balanced growth in international trade and the maintenance of equilibrium in the balance of payments of member countries by encouraging foreign investments for the development of the productive resources of the member countries.
6. To provide assistance in improving the economic development and standard of living of the people of member countries.
Functions of the World Bank
The functions of Banks are as follows:
1. Granting of loans: The most important function of the bank is the granting of liberal long term united loans to member countries for specific development projects. The Bank’s financial assistance to a member country takes three forms. They are (a) Loans out of its own funds i.e., out of the capital raised from the members. (b) Loans out of funds borrowed by the Bank from member countries. (c) Guarantee of loans granted by private investors to member countries.
2. Provision of Technical Assistance: It sends to the member countries its economic experts to carry out the general survey of their physical or economic resources.
3. Other functions: In addition to the provision of financial and technical assistance to member countries, the Bank performs some other functions also. It uses its good offices for the settlement of disputes between the member countries.
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Introduction
Co-operative banks are an important constituent of the Indian financial system, judging by the role assigned to them, the expectations they are supposed to fulfil, their number and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased in recent years mainly due to the sharp increase in the number of primary co-operative banks.
Origin and Growth of Co-operative Banks in India
Co-operative banks are a part of the vast and powerful superstructure of co-operative institutions which are engaged in the tasks of production, processing, marketing, distribution, servicing, and banking in India. The beginning of co-operative banking in this country dates back to about 1904. Official efforts were initiated to create a new type of institution based on the principles of co-operative organisation and management, which were considered to be suitable f0r solving the problems peculiar to Indian conditions. In rural areas, as far as agricultural and related activities were concerned the supply of credit, particularly institutional credit, was inadequate, and unorganised money market agencies, such as money lenders, were providing credit often at high rates of interest. The co-operative banks were conceived in order to substitute such agencies, provide adequate short term and long term institutional credit at reasonable rates of interest, and to bring about integration of the unorganised and organised segments of the Indian money market.
When the national economic planning began in India, co-operative banks were made an integral part of the institutional framework of community development and extension services, which was assigned the important role of delivering the fruits of economic planning at the grass root levels. In other words, they became a part of the arrangements for decentralised plan formulation and implementation for the purpose of rural development in general and agricultural development in particular. Today co-operative banks continue to be a part of a set of institutions which are engaged in” financing rural and agricultural development. This set-up comprises the REI, NABARD, Commercial Banks, Regional Rural Banks, and Co-operative Banks. The relative importance of co-operative in financing agricultural and rural development has undergone some changes over the years. Till 1969, they increasingly substituted the informal sector lenders. After the nationalisation of and the creation of RRBs and NABARD, however, their relative share has somewhat declined. All the institutional sources contributed about 4 per cent of the total rural credit till 1954. This contribution increased to 62 per cent by 1990. The share of co-operative banks in this institutional lending has declined from 80 per cent in 1969 to about 42 per cent at present. The percentage of rural population covered by the Agricultural Credit Co-operatives was 7.8 in 1951, 36 in 1961 and about 65 per cent at present.
Features of Co-operative Banks
Some distinguishing characteristics of the nature of co-operative banks are as follows:
i. They are organised and managed, on the principles of co-operation, self-help, and mutual help: They function with the rule of one member, one vote
ii. They function on “no’ profit, no loss” basis: For commercial banks also, profitability is no longer the main objective, but in their case this change has been brought about as a result of social or public policy, while co-operative banks, by their very nature, do not pursue the goal of profit maximisation.
iii. Co-operative banks perform all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. However, it is said that the range of services offered is narrower and the degree of product differentiation in each main type of service is much less in the case of co-operative banks, compared to commercial banks. In other words, co-operative banks are characterised by functional specialisation. It should be added that this is true with much less force now, because many changes have taken place in the co-operative banking system since the Banking Commission arrived at the above-mentioned conclusion. For example, co-operative banks now provide housing loans also. The UCBs provide working capital loans and term loans as well. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans up to Rs one lakh to an individual. The scheduled UCBs, however, can lend up to Rs three lakh for housing purposes. The UCBs can provide advances against shares and debentures also.
iv. Co-operative banks do banking business mainly in the agricultural and rural sector: However, certain types of Banks viz., UCBs, SCBs and CCBs operate in semi-urban, urban and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural.
v. Co-operative banks are perhaps the first government-sponsored, government-supported, and government subsidise Financial agency in India. They get financial and other help from the REI, NABARD, Central Government and State Governments. They constitute the “most favoured” banking sector with no risk of nationalisation. For commercial banks, the RBI is a lender of last resort, but for co-operative banks, it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state governments), working capital, and re-finance. The promotional role of the RBI can be seen in respect of co-operative banks, and this role supersedes its regulatory role, in respect of these banks.
vi. Co-operative banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long term loans, UCBs meet working capital as well as fixed capital requirements, and SCBs and CCBs also provide both short term and long term loans. Similarly, they accept short-term and long term deposits and some of them mobilise resources through the issue of debentures.
vii. Co-operative banks are financial intermediaries only partially. The sources of their funds resources are: (a) Central and state governments, (b) the REI and NABARD, (c) other co-operative institutions, (d) ownership funds, and (e) deposits or debenture issues. It is interesting to note that intra-sectored flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit form a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intrasectoral interaction is high for co-operative banks.
viii. Co-operative banks have a federal structure of three-tier linkages. Further, their operation of mixed banking type. Primary credit societies are unit banks; many UCBs also are unit banks. But SCBs, DCBs (CCBs), and SLDBs, PLDBs and many UCBs have a number of branches, subject to this, it can be said that each co-operative institution in each tier is a separate entity with definite jurisdiction and has an independent board of management.
ix. Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative banks are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crores are included in the Second Schedule of the RBI Act.
x. Co-operative banks accept current, saving, and fixed or time deposits from individuals and institutions including banks. Some UCBs numbering about 40 in 1989 are allowed to open and maintain NRI accounts in rupees but not in foreign currency. Deposits mobilised by them in a given area are used for financing activities in that locality.
xi. The co-operative banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are.
xii. Since 1966, the lending and deposit rates of commercial banks have been directly regulated by the RBI. In the recent past, the RBI has introduced changes in interest rates of co-operative banks also, along with changes in interest rates of commercial banks. The interest rates structure of co-operative banks is quite complex. The rates charged by them depend upon the type of bank, the type of loans, and vary from state to state.
xiii. (xiii)Although the main aim of the co-operative banks is to provide cheaper credit to their members, and not to maximise profits, they may access the money market to improve their income so that they remain viable.
xiv. (xiv) Co-operative banks (COBs). In short, have played a pivotal role in the development of short term and long term rural credit structure in India over the years. The co-operative credit endeavour is said to be the first ever attempt at micro-credit dispensation in India. The entire cooperative credit system covers more than 74 per cent of rural credit outlets, and it has a market share of about 46 per cent of total rural credit in the country. From being the providers of loans for redemption of debt, COBs have gone on to meet the investment requirements of all activities in rural areas. The co-operative credit structure had a membership of 1.3 crores, net owned funds of Rs 3191 crores, and outstanding loans and advances of Rs 17261 crores in 2001. However, too much intervention by the State in day-to-day arrangement has ‘contributed to the lack of involvement and ownership of people in their functioning. The COBs need to become member-driven banks. There is also a need to do away with the duality of control over them by the RBI and state government. They need support in respect of infrastructure, resource base, professional management, etc.
Main Weaknesses of Co-operative Banks
The main weaknesses of co-operative banks are as follows:
a) The vital link in the co-operative credit system namely, the PACSs, themselves remain very weak. They are too small in size to be economical and viable; besides too many of them are dormant, existing only on paper.
b) With the expanding credit needs of the rural sector, the commercial banks have come in actively to meet the credit requirements of this sector, and this has aggravated the difficulties of co-operative banks. The theory that co-operative banks would be buoyed up by the competition from other financial institutions does not appear to have worked.
c) Co-operative banks are not doing well in all the states; only a few account for a major part of their business. For example, 75 per cent of total deposits mobilised by SCBs was only from seven states in 1987Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, and Uttar Pradesh.
d) These banks still rely very heavily on refinancing facilities from the government, the RBI, and NABARD. They have yet not been able to become self-reliant in respect of resources through deposit mobilisation.
e) They suffer from dangerously low or weak quality of loan assets, and from highly unsatisfactory recovery of loans.
f) They suffer from infrastructural weaknesses and structural flows. They do not look like banks and do not inspire confidence in the potential members, depositors and borrowers.
g) They suffer from top much officialisation and politicisation. Undue governmental interventions have prevented them from developing steadily as a self-reliant credit system. Most of them are headed by politicians.
h) They unduly depend on government capital rather than member capital.
i) There is no active participation of their members in their working, which can come about “If they work with members’ money rather than government largesse”.
j) They have been resorting to unethical practices
k) There are many regulators for them, but still there are many lacunae in their regulation. In fact, the existence of multiple regulatory authorities has come in the way of effective regulation, control, and monitoring of COBs. The RBI had suggested a creation of a single regulatory body, but the proposal has not been accepted so far due to considerations of powerful politics, which afflicts the co-operative sector perhaps more than other sectors in India.
Introduction
Foreign exchange banks have been operating in India since a-very long time. There were foreign exchange banks doing business in India even before 1870. Under the special treatment given to them by the British Government in India, they made rapid progress. Before 1947, they had maintained a monopolistic position in India’s foreign trade. Even today, they have a major share of India’s foreign trade.
Today, there are 31 foreign exchange banks, with about 182 branches spread in the important towns and cities of India. Some of the important foreign banks are:
1. Lloyds Bank.
2. Chartered Bank.
3. Eastern Bank.
4. Mercantile Bank.
5. National and Grind1ays Bank.
6. British Bank of the Middle East.
7. Banque Nationele de Paris.
8. General Bank of Nethyrlands.
9. First National City Bank.
10. American Express Company.
11. Bank of America (American National Trust and Savings-Association.)
12. Hongkong and Shanghai Banking Corporation.
13. Bank of Tokyo.
14. Mitsui Bank.
Meaning of Foreign Exchange Banks
Foreign exchange banks are joint stocks banks incorporated in foreign countries, and engaged mainly in the financing of the foreign trade of India through their branches in India. They are called foreign exchange banks for two reasons.
(a) They are incorporated in foreign countries.
(b) They deal mainly in the foreign exchange business of India. i.e., they finance mainly the foreign trade of India.
Factors responsible for the Foreign Exchange Bank’s, major share in India’s Foreign Trade
A major share of India’s foreign trade is handled by the foreign exchange banks. Only a small proportion of India’s foreign trade is handled by Indian commercial banks.
The main causes responsible for the foreign exchange banks’ major share in India’s foreign trade and the Indian Commercial banks’ meagre share in India’s foreign trade are:
1. The foreign exchange banks have been operating in India since a very long time. As such, they have high prestige and enjoy a high degree of public confidence.
2. The financial resources of foreign exchange banks are much more than those of Indian commercial banks.
3. The level of efficiency of foreign exchange banks is much higher than that of Indian Commercial Banks. Consequently, the foreign exchange banks are able to get more exchange business than the Indian Commercial Banks.
4. Prior to 1947, the foreign exchange banks were given all sorts of facilities, by the British Government in India. On the other hand, these special privileges were not given to the Indian commercial banks.
5. Before 1947, the foreign trade of India was mainly in the hands of foreign business firms. These foreign business firms patronised only the foreign exchange banks, and not the Indian commercial banks.
6. The foreign exchange banks have branches in almost all the important trade centres of the world. But the Indian commercial banks have branches only in a few foreign cities like London, New York, etc.
The limited financial resources of Indian joint stock banks are absorbed in inland business itself, and so, foreign exchange business does not afford sufficient attraction for them. On the other hand the foreign exchange banks concentrate mainly on the foreign exchange business.
Foreign exchange business is highly technical and complicated. It requires the services of skilled and experienced personnel. The foreign exchange banks have a large number of such personnel. On the other hand, the Indian joint stock banks do not have sufficient number of such personnel.
Functions of Foreign Exchange Banks
Foreign Exchange Banks perform a number of functions. They are:
1. Financing of India’s Export Trade: One of the main functions of the foreign exchange banks is the financing of India’s export trade. They finance about 70% of India’s export trade.
2. Financing of India’s Import Trade: Financing of India’s import trade is another important function of Foreign Exchange Banks. They finance over 80% of India’s import trade.
3. Financing of India’s Inland Trade: The foreign exchange banks do not confine themselves to the financing of India’s foreign trade alone. They have begun to finance even the internal trade of India. They finance the movement of goods from the interior centres to the ports, and from the ports to the interior centres. They are able to finance a substantial portion of India’s inland trade, because exporters and importers feel that it is convenient and economical to deal with a single bank, Le., an exchange bank, for the movement of goods from the interior centres to the ports and from the ports to the foreign countries and vice versa, instead of dealing with two banks, i.e., an exchange bank and a commercial bank, for the same purpose.
4. Performance of Ordinary Banking Functions: Foreign exchange banks perform many ordinary commercial banking functions also. They are:
a. They accept deposits from the public. As they have high prestige and public confidence, they are able to attract huge deposits.
b. They give loans and advances to businessmen and industrialists.
c. They discount inland bills also.
d. They provide remittance facilities to their customers.
e. They collect information about businessmen in other places, inland as well as foreign, and supply the same to their customers.
5. Purchase and Sale of Foreign Currencies: Since the institution of exchange control by the Reserve Bank of India, the foreign exchange banks have been appointed as authorised dealers in foreign currencies. They buy and sell foreign currencies to those who hold the necessary permits from the Reserve Bank of India.
Complaints against the Foreign Exchange Banks
Many charges have been levelled against the foreign exchange banks.
They are:
1. They handle the bulk of India’s foreign trade and earn large sums of money as commission, brokerage, etc. With the result, the Indian banks are deprived of their due share of the profitable part of banking business, viz., the foreign exchange business.
2. They discriminate against Indian importers. Indian importers are offered only Documents against Payment (DIP) terms, while foreign firms in India importing goods from foreign countries and foreign importers are given Documents against Acceptance (DIA) terms.
3. When the Indian importers approach the exchange banks for letters of credit, they insist on a margin of at least 10 % to 15 % of the value of securities offered by the Indian importers. On the other hand, when the foreign firms in India approach them for such credit, they do not insist on margins.
4. They give poor references even in the case of Indian firms with good financial standing. On the other hand, they give very good references about foreign firms even though their financial standing is very poor.
5. When the Indian importers are unable to make immediate payments, they force them to take delivery of the shipping documents under a trust receipt and pay 6 % interest on the value of the bill.
6. They force the Indian exporters to offer D/A terms to the foreign importers, and thereby, make the Indian exporters wait for 3 months for the payment or discount the bills and lose some money, if they want immediate payment.
7. Before the passing of the Banking Regulation Act of 1949, they used to divert a major portion of the funds raised by them in India to foreign countries for investment.
8. They pressurise the Indian businessmen to make use of the services of foreign shipping and foreign insurance companies and thereby discourage Indian shipping and insurance companies.
9. By keeping the import bills in their hands till the due dates, and not discounting them immediately, they have stood in the way of the development of a bill market or discount market in India.
10. They are not content with the financing of India’s foreign trade. They are competing with Indian commercial banks even in India’s inland trade.
11. They also compete with Indian commercial banks in the ordinary banking activities, such as the acceptance of deposits, the granting of loans and discounting of inland bills. .
12. While giving advances, they give preferential treatment to foreign firms in India.
13. As the head offices of these banks are situated in foreign countries, the policies of these banks are not formulated with Indian interests in view.
14. They have been deliberately shutting out Indians from high administrative positions in their banks.
15. They keep very small cash reserves. This is not in the interests of the Indian depositors.
16. The accounts maintained by foreign banks were not subject to auditing. They never published their annual statements of affairs.
Amongst the banking institutions in the organised sector, the commercial banks are the oldest institutions having a wide network of branches, commanding utmost public confidence and having the lion share in the total banking operations. The commercial banks play a significant role in all the economic activities of a nation. Today, commercial banks have come to be regarded as instruments of economic growth with social justice. In this role they have to mobilise savings of the community and channel them into socially productive investment.
To have a clear idea about the economic significance of commercial banks, it is essential to analyse the various functions performed by them. The various functions may be classified under two main headings -
A. Primary functions B. Secondary functions
A. Primary Functions
The primary functions of a commercial bank can be classified as: (i) Accepting Deposits, (ii) Lending Money and (iii) Creation of Credit.
(i) Accepting Deposits
One of the most important primary functions of a commercial bank is accepting deposits of various kinds. A major portion of the deposits accepted are repayable on demand. Generally, the following:
1. Fixed Deposits: In this category are included the deposits with the bank for a fixed period which is specified at the time of making the deposit. Such deposits are therefore, called Fixed Deposits or Time Deposits. Fixed Deposits are repayable on the expiry of the specified period, chosen by the depositor to suit his purpose. As the date of repayment is certain, they are able to invest the money for long periods and thus earn a higher return on the investment. Cheque system is not allowed against fixed deposits. At the time of opening fixed deposit account, banker issues a receipt acknowledging the receipt of money on deposit account. It is known as Fixed Deposit Receipt (FDR).
2. Current/Demand Deposits: A current account is a running and active account which may be operated upon any number of times during a working day. These deposits are usually opened with a minimum balance prescribed by the bank and any amount can be deposited in the account. There is no restriction on the number and the amount of withdrawals, from a current account. Overdraft facility is also available. As the banker ·is under an obligation to repay these deposits on demand, they are called demand liabilities of a banker. Current accounts suit the requirements of big businessmen, joint stock companies, institutions, public authorities and public corporations etc.
3. Recurring/Cumulative Deposits: This account is intended to Inculcate the habit of savings on a regular basis as an inducement is offered in the form of comparatively higher rate of interest. A depositor opening a recurring deposit account is required to deposit an amount chosen by him, generally a multiple of Rs.5 or 10, in his account every month for a period selected by him.
4. Saving’s Deposits: A savings bank account is meant for the people of the lower and middle classes who wish to save a part of their current income to meet their future” needs and also intend to earn an income from their savings. Certain restrictions are also imposed on the opening and operations of savings deposits. Usually all banks restrict the maximum amount that can be deposited or withdrawn from saving’s account. The number of withdrawals over a period of one year is limited to 150 times.
5. Endowment Deposits: Such deposits can be made by the customers to meet expenses on children’s education or their marriages.
6. Miscellaneous Deposits: The commercial banks have initiated several plans to inculcate the habit of saving among the masses. There are schemes to suit the convenience of different kinds of people. Some of the important schemes are children gift plan, old age pension scheme, and fixed deposit linked with personal Accident Insurance Policy.
ii) Lending Money
Commercial banks not only accept deposits, but also lend money that they have obtained through deposits to those who want money. They provide a channel through which the individual savings can be lent to commerce and industry. The banks lend money in different forms. They can be either secured or unsecured. The most popular forms of lending are:
a) Overdraft: When a current account holder is permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. Generally an overdraft facility is given on the basis of a written application and a promissory note signed by the customer. The customer is permitted to withdraw the amount as and when he needs it and to repay it by means of deposit in his account. Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilisation.
b) Cash Credit: Under this, the banker specifies a limit, called cash credit limit, for each customer, upto which the customer is permitted to borrow against the security of tangible assets or guarantee, the cash credit account is an active and running account to which deposits and withdrawal may be affected frequently. The borrower is charged interest on the actual amount utilised by him and for the period of actual utilisation.
c) Discounting of Bill of Exchange: Banks grant advances to their customers by discounting bill of exchange or pronotes. The amount, after deducting the interest from the amount of the bill, is credited in the account of the customer. In this form of lending, the interest is received by the banker in advance. Discounting of bill constitutes a clean advance and banks rely on the credit worthiness of the parties to the bill:
d) Loans and Advances: In case of loan, the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid either in cash or. by credit in his current account which can withdraw at any time. The roan may be made with or without security.
Loan may be a demand loan or a term loan. Demand loan is payable on demand. It is for a short period and usually granted to meet working capital needs of the borrower. Term loans may be medium term or long term loan. Medium term loans are granted for a period ranging from one year to five years for the purchase of vehicles, tractors, tools and equipments. Long term loans are granted for capital expenditure such as purchase of land, construction of factory building, purchase of new machinery and modernisation of plant.
iii) Creation of Credit
The creation of credit is one of the important functions of commercial banks. In the ordinary course of business, banks accept deposits from the public and lend money to its customers. When a bank advances a loan, it does not pay the amount in cash. But it opens an account in his name and allows him to withdraw the required amount by cheque. In this way a bank creates credit or deposits which are regarded as money which can be used for the purchase of goods and services and also for the payment of debt just like currency notes:
B. Secondary Functions
The modern commercial banks, in addition to the primary functions, perform a large number of other functions just to provide additional facilities to its customers. Such functions can also be classified under two heads:
(i) Agency Services (ii) General Utility Services
(i) Agency Services
The banker acts as the agent of his customer in performing the following functions.
1. Payment and Collection: Banker makes payments and receive money on behalf of their customers in the following ways:
a. Payment of insurance premium
b. Payment of membership subscription to club, libraries and Professional association.
c. Payment of rent and salaries
d. Collection of dividends on behalf of customers
e. Collection of pension, rent, etc.
f. Transfer of funds from one account to another.
2. Purchase and Sale of Securities: Banks undertake to purchase and sell shares and debentures of joint stock Company on behalf of its customers. Whenever the customers delegate the work, the bankers should get clear and precise instruction in a special form used for this purpose.
3. Acting as Executor, Administrator and Trustee
a. Executor: The person who is appointed by the will to administrator the estate of the deceased person is known as the executor. The bank acts as an executor for the disposal of the properties of the deceased customer after his death.
b. Administrator: The administrator administers the property of the deceased according to the law. The person in whose favour the court grants letter of administration is known as the administrator. Most often the banker of the deceased act as administrator.
c. Trustee: A person may desire that after his death, a part or whole of his estate be held in a trust for the benefit of certain beneficiaries named in the will. The person who .holds the property for the beneficiaries is known as trustee. Commercial banks undertake the function of executors, administrators and trustees. Many banks have set up at their respective head office, Executor and Trustee Department which administers the trust and will of the customers.
4. Acting as Attorney: Power of attorney may be given by a customer to his banker. By granting power of attorney, the customer authorises the banker to receive dividend and interest on securities belonging to him and give a valid discharge thereof. The banker may also be empowered to· sign transfer forms in respect of purchase and sale of stock exchange securities and government securities.
5. Acting as Correspondents and Representatives: Bank serves as correspondents and representatives of their customers. On behalf of the customers, banks prepare the income-tax returns and correspond with the income tax authorities. As per the standing instructions of the customers, banks pay income tax of their customers. Banks also render valuable services to their customers when they go on foreign tours. They obtain passport and travel tickets and· even arrange for hotel accommodation for their customers.
6. Collection of information: Banks collect information on various stock exchange securities and on the basis of the information collected, advice the customers on the right types of investment, when their advice is sought by the customers.
7. Remittance of Funds: Banks arrange for remittance of funds from one place to another on behalf of their customers by means of bank draft, mail transfers and telegraphic transfers.
ii) General Utility Services
The banker provides the following general utility services to customers and general public.
1. Safe custody of valuables: Banks accept shares, debentures, bonds, fixed deposit receipts, deeds of property, life insurance policies and sealed boxes and packets containing will or valuables such as jewellery from’ their customers for safe custody. Banks are equipped with strong, fire proof and theft proof rooms for safe maintenance of the articles. There are two ways through which a banker ensures safety of its customer’s valuables -
a. By accepting valuables for safe custody
b. By hiring out safe deposit lockers to the customers.
2. Letter of Credit: It assumes great importance in international trade. The letter of credit is a sort of a guarantee to the exporter that his draft will be honoured by a specified bank upto a certain amount as per the specified terms.
3. Travellers’ Cheque: A traveller’s cheque can be purchased by anyone. These are useful to persons who frequently travel within the country or abroad. The purchaser has to deposit money with the issuing bank equivalent to the amount of travellers’ cheque he intends to buy. These cheques are usually encashable only at the branches of the issuing bank. Moreover there is no expiry period for the traveller’s cheques.
4. Remittance of Funds: Banks remits funds from one place to another through the network of their branches. The main instruments for transfer of funds are bank drafts, mail transfer, telegraphic transfer and travellers’ cheques.
5. Merchant Banking: Merchant banking division of commercial banks offer wide range of services - financial, technical, managerial etc. The main services include:
a. Facilitate in the formation of corporate units
b. Assisting in formation of financial plan
c. Management of public issue by corporate
d. Assisting companies in matters relating to restructuring, amalgamations, mergers and takeovers, etc.
6. Dealings in Foreign Exchange Business: Bank offers varied services in respect of foreign exchange business. They include deferred payments, import packing facility, Export finance, forward contracts, etc.
7. Lease Financing: Lease is a method of financing for purchasing equipment and machinery. It is the mechanism by which a person acquires the use of an asset by paying a predetermined amount called ‘Lease rental’ periodically over a period of time. A subsidiary company promoted by a bank may undertake equipment leasing and such other activities incidental thereto. .
8. Factoring: It is a facility provided to finance on trade debt of corporate. It is an arrangement between the factor agent and the business concern selling goods/services to trade customers whereby the factor purchase the book debts either with or without recourse to the client and in relation there to controls the credit extended to the customers and administers the sales budget.
9. Underwriting of Securities: Commercial banks underwrite a portion/ whole of the public issue of shares, bonds and debentures of joint stock companies. Such underwriting, provides an indirect form of insurance to the companies on the event of public· subscriptions falling, short of expectation. Moreover, banks act as banker to the public issue.
10. Tax Consultancy: The Bank Income Tax Department offers complete tax service which consists of advice on income tax and other personal taxes, preparing customer’s annual statement, claiming allowances, file appeals etc. .
11. Gift Cheques: Banks in India sell gift cheques against payment in cash or by debit to customers account. As the name indicates, these are intended to be given as gifts on occasions such as wedding, birthdays etc. The payee can encash them at any time.
12. Teller System: Under this system, the teller is authorised to receive cash and make payments upto limited amounts without reference to the ledger balance or the specimen signature.
13. Credit Cards: Credit cards are issued to good customers having current ·or saving accounts, free of charge. It enables a customer to purchase goods or services from retail and service establishment upto a certain limit without making immediate payment. The bank assumes the risk and responsibility of collecting the due from the customers.
14. Consultancy Service: State Bank of India and Indian Bank has set up consultancy cell to provide consultancy service to small scale industries. The consultancy service covers technical, financial, managerial and economic aspects. This service is offered not only at the project stage but also at every stage of implementations of the project.
15. Debit Card: A debit card facilitates purchases/payments by the card holder in the same way as a credit card does. The card holder presents the card to the merchant establishment after a purchase and signs on the payment slip. The merchant verifies the signature electronically by inserting the card into an electronic data capture machine that links up with the card holder’s bank through a payment gateway like Visa or Master Card. The bank then debits the amount from the card holder’s account and verifies the transaction.
16. While the credit card extends credit to the card holder, a debit card debits money from his account during a transaction. This implies that the Debit Card holder can spend only if his account permits.
17. Bank Drafts: Bank issues bank drafts to customers and general public. For remitting money from one place to another, bank issues bank drafts or demand drafts on their branches at the place of destination. According to Sec.85 A of Negotiable Instrument Act, a bank draft is an order from one branch to another branch of the same bank to pay a specified sum of money to the person named therein or his order. A draft is always payable on demand.
Public sector banks are those banks which are owned, managed and (controlled by the government. In India, fourteen major joint stock banks with deposits of Rs. 50 cores or more were nationalised on 19th July, 1969. They are (1) The Central Bank of India, (2) The Bank of India, (3) The I’lIl1jab National Bank, (4) The Bank of Baroda, (5) The United Commercial Bank, (6) The United Bank of India, (7) The Canara Bank, (8) The Dena Bank, (9) The Syndicate Bank, (10) The Union Bank of India, (11) The Allahabad Bank, (12) The Indian Overseas Bank, (13) The Bank of Maharashtra and (14) The Indian Bank.
Again, on 15th April, 1980, six more joint stock banks were nationalised.
They were (1) The Vijaya Bank Ltd., (2) The Corporation Bank Ltd., (3) The Andhra Bank Ltd., (4) The Bank of India Ltd, (5) The Oriental Bank of Commerce and (6) The Punjab and Sind Bank Ltd.
They are all commercial banks. They occupy an important position in the Indian Money Market. With more than 40,000 branches, they control about 60 % of the total deposits in the country. They provide short-term funds to industries, traders, farmers and others. Some of them do foreign exchange business also.
At present, there are 28 public sector banks in India.
Private sector banks are owned, controlled and managed by private individuals or corporations and not by the government. The banks in the private sector are of two types. They are (1) Scheduled Banks and (2) Non-Scheduled Banks. Scheduled banks are those which are included in the second schedule of the Reserve Bank of India Act. Non-scheduled banks are those which are not included in the second schedule. They are also commercial banks. They occupy an important place in the Indian Money Market. They control about 5 % of the total deposits in the country. They grant short term loans to traders, industrialists and farmers.
In the banking sector, there are23 old private sector banks and 8 new generation private banks. The aggregate deposit of old private sector banks was Rs. 73,549 crores which is 7.2 % of total deposits during 2004-05. The aggregate deposit of .new private banks was Rs. 69,920 crores which constitute 6.1 % of total deposits during 2004-05. Advances made by the old private sector banks and new private banks were Rs. 37,801 crores (7.7%) and Rs. 30,086 (6.1 %) respectively during 2004-05.
At present there are 31 private banks in India.
Any Where Banking and Any Time banking
Electronic banking is a banking system whereby banking services and products are made available to customers through electronic channels.
Internet banking enables a customer to do banking transactions thrOlll!1I file bank’s website in the internet.
Any where banking is a technology based customer service designed to provide grater convenience to customers with the introduction of any where Banking facility, customer has an account with any branch of the bank, and He can operate it from any other branch of the bank. Technological advancement has led to widespread improvement in the range of services offered by bank to their customers.
The revolution in the information technology sector could develop Wide Area Network of computers. WAN encouraged banking sector to introduce Core Banking with a view to improve the customer service. The customer can transact their business through any branch of the bank. The fund transfer from one branch to another is now possible on Real Time Basis. Now banking no longer confined to the branches.
In traditional banking, customer has to approach the branch in person. Now internet banking enables to do the same through any PC connected to the Internet from any where in the world.
E-banking increases the customer’s convenience. No personal visit to the branch is required. Customers can perform basic banking transactions by simply sitting at their house or office through PC or Laptop. Customers can perform banking facilities at their door steps through E-mail call. More over, E-Banking facilities performing of basic banking transactions by customers round the clock globally. World-wide 24 hours and 7 days a week banking services are made possible. In fact, there are no restricted office hours for E-banking. Under any where banking facility, there is the round the clock access. They remain available all the time unlike the traditional banks, which are pen only access the bank from anywhere in the world at customers own convenience. For banks, the operational cost is very low and the bank need not invest in infrastructure and staff management. With help of on-line banking, the banks can attract new and potential customers by providing them with any time and any where banking facility. The speed employed by the on-line banking for executing the banking transactions in faster than the traditional speed of ATM processing.
