UNIT - I

COMMERCIAL BANK

A commercial bank is a typical financial institution that accepts as well as deposits from
the general public and also, they give loans for the purposes of consumption activities and
investment activities, to make their own profit.

Commercial banks are profit-based institutions that offer financial services like loans,
as well as services like deposits, electronic transfers of funds, etc. to their customers.
Commercial banks have a significant role in a country’s economy as these organizations fulfill
the short and mid-term financial requirements of industries.

The functions of commercial banks are primarily based on a business model of

accepting public deposits and utilizing that fund for various investment purposes. Such
functions can be classified into two categories, primary and secondary functions.

FUNCTIONS OF COMMERCIAL BANK

Commercial Banks have both primary and secondary functions that as explained in detail
below.

Primary Functions

• Accepting Deposits – Commercial banks accept deposits from their customers in the
form of saving, fixed, and current deposits.
• Savings Deposits – Savings deposits allow a customer to credit funds towards their
accounts for up to a certain limit. These deposits are preferred by individuals with a
fixed income, utilized to create savings over time.
• Fixed Deposits – Fixed deposits come with a predetermined lock-in period. Fixed
deposits are also referred to as time deposits as the funds are deposited for a specific
time frame.
• Current Deposits – Current deposits allow account holders to deposit and withdraw
money whenever necessary. In some cases, current accounts also offer overdrafts until
a pre-specified limit to individuals and businesses.
• Providing Loans – One of the main functions of commercial banks is providing credit
to organizations and individuals, and profit from the earned interest. Usually, banks
retain a small reserve for their expenses while offering the remaining amount to
customers as various types of short and long-term credits.
• Credit Creation – A unique function of commercial banks is credit creation. Instead
of offering liquid cash, banks create a line of credit and transfer the loan to a business
or commercial body all at once.

Categories of Secured and Unsecured Loans provided by Commercial Banks

• Cash Credit – Commercial Banks and their Functions include extending advances to
individuals and organizations against bonds, inventories, and other types of securities.
 This facility, commonly known as cash credit, provides a more substantial sum when
compared to other forms of credit.
• Short-Term Credits – Short-term loans are usually pledged without any security,
offering a smaller loan amount and repayment tenor. These are also referred to as
personal loans.

Secondary Functions
The following can be considered as the secondary functions of commercial banks –
• Providing locker Facilities – Commercial banks provide locker facilities to customers
who want to store valuables safely. Locker facilities eliminate the impending risk of
theft or loss, which prevail when kept at home.
• Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to
individuals and organizations that export or import goods from overseas. However,
only certain banks which have the license to deal in foreign exchange are eligible for
such transactions.
• Exchange of Securities – Another function of commercial banks is to trade in bonds
and securities. Customers can purchase or sell the units from the financial institution
itself, which offers more convenience than alternate approaches.
• Discounting Bills of Exchange – The main function of a commercial bank in today’s
date is to discount bills of businesses. Bill discounting is considered a profitable
investment for banks. Bills create a steady flow of funds, while not becoming a risky
venture during payment as it is considered as a negotiable instrument. These also do
not involve the financial institution in any litigation.
• Bank as an Agent – Commercial Bank and its Function also require them to provide
finance-related services to customers, fulfilling the role of an agent. These services
usually include –
• Acting as an administrator, trustee, or executor of a customer-owned estate.
• Assisting customers with tax returns, tax refunds, and other similar tasks.
• Serving as a platform to pay premiums, repay loan instalments, etc.
• Offering a platform for electronic transaction of funds, processing of cheques,
drafts, bills, etc.

TYPES OF COMMERCIAL BANKS

It is necessary to understand the different types of financial institutions to explain the
functions of commercial banks effectively. Commercial banks are commonly categorized into
three types. They are as follows:
• Public sector banks
• Private sector banks
• Foreign banks

Public Sector Banks

 Public sector banks refer to a type of financial institution that is state-owned by the
corresponding Government. A significant part of the share of such organizations is held by the
Government. In India, the Reserve Bank of India, which acts as the central bank, creates
operating guidelines for the public sector banks.

Private Sector Banks

Private sector banks are financial institutions registered as companies with limited
liabilities. The major part of the share capital of such companies is owned by individuals or
private businesses.

Foreign Banks
Foreign banks are financial institutions that are operating overseas within a foreign
nation. Post the financial reform of India (in 1991), there was a marked increase in the number
of foreign banks on Indian soil. They are essential for the economic development of a nation.

Apart from these commercial banks that lend and deposit money, there is Central Bank
which is known as the ‘head honcho’ in terms of banks. The Central Bank supervises the
commercial banks, sets their interest rates, and controls the money flow in the economy. This
bank, unlike the commercial banks, does not engage with the general public in terms of
providing banking services. Thus, Central Bank will never be as helpful as commercial banks
to the general mass.

TYPES OF DEPOSITS

On the basis of purpose they serve, bank deposit accounts may be classified as follows:

• Savings Bank Account

• Current Deposit Account

• Fixed Deposit Account

• Recurring Deposit Account

Savings Bank Account

As the name suggests this type of account is suitable for people who have a definite income
and are looking to save money. For example, the people who get salaries or the people who work
as laborers. This type of account can be opened with a minimum initial deposit that varies from
bank to bank. Money can be deposited at any time in this account.

Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or

by using an ATM card. Normally banks put some restriction on the number of withdrawal from
this account. Interest is allowed on the balance of deposit in the account. The rate of interest
on savings bank account varies from bank to bank and also changes from time to time. A
minimum balance has to be maintained in the account as prescribed by the bank.
Current Deposit Account

Big businessmen, companies, and institutions such as schools, colleges, and hospitals
have to make payment through their bank accounts. Since there are restrictions on the number of
withdrawals from a savings bank account, that type of account is not suitable for them. They need
to have an account from which withdrawal can be made any number of times.

Banks open a current account for them. Like a savings bank account, this account also
requires a certain minimum amount of deposit while opening the account. On this deposit,
the bank does not pay any interest on the balances. Rather the account holder pays a certain
amount each year as an operational charge.

These accounts also have what we call the overdraft facility. For the convenience of the
accountholders banks also allow withdrawal of amounts in excess of the balance of the deposit.
This facility is known as an overdraft facility. It is allowed to some specific customers and up to
a certain limit subject to previous agreement with the bank concerned.

Fixed Deposit Account

Some bank customers may like to put away money for a longer time. Such deposits offer
a higher interest rate. If money is deposited in a savings bank account, banks allow a lower rate of
interest. Therefore, money is deposited in a fixed deposit account to earn interest at a higher rate.

This type of deposit account allows the deposit to be made of an amount for a specified
period. This period of deposit may range from 15 days to three years or more during which no
withdrawal is allowed. However, on request, the depositor can encash the amount before its
maturity. In that case, banks give lower interest than what was agreed upon. The interest on a fixed
deposit account can be withdrawn at certain intervals of time. At the end of the period, the deposit
may be withdrawn or renewed for a further period. Banks also grant a loan on the security of the
fixed deposit receipt.

Recurring Deposit Account

While opening the account a person has to agree to deposit a fixed amount once in a month
for a certain period. The total deposit along with the interest therein is payable on maturity.
However, the depositor can also be allowed to close the account before its maturity and get back
the money along with the interest till that period.

The account can be opened by a person individually, or jointly with another, or by the
guardian in the name of a minor. The rate of interest allowed on the deposits is higher than that on
a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period.

The Recurring Deposit Accounts may be of the following types:

1. Home Safe Account or Money Box Scheme: For regular savings, the bank provides a safe
or box (Gullak) to the depositor. The safe or box cannot be opened by the depositor, who
can put money in it regularly, which is collected by the bank’s representative at intervals
and the amount is credited to the depositor’s account. The deposits carry a nominal rate of
interest.

2. Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited at regular

intervals in this account. The accumulated deposits over time along with interest can be
used for payment of medical expenses, hospital charges, etc.

3. Home Construction deposit Scheme/Saving Account: In this account, we can deposit the
money regularly either for the purchase or construction of a flat or house in future. The rate
of interest offered on the deposit, in this case, is relatively higher than in other recurring
deposit accounts.

DIFFERENCE BETWEEN CURRENT ACCOUNT AND SAVINGS ACCOUNT

Criteria Savings Bank Account Current Account

A Savings Bank Account is an A Current Account is an account

Meaning account meant to store, safeguard, designed to offer the facility of
and earn returns on your savings. frequent transactions.

A Savings Bank Account can be

A Current Account can be opened by
opened only by individuals or a
Eligibility individuals as well as corporate
group of individuals (in the case of
entities.
a joint account)

Minimum A Savings Bank Account usually

A Current Account usually has a high
balance has a low minimum balance
minimum balance requirement.
requirements requirement.

Owing to the high degree of flexibility

Interest at a fixed rate is accrued
of a Current Account, there is no
Interest on the balance available in a
provision of interest on the balance
Savings Bank Account.
available in such an account.
 You can carry out a limited and
Cap on the
predefined number of transactions There is no ceiling on the number of
number of
in your Savings Bank Account in a transactions in a Current Account.
transactions
day.

A Savings Bank Account is ideal

A Current Account is ideal for
Ideal for for salaried people, students,
business entities and sole proprietors.
homemakers, pensioners, etc.

TYPES OF BANKS

1. Central Bank
Every country has a central bank that regulates and takes care of other banks’
mechanisms within it. In India, we have the Reserve Bank of India, the Central Bank. Which
acts as a bank for the government, manages the monetary policy and system, and guides other
banks and institutions. Similarly, every country has their central bank, such as Federal Reserve
in the US. It also takes care of issuing the currency and supervises overall financial affairs and
systems in the country. Given that it is a general bracket and head for the entire financial
system, it is also known as the banker’s bank.

2. Commercial Banks
Commercial banks have come into existence under the Banking companies act of 1956,
which exists in rural and urban regions. As the name suggests, the main motto of these banks
is generating profit. There are both public as well as private (Indian and foreign) commercial
banks existing in this country. The primary source of running for these banks are the only
public deposits and customers.

Examples of different types of commercial, public banks include State Bank of India
(the most significant public sector bank in India), Canara Bank, Bank of India, etc. The private
sector banks include HDFC, ICICI Bank, Axis Bank, and so on. There are also foreign banks
in India, such as HSBC, Standard Chartered bank, etc. Commercial banks, both public and
private, are present across the globe.

3. Regional Rural Banks

The RRBs, also known as the Regional Rural banks, fall under sub-class commercial
banks that provide only loans for agriculture and allied activities. These banks are established
under the RRB act of 1976 and are a joint venture of the Central Government, State
Government, and Commercial banks. These banks’ main aim is only to focus on provisions to
lending and banking facilities for people across rural areas. Some of RRB examples include
Andhra Pragathi Grameena Bank in AP under the sponsorship of Syndicate bank, Bihar Gramin
Bank in Bihar under the sponsorship of UCO bank.

4. Cooperative Banks
 Types of Cooperative banks are the respective state-controlled and managed banks
under their act and regulations to promote social welfare amongst their citizens. They look after
affairs and giving loans for agriculture and other allied livelihood activities within every state.
The cooperative banks operate in three-tier structures: state-level where SBI, state governments
directly regulate them. These include banks such as NABARD. Then, in the second tier, we
also have district-level cooperative banks, respectively, and the third tier includes agriculture
cooperative banks in villages.

5. Local Area Banks

The Local area banks are introduced only around 1996 as the main objective to run only
in local areas to generate profits. Commercial private sector banks manage these banks.
However, not many local area banks are there in India. Some of them include Coastal Local
Area Bank in Andhra Pradesh, Subhadra Local area bank in Kolhapur, Capital Local area bank
in Punjab, and Krishna Bhima Samruddhi Local area bank in Telangana.

6. Specialized Banks
As the name suggests, few banks have come into existence only for specialized
purposes. They have different specific roles and objectives to develop the particular cause
financially. The examples under Specialized banks include Small Industries Development
Bank of India (SIDBI) to give loans for small scale industries and units, in order to encourage
them, EXIM bank for financial assistance to give for exports and imports to other countries,
NABARD to help assist and provide finance in agricultural development, village and rural
concerns.

7. Small Finance Banks

The small finance banks are specifically present to look into the needs and financial
assistance of small and micro industries, farmers, and the unorganized sector in India. The
central bank of India overall governs them. A few examples of Small Finance Banks include
AU Small finance bank, Equitas small finance bank, Fincare small finance bank, etc.

8. Payments Bank
Payments banks are more of a new phenomenon that we have been witnessing in the
recent past. These payment banks are conceptualized and developed by the Reserve Bank of
India, where they can deposit a maximum of the amount up to Rs. 1,00,000. These banks,
however, cannot grant loans, lending as well as credit cards. However, one can have access to
online and mobile banking under the Payments bank. So, one can say that almost all of them
have the same types of internet banking, online banking, retail banking, electronic banking,
and other digital methods under here too. Some of India’s most popular Payments banks are
Airtel Payments Bank, Paytm Payments Bank, Jio Payment Bank, India Post Payment Bank,
NSDL Payment bank, etc.

9. Exchange Banks
Exchange banks are governed for foreign trade and exchanges only. They manage
foreign bill collection, discounting, and sell foreign currencies to help people convert their
money into foreign currencies. In most cases, few specialized branches of the commercial
banks take care of this function, and the separate exchange banks’ presence is less.

10. Investment Banks

 These investment banks are pretty well-known in western countries. The banks such as
Morgan Stanley, Goldman Sachs, etc., are popular investment banks. These banks have the
function of assisting and aiding individuals and institutions to raise capital, issue securities, and
invest the income. They are also quite popular for trading securities, stocks, and instruments.

FIXED DEPOSIT

A fixed deposit, also known as an FD, is an investment instrument offered by banks, as

well as non-banking financial companies (NBFC) to their customers to help them save money.
With an FD account, you can invest a sizeable amount of money at a predetermined rate of
interest for a fixed period. At the end of the tenure, you receive the lump sum, along with an
interest, which is a good money-saving plan. Banks offers different rates of interest for a fixed
deposit account.
You can choose a fixed deposit for a period ranging from minimum 7-14 days to
maximum 10 years. This is why an FD is sometimes called a term deposit. When you open a
fixed deposit account at a specific interest rate, it is guaranteed, for the rate of interest remains
the same, irrespective of any changes, which happen due to market fluctuations.

The interest you earn is either paid at maturity or on periodic basis depending on your
choice. You are not allowed to withdraw the money before the maturity. If you want to, you
have to pay a penalty.

Features of a Fixed Deposit

➢ The amount can be deposited only once. Any additional deposits have to be made in
separate accounts.
➢ The rate of interest is higher than the savings account.
➢ The duration ranges anywhere between 7 days and 10 years.
➢ Fixed deposits can be renewed without any hassle.
➢ Withdrawals can't be made before the maturity period. In case of an emergency
withdrawal, a penalty has to be paid by the customer.

CURRENT ACCOUNT
A current account, also known as financial account is a type of deposit account
maintained by individuals who carry out significantly higher number of transactions with banks
on a regular basis. It is created by the bank on request of the applicant and is made available
for frequent or immediate access. Current accounts relate to liquid deposits and it offers a broad
range of customized options to aid financial dealings. Current accounts also allows to make
payments to creditors through the cheque facility offered by the bank. Generally, current
accounts do not provide interests and requires a higher minimum balance when compared
to savings account. However, the greatest advantage of current bank account is that, account
holders can easily avail overdraft facility up to an agreed limit.
Features of Current Account

➢ A current account allows transactions beyond the scope of a savings account

➢ Compared to savings account, a current account requires a higher minimum balance
➢ It is designed to facilitate frequent transactions – transfer funds, receive cheques, cash,
etc.
➢ A current account can be operated by individuals, proprietary concerns, public and
private companies, associations, trusts, etc.
➢ No restriction on the number of transactions in a day
➢ Non-maintenance of the minimum balance can attract penalty charges
➢ Just like savings account, KYC guidelines are to be followed even for current accounts
➢ For a single business, there cannot be multiple current accounts
➢ The prime objective of current account is to facilitate smooth transactions for
businesses
➢ Nowadays, some banks offer interest rates on current accounts as well.