BANKING

Samir K Mahajan
 Commercial Bank and its Functions
A commercial bank or simply a bank is a financial institution which deals with money, accepts deposits,
advances loans, and create credits with the sole purpose of earning profits. Modern banks performs a wide
variety of functions. The important functions of the commercial banks are as follows.

 Acceptance of Deposits: Commercial bank borrows by accepting deposits from the public. These
deposits are broadly classified as time deposits and demand deposits.

o Demand Deposits: Demand Deposits are repayable by the bank on demand or may be withdrawn by
the depositors at any time without previous notice to bank through issue of cheque or other forms. It
includes savings deposits (interest bearing) and current account deposits (non-interest bearing) .

o Time/term Deposits: These are deposits repayable after a certain fixed time period varying from seven
days to ten years or more. These deposits are not withdrawn able by cheque, draft or by other means. It
includes fixed deposits, recurring deposits, certificate of deposits.

 Advancing of Loans: The commercial banks provide loans and advances to the public in various forms.
These includes overdraft, cash credit, discounting of bills, loans and advances, consumer loans etc.
 FUNCTIONS OF COMMERCIAL BANKS contd.

 Credit Creation : Credit creation is the multiple expansions of bank demand deposits. When a bank
advances a loan to its borrower , it does not lend cash buts open a demand deposit account in the name
of the borrower and credits the loan amount to his account. The bank allows the borrower to draw upon
the bank as and when required though cheque. Thus whenever a bank grants a loan, it creates an equal
amount bank deposits. Creation of such derivative demand deposits is called credit creation which results
in net increase in the money stock of the economy. Banks have the ability to create many times more than
their deposits. The ability of bank to create credit is limited by cash-reserve requirements.

Agency Functions: Commercial banks also performs agency functions on behalf of the customers/clients
which includes

o Collection of cheques, dividends, and interests on behalf of the customers

o Payment of rent, insurance premiums on behalf of the customers
o Dealing in foreign exchange
o Purchase and sale of securities on behalf of the customers
o Act as correspondent of their customer
o Preparations of Income-Tax returns for their customers
o Act as trustee, executor, attorney etc
 FUNCTIONS OF COMMERCIAL BANKS contd.

 General Utility Services: Banks also performs certain general utility services which yields non-interest
income to the banks. Such services includes:

o Safety locker facility

o Money Transfer
o Travelers' cheques
o Gift cheques
o ATM facilities
o Credit card
o Debit card
o Accepting bills
o Internet banking
o Letters of credit
o Merchant Banking
o  Bancassurance
 CENTRAL BANK and ITS FUNCTIONS WITH SPECIAL REFERENCE TO RESERVE BANK OF INDIA

The Central Bank (The Reserve Bank of India in India) is the highest monetary authority of a country. It acts as the
regulatory authority of a country's banking system, and is the sole provider and printer of notes and coins in
circulation. It also formulates monetary and credit policy of a country. The Central bank of a country perms the
following functions:

 Monopoly of Note-Issue: The central bank has the sole monopoly of note issue in almost every country. It mints
currency coins and prints currency notes. In India, the Reserve Bank of India It has the sole right to issue currency
notes of all denominations except one-rupee notes. One-rupee notes had been issued by the Ministry of Finance
of the Government of India.

 Banker, Agent & Adviser to the Government: The central bank acts as the banker, agent and adviser to Government
of India. As banker to the government, central bank provides all those services and facilities to the government
which public gets from the commercial banks. In India, RBI maintains and operates government deposits, advises
the government on all financial matters etc. As agent, it manages government funds, raises loans from the public
on behalf of the government, looks after the management of public debt etc.

 Banker's Bank: Central bank is the bank of banks. It is the custodian of cash reserves of commercial banks. It gives
them advice on financial and economic matters and regulate banking activities such relating to licensing of banks
and their branch expansion; management and methods of working of the banks; amalgamation, acquisition of
banks etc.
 FUNCTIONS OF CENTRAL BANK contd.

 Lender of Last Resort: Central bank provides security to their cash reserves, gives them loan and
accommodation at the times of emergency and thus act as the lender of the last resort. The Reserve
Bank provide financial assistance to the scheduled banks by rediscounting their eligible bill, and through
loans and advances against approved securities.

 Credit Control: The central bank of the country regulates bank credit and thus money supply in
economy in order to ensure internal price stability and promote economic growth and thus, avoids
inflationary and deflationary tendencies in the country. The monetary authority use of various
quantitative (such as bank rate, open market operation, cash reserve ratio, repo and reverse repo) and
qualitative techniques (such as margin requirements, moral suasion, appeal etc) to effectively control
and regulate credit in the country.

 Custodian of Country’s Reserves of Foreign Currencies: Central bank is the custodian of the foreign
currency obtained from various countries. It maintains and stabilizes the external value of the domestic
currency , and thus administers exchange controls and other restrictions imposed by the government,
and manages the foreign exchange reserves
 FUNCTIONS OF CENTRAL BANK contd.

Clearing House Function

All the commercial banks have their accounts with the central bank. Therefore, central bank settles the
mutual transactions of banks and thus saves all banks contacting each other individually for setting their
individual transactions, and claims. In this way; the unnecessary cash transactions between individual banks
are avoided.

Other Functions
Besides the traditional central banking functions, Central Bank (RBI)also performs a variety of promotional
and developmental functions.
 It collects and publishes statistical information relating to banking, finance, credit, currency, agricultural
and industrial production, etc.
 It also publishes the results of various studies and review of economic situation of the country in its
monthly bulletins and periodicals.
 As on Aug. 29, 2014
Ratios and Rate (in percent)
RBI
Cash Reserve Ratio 4.00
Statutory Liquidity Ratio 22.00
Repo Rate 8.00
Reverse Repo Rate 7.00
Bank Rate 9.00