Commercial banking plays an important role in the economic development of any country. A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. The objective of these banks is to make profits
Most of the Indian joint stock banks are commercial banks such as State Bank of India, Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc
Meaning of Commercial Bank
According to Banking Regulation Act of 1949, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.
Role of Banks in Indian Economy
Banks help in money growth and capital formation. They are reservoirs of resources for economic growth and development of the nation. They help in building the infrastructure, boosting the agriculture, setting up industries and aid to global trade. Thus, a bank, by discharging its functions effectively enhances the productive and industrious capacity of the nation and boosts the pace of growth. Banks are the heart of the financial system.
Structure of Banking in India
In India, banking system consists of the Commercial Banks, Co-operative Banks and Development Banks which are broadly listed as:
- Commercial Banks:
- Public Sector Banks
- Private Sector Banks
- Foreign Banks
- Co-operative Banks
- Short term agricultural institutions
- Long term agricultural credit institutions
- Non-agricultural credit institutions
- Development Banks
- National Bank for Agriculture and Rural Development (NABARD)
- Small Industries Development Bank of India (SIDBI)
- EXIM Bank
- National Housing Bank
Importance of Commercial Bank
The significance of commercial banks is as follows:
- They promote savings and accelerate the rate of capital formation
- They are source of finance and credit for trade and industry of a country
- They promote balanced regional development by opening branches in backward and remote areas of a country
- Bank credit enables entrepreneurs to innovate and invest in the large and small scale industries which accelerate the process of economic development of a country
- They help in encouraging large-scale production and growth of priority sectors such as agriculture, small-scale industry, retail trade and export
- They help commerce and industry of a country to expand their field of operation
Types of Commercial Bank
There are two types of Commercial Banks: scheduled commercial banks and non-scheduled commercial banks.
- Scheduled Commercial Banks: Scheduled commercials banks are those banks which are included in Second Schedule of Reserve Bank of India. A scheduled bank must have a paid-up capital and reserves of at least Rs 5 lakh. The scheduled commercial banks are further of three types:
- Public Sector Banks: These banks are owned and controlled by the government. The majority of the control is held by the government. The main objective of these banks is to provide service to the society, not to make profits. Some examples of public sector banks are State Bank of India, Bank of India, Punjab National Bank, Canada Bank, Bank of Baroda.
- Private Sector Banks: These banks are owned and controlled by private businessmen and corporate houses. The majority of the control is held by the private owners. The main objective of these banks is to earn profits. Some examples of private sector banks are ICICI Bank, HDFC Bank, Kotak Mahindra Bank.
- Foreign Banks: These banks are owned and controlled by foreign promoters. Some examples of foreign banks are Bank of America, American Express Bank, Standard Chartered Bank.
- Regional Rural Banks: The regional rural banks are banks set up to increase the flow of credit to smaller borrowers in the rural areas.
- Non-Scheduled Commercial Banks: The banks which are not included in Second Schedule of RBI are known as non-scheduled commercial banks. A non-scheduled bank has a paid-up capital and reserves of less than Rs 5 lakh.
Functions of Commercial Bank
The functions of Commercial Bank are classified into two main categories:
- Primary Functions: The primary functions of banks are to accept deposits and lending of these deposits.
- Accepting Deposits: A commercial bank accepts deposits in the form of current, savings and fixed deposits. The deposits accepted by them are considered as liability of banks.
- Current account deposits: Such deposits are payable on demand. The bank does not pay any Interest on these deposits but provides cheque facilities. These accounts are generally maintained by businesses.
- Savings account deposits: These are deposits whose main objective is to save. Savings account is most suitable for individual households
- Fixed deposits: Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are deposits for a fixed term, i.e., period of time ranging from a few days to a few years. These are neither payable on demand nor they enjoy cheque facilities. They carry higher rate of interest.
- Granting Loans and Advances: The second major function of a commercial bank is to give loans and advances particularly to businessmen and entrepreneurs and thereby earn interest. This is the main source of income of the bank. The loans granted by banks are considered as assets of banks.
- Secondary Functions
- Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers
- Facilities of foreign exchange
- Remittance of funds
- Collection of funds
- Issuing demand drafts and pay orders
- Collection and payment of cheques and bills on behalf of the customers
- Purchase and sale of shares and securities on behalf of customers
- Acting as a Trustee
Download as PDF
Watch this article as video
Check out Financial Markets Institutions and Services Course
Tags: Commercial Banking in India, Commercial Banking Explained