A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits intolending activities,

either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits intolending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.

Banks can be classified into various types on the basis of their functions, ownership, domicile, etc. The following are the various types of banks:

1. Commercial Banks:
The banks, which perform all kinds of banking business and generally finance trade and commerce, are called commercial banks. Since their deposits are for a short period, these banks normally advance short-term loans to the businessmen and traders and avoid medium-term and long-term lending. However, recently, the commercial banks have also extended their areas of operation to medium-term and long-term finance. Majority of the commercial banks are in the public sector. However, there are certain private sector banks operating as joint stock companies. Hence, the commercial banks are also called joint stock banks.

2. Industrial Banks:
Industrial banks, also known as investment banks, mainly meet the medium-term and longterm financial needs of the industries. Such long-term needs cannot be met by the commercial banks, which generally deal with short-term lending. The main functions of the industrial banks are: (a) They accept long-term deposits. (b) They grant long-term loans to the industrialists to enable them to purchase land, construct factory building, purchase heavy machinery, etc. (c) They help selling or even underwrite the debentures and shares of industrial firms, (d) They can also provide information regarding the general economic position of the economy. In India, industrial hanks, like Industrial Development Bank of India, Industrial Finance Corporation of India, Slate Finance Corporations, are playing significant role in the industrial development of the country.

3. Agricultural Banks:

Agricultural credit needs are different from those of industry and trade. Industrial and commercial banks normally do not deal with agricultural finance. The agriculturists require: (a) short-term credit to buy seeds, fertilizers and other inputs, and (b) long-term credit to purchase land, to make permanent improvements on land, to purchase agricultural machinery and equipment, etc. In India, agricultural finance is generally provided by co-operative institutions. Agricultural co-operatives provide shortterm loans and Land Development Banks provide the long-term credit to the agriculturists.

4. Exchange Banks:
Exchange banks deal in foreign exchange and specialise in financing foreign trade. They facilitate international payments through the sale, purchase of bills of exchange, and thus play an important role in promoting foreign trade.

5. Saving Banks:
The main purpose of saving banks is to promote saving habits among the general public and mobilise their small savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates.

6. Central Bank:
Central bank is the apex institution, which controls, regulates and supervises the monetary and credit system of the country. Important functions of the central bank are: (a) It has the monopoly of note issue; (b) It acts as the banker, agent and financial adviser to the state; (c) It is the custodian of member banks reserves; (d) It is the custodian of nation's reserves of international currency; (e) It serves as the lender of the last resort; (f) It functions as the bank of central clearance, settlement and transfer; and (g) It acts as the controller of credit. Besides these functions, India's central bank, i.e., the Reserve Bank of India, also performs many developmental functions to promote economic development in the country.

7. Classification on the Basis of Ownership:

On the basis of ownership, banks can be classified into three categories:

(a) Public Sector Banks: These arc owned and controlled by the government. In India, the nationalized banks and the regional rural banks come under these categories, (b) Private Sector Banks: These banks are owned by the private individuals or corporations and not by the government or co-operative societies, (c) Cooperative Banks: Cooperative banks are operated on the cooperative lines. In India, cooperative credit institutions are organised under the cooperative societies law and play an important role in meeting financial needs in the rural areas.

8. Classification on the Basis of Domicile:

On the basis of domicile, the banks are divided into two categories: (a) Domestic Banks: These are registered and incorporated within the country, (b) Foreign Banks: These are foreign in origin and have their head offices in the country of origin.

9. Scheduled and Non-Scheduled Banks:

In India, banks have been broadly classified into scheduled and non-scheduled banks. A Scheduled Bank is that which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 and fulfills the three conditions (a) it has paid-up capital and reserves of at least Rs. 5 lakhs. It ensures the Reserve Bank that its operations are not detrimental to the interest of the depositors; (c) It is a corporation or a cooperative society and not a partnership or a single owner firm. The banks which are not included in the Second Schedule of the Reserve Bank of India Act are non-scheduled banks.

The central bank generally performs the following functions:

1. Bank of Note Issue:

The central bank has the sole monopoly of note issue in almost every country. The currency notes printed and issued by the central bank become unlimited legal tender throughout the country. In the words of De Kock, "The privilege of note-issue was almost everywhere associated with the origin and development of central banks." However, the monopoly of central bank to issue the currency notes may be partial in certain countries. For example, in India, one rupee notes are issued by the Ministry of Finance and all other notes are issued by the Reserve Bank of India. The main advantages of giving the monopoly right of note issue to the central bank are given below: (i) It brings uniformity in the monetary system of note issue and note circulation. (ii) The central bank can exercise better control over the money supply in the country. It increases public confidence in the monetary system of the country. (iii) Monetary management of the paper currency becomes easier. Being the supreme bank of the country, the central bank has full information about the monetary requirements of the economy and, therefore, can change the quantity of currency accordingly. (iv) It enables the central bank to exercise control over the creation of credit by the commercial banks. (v) The central bank also earns profit from the issue of paper currency. (vi) Granting of monopoly right of note issue to the central bank avoids the political interference in the matter of note issue.

2. Banker, Agent and Adviser to the Government:

The central bank functions as a banker, agent and financial adviser to the government, (a) As a banker to government , the central bank performs the same functions for the government as a commercial bank performs for its customers. It maintains the accounts of the central as well as state government; it receives deposits from government; it makes shortterm advances to the government; it collects cheques and drafts deposited in the government account; it provides foreign exchange resources to the government for repaying external debt or purchasing foreign goods or making other payments, (b) As an Agent to the government, the central bank collects taxes and other payments on behalf of the government. It raises loans from the public and thus manages public debt. It also represents the government in the international financial institutions and conferences,

(c) As a financial adviser to the lent, the central bank gives advise to the government on economic, monetary, financial and fiscal ^natters such as deficit financing, devaluation, trade policy, foreign exchange policy, etc.

3. Bankers' Bank:
The central bank acts as the bankers' bank in three capacities: (a) custodian of the cash preserves of the commercial banks; (b) as the lender of the last resort; and (c) as clearing agent. In this way, the central bank acts as a friend, philosopher and guide to the commercial banks As a custodian of the cash reserves of the commercial banks the central bank maintains the cash reserves of the commercial banks. Every commercial bank has to keep a certain percentage of its cash balances as deposits with the central banks. These cash reserves can be utilised by the commercial banks in times of emergency. The centralization of cash reserves in the central bank has the following advantages: (i) Centralised cash reserves inspire confidence of the public in the banking system of the country. (ii) Centralised cash reserves provide the basis of a larger and more elastic credit structure than if these amounts were scattered among the individual banks. (iii) Centralised reserves can be used to the fullest possible extent and in the most effective manner during the periods of seasonal strains and financial emergencies. (iv) Centralised reserves enable the central bank to provide financial accommodation to the commercial banks which are in temporary difficulties. In fact the central bank functions as the lender of the last resort on the basis of the centralised cash reserves. (v) The system of contralised cash reserves enables the central bank to influence the creation of credit by the commercial banks by increasing or decreasing the cash reserves through the technique of variable cash-reserve ratio. (vi) The cash reserves with the central bank can be used to promote national welfare.

4. Lender of Last Resort:

As the supreme bank of the country and the bankers' bank, the central bank acts as the lender of the last resort. In other words, in case the commercial banks are not able to meet their financial requirements from other sources, they can, as a last resort, approach the central bank for financial accommodation. The central bank provides financial accommodation to the commercial banks by rediscounting their eligible securities and exchange bills.

The main advantages of the central bank's functioning as the lender of the last resort are : (i) It increases the elasticity and liquidity of the whole credit structure of the economy. (ii) It enables the commercial banks to carry on their activities even with their limited cash reserves. (iii) It provides financial help to the commercial banks in times of emergency. (iv) It enables the central bank to exercise its control over banking system of the country.

5. Clearing Agent:
As the custodian of the cash reserves of the commercial banks, the central bank acts as the clearing house for these banks. Since all banks have their accounts with the central bank, the central bank can easily settle the claims of various banks against each other with least use of cash. The clearing house function of the central bank has the following advantages: (i) It economies the use of cash by banks while settling their claims and counter-claims. (i) It reduces the withdrawals of cash and these enable the commercial banks to create credit on a large scale. (ii) It keeps the central bank fully informed about the liquidity position of the commercial banks. The main functions of commercial banks are accepting deposits from the public and advancing them loans. However, besides these functions there are many other functions which these banks perform. All these functions can be divided under the following heads: 1. Accepting deposits 2. Giving loans 3. Overdraft 4. Discounting of Bills of Exchange 5. Investment of Funds 6. Agency Functions 7. Miscellaneous Functions

1. Accepting Deposits: The most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment. Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there ire three types of deposits which are as follows: (i) Current Deposits: The depositors of such deposits can withdraw and deposit money whenever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits because these can be demanded or withdrawn by the depositors at any time they want. Such deposit accounts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day. (ii) Fixed Deposits: These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits. These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn. (iii) Saving Deposits: In such deposits, money upto a certain limit can be deposited and withdrawn once or twice in a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income. 2. Giving Loans: The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income.

Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks. Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan. At limes, banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured loan. Banks generally give following types of loans and advances: (i) Cash Credit: In this type of credit scheme, banks advance loans to its customers on the basis of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created. (iii) Demand loans: These are such loans that can be recalled on demand by the banks. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower, and thus entire loan becomes chargeable to interest with immediate effect. (iv) Short-term loan: These loans may be given as personal loans, loans to finance working capital or as priority sector advances. These are made against some security and entire loan amount is transferred to the loan account of the borrower. 3. Over-Draft: Banks advance loans to its customers upto a certain amount through over-drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest. 4. Discounting of Bills of Exchange: This is the most prevalent and important method of advancing loans to the traders for shortterm purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity.

5. Investment of Funds: The banks invest their surplus funds in three types of securitiesGovernment securities, other approved securities and other securities. Government securities include both, central and state governments, such as treasury bills, national savings certificate etc. Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks units of UTI, shares of Regional Rural banks etc. 6. Agency Functions: Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions. The important functions of these types are as follows: (i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for their customers. (ii) Banks make payment for their clients and at times accept the bills of exchange: of their customers for which payment is made at the fixed time. (iii) Banks pay insurance premium of their customers. Besides this, they also deposit loan installments, income-tax, interest etc. as per directions. (iv) Banks purchase and sell securities, shares and debentures on behalf of their customers. (v) Banks arrange to send money from one place to another for the convenience of their customers. 7. Miscellaneous Functions: Besides the functions mentioned above, banks perform many other functions of general utility which are as follows: (i) Banks make arrangement of lockers for the safe custody of valuable assets of their customers such as gold, silver, legal documents etc. (ii) Banks give reference for their customers. (iii) Banks collect necessary and useful statistics relating to trade and industry. (iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange. (v) Banks advise their clients relating to investment decisions as specialist (vi) Bank does the under-writing of shares and debentures also.

(vii) Banks issue letters of credit. (viii) During natural calamities, banks are highly useful in mobilizing funds and donations. (ix) Banks provide loans for consumer durables like Car, Air-conditioner, and Fridge etc.

The differences between Currency Swaps and Interest Rate Swaps

Posted on September 20, 2012 by Hedgebook This is part 2 of a 10 part series on currency swaps and interest rate swaps and their role in the global economy. In part 1, we discussed the beginnings of swaps. In part 2, well explore the differences between the two major types of swaps and their different uses for financial institutions. There are two main types of interest rate swaps, currency swaps and interest rate swaps. Although there are many other variations including the more recently popular commodity swaps and credit default swaps this series will concentrate on the main two types. Since 1981, the swaps market has grown into the largest financial derivatives market in the world, with trillions of funds in use today. Broadly speaking, a swap is a financial derivative in which two parties (called counterparties) exchange future cash flows of the first partys financial instrument for the future cash flows of the second partys financial instruments. The most common type of swap is a plain vanilla swap, or an interest rate swap, and is when one party exchanges its fixed rate obligation with a second partys floating rate obligation. Why would two parties want to exchange future cash flow obligations? Typically, swaps occur when the two parties have differing interest rate forecasts. For example, if the party holding the floating rate instrument believes rates will increase in the short-term while the party holding the fixed rate instrument believes rates will decrease in the short-term, they might swap obligations. Lets be clear both parties are seeking a comparative advantage, hence the desire to swap obligations. When borrowing money, a party wants to seek the lowest possible borrowing rate in order to reduce future payments. In some conditions like those experienced by the World Bank in 1981 a party does not always find itself borrowing in its desired environment, i.e., when it seeks to borrow at a floating rate but can only finance at a fixed rate. In parts 3 and 4, well dive into specific examples of interest rate swaps and how theyre calculated. Currency swaps differ slightly from plain vanilla swaps or interest rate swaps. A currency swap is an agreement to exchange principal interest and fixed interest in one currency (i.e. the U.S. Dollar) for principal interest and fixed interest in another currency (i.e. the Euro). Like interest rate swaps, whose lives can range from 2-years to beyond 10-years, currency swaps are a long-term

hedging technique against interest rate risk, but unlike interest rate swaps, currency swaps also manage risk borne from exchange rate fluctuations. Hedging against exchange rate risks is vital to companies in the global market. For example, if a U.S. company is selling products in Germany, it receives payments for those goods in Euros. If the value of the Euro plummets while those goods are being sold, then it loses potential profit. To hedge against this type of risk, that company might sell Euro futures. That way, any value that the Euro loses that could hurt revenue is insulated by the offsetting position in the futures market. The purpose of currency swaps is similar to that of futures: to limit risk from international financial transactions. The HedgeBook Blog recently discussed interest rate swaps and their basic functions in the recent blog post, Just What is an Interest Rate Swap?

Difference between Conventional and Islamic banking

Conventional Banking
Money is a commodity besides medium of

Islamic Banking

exchange and store of value. Therefore, it can Money is not a commodity though it is used as a medium of be sold at a price higher than its face value and exchange and store of value. Therefore, it cannot be sold it can also be rented out. at a price higher than its face value or rented out.

Time value is the basis for charging interest on Profit on trade of goods or charging on providing service is capital. the basis for earning profit.

Interest is charged even in case the organization Islamic bank operates on the basis of profit and loss suffers losses by using banks funds. sharing. In case, the businessman has suffered losses, the

Therefore, it is not based on profit and loss bank will share these losses based on the mode of finance sharing. used (Mudarabah, Musharakah).

While disbursing cash finance, running finance The execution of agreements for the exchange of goods & or working capital finance, no agreement for services is a must, while disbursing funds under Murabaha, exchange of goods & services is made. Salam & Istisna contracts.

Conventional banks use money as a commodity Islamic banking tends to create link with the real sectors which leads to inflation. of the economic system by using trade related activities. Since, the money is linked with the real assets therefore it

contributes directly in the economic development.

Role of Commercial Banks in Economic Development

Ads by Google Fifth Third Bank www.53.com Upgrade your checking account now. Learn more and apply online today! The Banking Sector has for centuries now formed one of the pillars of economic prosperity. Indeed history provides us with some starting information regarding how banks provided finance for imperialist ventures in newly acquired colonies. Over time banks have formed an important part in providing an avenue for both savings and investments. Land, Labor, capital and entrepreneurs are the basic economic resources available to business. However, to make the use of these resources, a business requires finance to purchase of the land, hire labor, pay for capital goods and pay for individuals with specialized skills. Detail role of commercial banks in economic development is given below: Trade Development The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade. Agriculture Development Commercial banks finance the most important sector of the developing economics i.e. agriculture, short, medium and long-term loans are provided for the purchase of seeds and fertilizer, installation of tube wells, construction of warehouses, purchase of tractor and thresher etc. Industrial Development The countries, which concentrated on industrial sector made rapid economic development. South Korea, Malaysia, Taiwan, Hong Kong and Indonesia have recently developed their industrial sector with the help of commercial banks. Capital Formation Commercial banks help in increasing the rate of capital formation in a country. Capital formation means increase in number of production units, technology, plant and machinery. They finance the projects responsible for increasing the rate of capital formation. Development of Foreign Trade Commercial banks help the traders of two different countries to undertake business. Letter of credit is issued by the importers bank to the exporters to ensure the payment. The banks also arrange foreign exchange. Transfer of Money Commercial banks provide the facility of transferring funds from one place to another which leads to the growth of trade.

More Production A good banking system ensures more production in all sectors of the economy. It increases the production capabilities of the economy by strengthening capital structure and division of labor Development of Transport The commercial banks financed the transport sector. It has reduced unemployment on one hand and increased the transport facility on the other hand. Remote areas are linked to main markets through developed transport system. Safe Custody The business concerns and individuals can make themselves tension free by depositing their surplus money in banks. The banks also provide them the facility of lockers to keep their precious articles and necessary documents safe. Increase in Saving Commercial banks persuade the people to save more. Different saving schemes with attractive interest rates are introduced for this purpose. Number of bank branches is opened in urban and rural areas. Construction of Houses Commercial banks provide credit facilities to their customers for the purchase or construction of houses. Assistance to Government By providing funds to government for development programs, the commercial banks share the government for economic stability. Increase in Employment A countrys economic prosperity depends on the development of trade, commerce industry, agriculture, transport and communication etc. These sectors are financed by the commercial banks and employment opportunities are increasing. Saving in Metallic Reserve Cheques and drafts etc works like money. In this way the need of precious metals to make coins reduces and metallic reserve of the country can be utilized on other important matters Credit Creation Commercial banks are called the factories of credit. They advance much more than what the collect from people in the form of deposits. Through the process of credit creation, commercial banks provide finance to all sectors of the economy thus making them more developed than before. Proper use of Money People deposit their saving in the banks, so the scattered money becomes a huge amount in the way, which can be used for different projects in a proper way.

Financial Advices Commercial banks also give useful financial advices to promote the business of their customers, besides credit facilities. Increase in Investment Commercial banks mobilize savings of the people. They make them available to the farmers, traders and industrialists for the development of agriculture, trade and industry. Success of Monetary Policy Under the supervision of central bank, all scheduled commercial banks make effort for the success and objectives of monetary policy. This joined effort of commercial banks makes the economic development possible. Use of Modern Technology The use of modern technology in less developed countries is only possible in the presence of developed commercial banking as it can be the main source of their funds. These funds are utilized for the import of modern technology from developed countries. Export Promotion Cells In order to boost the exports of the country, the banks have established export promotion cells for the information and guidance to the exporters. Economic Prosperity Economic prosperity of a country depends on number of factors including the development of commercial banking. A sound banking system promotes the economic status of the people by providing them short, medium and long-term loans. Training Center Commercial banks established many trading centers for their employees to modernize the banking system of a country. In this way the banking experts enhance their abilities and contribute towards the development of country.

Electronic Banking
Electronic banking, also known as electronic funds transfer (EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by check or cash. You can use electronic funds transfer to: have your paycheck deposited directly into your bank or credit union checking account. withdraw money from your checking account from an ATM machine with a personal identification number (PIN), at your convenience, day or night. instruct your bank or credit union to automatically pay certain monthly bills from your account, such as your auto loan or your mortgage payment. have the bank or credit union transfer funds each month from your checking account to your mutual fund account. have your government social security benefits check or your tax refund deposited directly into your checking account. buy groceries, gasoline and other purchases at the point-of-sale, using a check card rather than cash, credit or a personal check. use a smart card with a prepaid amount of money embedded in it for use instead of cash at a pay phone, expressway road toll, or on college campuses at the library's photocopy machine or bookstores. use your computer and personal finance software to coordinate your total personal financial management process, integrating data and activities related to your income, spending, saving, investing, recordkeeping, billpaying and taxes, along with basic financial analysis and decision making.

Weighted Average Cost Of Capital - WACC'

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation is the cost of each capital component multiplied by its

proportional weight and then summing:

Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate

A bank failure occurs when a bank is unable to meet its obligations to its depositors or othercreditors because it has become insolvent or too illiquid to meet its liabilities. [1] More specifically, a bank usually fails economically when the market value of its assets declines to a value that is less than the market value of its liabilities. The insolvent bank either borrows from other solvent banks or sells its assets at a lower price than its market value to generate liquid money to pay its depositors on demand. The inability of the solvent banks to lend liquid money to the insolvent bank creates abank panic among the depositors as more depositors try to take out cash deposits from the bank. As such, the bank is unable to fulfill the demands of all of its depositors on time. Also, a bank may be taken over by the regulating government agency if Shareholders Equity (i.e. capital ratios) are below the regulatory minimum.