Module --- III

Banking: Meaning and functions Of commercial banks, function Of reserve bank Of India, Financial systems - structure Of Indian money market, Measures to improve Ind ian Money Market, S t ructuere Of Development banks Of India, Export-Import bank Of India.

Banking: Meaning and function of commercial banks

Chamber's Twentieth Century Dictionery defines a bank as an " Institutions for the keeping, lending and exchanging, etc. of money". In fact bank is an institution which accepts deposits from public and in turn advances 19~s By s~ating credit which in turn helps the needy individuals/customers to meet with\t~~tr financial requirements.

Functions of Commercial Banks

Commercial banks are those banks which performs all kinds of banking functions such as accepting deposits, advancing loans, credit creation, and agency functions. They are also called joint stock banks because 'they are organised in the manner as joint stock companies. Some of the commercial banks in India are Andhra Bank, Canara Baf\'k) Indian Bank, Punjab National Bank etc.

Commercial banks perform a variety of functions which can be divided as : (1) Accepting Deposits (II) Advancing Loans' (JII) Credit Creation (IV) Financing Foreign Trade. (V) Agency Services and (VI) Misc. servises to customers. These functions are discussed as fo11o\\·s:-

(I) Accepting Deposits

Now adavs banks accepts three kinds of deposits from its customers. The first is the saving deposits on which the bank pays small interest to the customer/depositors who arc usually small savers. III secondary deposits businessman keep their deposits in current a~~Collllt$ 'l'h',;y can wi I ildr;lw allY amount standing to -their credit in current deposits by cheques without any notice. The bank does not pay interst on such accounts but instead charges a nominal sum for services rendered to its customers.Tn another case of deposit savers or customers do not need to withdraw their mony upto a stipulated period of time known as fixed deposit. The banks pays a higher rate of intcrst on such deposits. This interst rate is completely conditional and depends upon market conditions and the policies framed by the finance ministry and reserve bank of india.

(II) Advancing Loans

One of ti.c primary Iunctions of a commercial bank is to advance loans to its customers .. The bank advances loans in the following ways:-

(a) Cash Crcdit-- The bank advances loan to businesssmen agaist certain specified securities. The amount of the loan is credited to the current account of the borrower. In case of the new customer a a loan account for the sum is open.

(b) Calls Loan=-These are very short -term loans advanced to the bill brokers for not more than fifteen days. They are advanced against first class bill or securities. Such loans can be recalled at a very short notice. In normal times they can also be renewed.

tender money because the one rupee note issued by Minitry Of Finance are also circulated through the Minimum Reserve System for the note issue. Since 1957, it maintains gold and- foreign exchange reserves of Rs. 200 crore, of which atleast Rs. 115 crore should be in gold.

(n) Banker to the Govcrnmcnt-« The second important function of the Reserve Bank Of India is to ad as the banker, agent and advicer to the government, It performs all the banking functions of the State and Central Government on matters related to economic and monetary policy. it also manages the public debt for the Government.

(Ill) Bankers Bank-s- The Reserve Bank Of India performs the same function for the other banks as the otl~er bunks ordinarily perform for their customers. It is not only a banker to the commercial banks, but it is the tender of the lastv resort.

CIV) Controller Of Credit-The Reserve Bank Of India undertakes the responsibility of

_ controlling credit created by the commercial banks. To achieve this objective it makes extensive lise of quantitative and qualitative techniques to control- and regulate the credit effectively in the country.

(V) Custodian Of foreign Reserves=- For the purpose of keeping the foreign exchange rates stable the Reserve Bank Of India buys and sells the foreign currencies and also protects the countrys foreign exchange funds.

financi~11 systems - stl'Ucturc Of Indian money market

The Indian money market deals with collective name of Institutions and various grades of near money. It is a market in short term funds in which the lenders of money meet with borrowers of money. The lenders of money are the Reserve Bank Of India, All scheduled commercial banks, Coperative banks, financial institutions like LIC, UTT, OIC, Foreign exchange banks etc. the borrowers of money are the central Goverrunent, State Government, local bodies, traders, businessmen, expoters,importers etc.Thus the money market is P.- market for monetary assets in which the short term requirements of the borrowers are met in order to provide liquidity or cash to the lenders.

The structures of money market in India comprises of both organised and unorganised markets.

The organised market consists of the Reserve Bank Of India, Commercial Banks, Cooperative banks, and allied financial Institutions like LIC,OIe,UTT , foreign exchange banks etc.

The unorganised mOI1(;y market includes indegenous bankers, moneylenders, both professional and non-professional traders, landlords etc.

~aSl!!::£'~ to improve Indian Money Market

The following are the measures to improve Indian Money Marken-

(I) Control over Indigenous Bunkcrs->- As recommended by the Banking Commission, 1972, the activities of the indigenous bankers should be controlled through the commercial banks arid they should encourage the former to transform themselves in to corporate bodies. The RBI should lay down guidelines for commercial banks in dealing

. with indigenous bankers.

(c. Overdraft-A bunl, often permits a businessmanto draw cheques for a sum greater thn the balance lying in his current account, This is done by providing the overdraft fa .. ility up to a spcci lie amount to the businessman. But he is charged interest only on the au.ount by which hi-. current account is actually overdrawn and not by the full amount of th. overdraft sanctioned to him by the bank.

(d) Discounting bills of Exchange--- If a creditor hold in;,:, a bill of exchange wantsc money immediately, the bank provides him the money by discounting the bill of exhange. It deposits the amount of the bill in the current account of the bill-holder after de 'ucting its rate of interst for the period of the loan which is not more than 90 days. w~ .en the bill of exchange matures, the bank gets its payment from the banker of the de .tor who accepted the bill.

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(3: Credit Creation

Ci ·dit Creation is one of the most important functions of the commercial banks. Like ot..er financial institutions, they aim at earning profits. For this purpose, they accept deposits and advances loans by keeping a small; cash in reserve for day-to-day trcisactions. When a bank advances a loan, it opens an account in the name of the cutorner and does not pay him cash but allows him tom draw the money by cheque according to his needs.

(4) Financing Foreign Trade

A .omrnercial bank finances foreign trade of its customers by accepting foreign bills of exchange and collecting them from foreign banks. It also transacts other foreign exchange business and buys and sells foreign currency.

(5) Agency Service

A bank acts as an agent of its customer in collecting and paying cheques,. bills of ex hange, drafts, dividends, etc. It also buys and sells shares, securities, debentures etc. for its customers. Further it pays subscriptions, insurance premium, rent, electric and water bills and other similar charges on the behalf of its clients.

(6) Misc. Services

be.ides the above noted services the commercial bank performs a number of otherv SCI vicco It acts as the custodian of the valuables of its customers by providing them lo. kcrs where they cuu keep their jewcllary and valuable documents. It iss lies various fo.ms of credit instruments, such as cheques, drafts, travellers cheques, etc. which fac.litute transactions. The bank also issues letters of credit and acts as a referee to its clirns. It underwrites ~.h:lres and debentures of companies and helps in till: collection of': fu, .ls from the publi ... :,

Ft nction or rCSl"f,\"i: bank Of India

(I) Issue Of Notcs-» The Reserve Bank Of India has the monopoly of the note issue in the country. It has the sole right to issue currency notes of various denominations except one rupee note. The Reserve Bank Of India actl4 lUI the only source of le~l\l

(It) Control Over Chit Funds-c-- To control the activies of chit funds which exploit and cheat their members of their hard - earned savings, the banking commission suggested that there should be a uniform legislation for chit funds throughout the country and that oldy public limited companies with a rninimwn paid up capital should be allowed to run chit funds. (chit funds arc the voluntary loan associations for mobilising savings).

(I)I) Standard Forms Of Hundis=- In the unorganised sector of the money market, large transactions are performed by discounting hundies by indigenous bankers. But these hundis are not accepted by commercial banks. In order to bring these hundis within the purview of the organised money market, the banking commission recommended that st.mdard forms of Darshni and Mudati hundis should be prescribed and the Negotiable In..truments Act be made applicable to thesehundis.

(I \') Development Of Bill Market ---- In the organised sactor of the money market. a 1'1 operly developed bil I market is essential' for the growth of money market in India.

(V) Growth Of Money Market in other centres ---- The money market is restricted 10 lour major cities ill 11IlJia. To expand the money market in other cities banking and clearing house facilities should be provided on a large scale.

(VI) Creation Of Secondary Market ---- For ';smooth running and 'growth of the muncy market, an active secondary market should be created by establishing new sets of institutions which should impact sufficient liquidity in the Indian money market.

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Structure Of DeVelopment banks Orlndia,

The category represents to all related banks to develop the trade activities in India and and to restucture the industrial units in India few of them are as follows

.:. ICICI (Industrial Credit and Investment Corporation Of India) .:. ·IFCI (Industrial Finance Corporation Of India)

.:. lDBI (Industrial Development Bank Of india)

.:. IRBl ( Industrial Reconstruction Bank Of India) etc.

ICICI---- was incorporated in 1955 as a: company under the companies act and has been empowered under its memorandum of association to undertake and discharge the usual functions of an industrial development finance company, i.e., to provide medium and long term loans, making investment in shares or debentures by underwriting and direct SUbscription. ICICI is actively engaged in entrepreneurial activities, and is also providing merchant banking services.

U'CI---- was set up in 1948 under an act of parliament with the main object of making medium and long term credit more readily available to industrial concern in India particularly in circumstances where banking accommodation is inappropriate or recourse to capital issue methods is impracticable. The IrCI promoted the investment information and credit rating Agency ofIndia (ICRA), which started functioning in 19'91 to provide credit rating services to the corporate sector.

ID BJ--- It is an financial institution established under the Industrial Development Bank of India act 1964, aimed at Co- ordinating in conformity with national Properties, the working of the -various institutions engaged in financing. promoting or developing

industry; for assisting the deevelopement of such institutions and for providing credit and other facilities for the- development of industry.

IRBI --- TIle IRBI was established in 1985 after reconstituting industrial reconstruction corporation in india. It is the principal credit and reconstruction institution for rehabilitation of sick and closed. industrial units in the public, joint and cooperative sectors and those units in the private sector whose management has been taken over under the Industrial (Development & Regulation) Act. Its authorised capital is Rs. 200 crores. It mobilises funds for its use from: (a) external sources which include borrowings from the government of India, RBI and by way of subscription to bonds and debentures or industrial concerns; and (b) internal sources which include repayment by borrowers, and interest and dividend received .

. Export-Import bank Of India

EXIM bank in India was established on january 1, 1982 for financing, facilitating and promoting foreign trade in india. Besides EXIM Bank also discharges duties of coodinating the activities of various financial Institutions, providing finances for export ami import of goods and services. Beside India this bank also manages finances to third world countries for export and import of goods and services. The Govt. Of India wholly owns EXIM bank of India. On March 31, 1994 the paid -up capital of the bank was Rs, 336 crore while its authorised capital was Rs. 500 crore. In Dec, 1998, the authorised capital of EX 1M bank increased from Rs. 500 crores to Rs. 1000 crores.

During the year ended 31 sl March 2004. EXIM bank sanctioned loans of Rs. 9266 crore while disbursement amounted to Rs. 6957 crore. Net profit (before tax) of the bank for the period 2003-04 on the account of General Fund amounted to Rs. 229.2 crore.

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