COURSE TITLE; BANK PRACTICES

INDIVIDWAL ASSIGNMENTS
Section: one

1. ABENEZER TAMRAT DRAC/1525/10

Submission date: April/13/2020

Submission TO; Simachew

1. Write and discuss on the major role of commercial banks for economic development

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 A. Capital Formation
Banks play an important role in capital formation, which is essential for the economic
development of a country. They mobilize the small savings of the people scattered over a wide
area through their network of branches all over the country and make it available for
productive purposes.
Now-a-days, banks offer very attractive schemes to attract the people to save their money with
them and bring the savings mobilized to the organized money market. If the banks do not
perform this function, savings either remains idle or used in creating assets, which are low in
scale of plan priorities.
B. Creation of Credit
Banks create credit for the purpose of providing more funds for development projects. Credit
creation leads to increased production, employment, sales and prices and thereby they cause
faster economic development.
C. Channelizing the Funds to Productive Investment
Banks invest the savings mobilized by them for productive purposes. Capital formation is not
the only function of commercial banks. Pooled savings should be distributed to various sectors
of the economy with a view to increase the productivity of the nation. Then only it can be said
to have performed an important role in the economic development of the nation.
D. Fuller Utilization of Resources
Savings pooled by banks are utilized to a greater extent for development purposes of various
regions in the country. It ensures fuller utilization of resources.
E. Encouraging Right Type of Industries
The banks help in the development of the right type of industries by extending loan to right
type of persons. In this way, they help not only for industrialization of the country but also for
the economic development of the country. They grant loans and advances to manufacturers
whose products are in great demand. The manufacturers in turn increase their products by
introducing new methods of production and assist in raising the national income of the country.

F. Bank Rate Policy

Economists are of the view that by changing the bank rates, changes can be made in the money
supply of a country. In our country, the RBI regulates the rate of interest to be paid by banks for

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the deposits accepted by them and also the rate of interest to be charged by them on the loans
granted by them.
G. Bank Monetize Debt
Commercial banks transform the loan to be repaid after a certain period into cash, which can be
immediately used for business activities. Manufacturers and wholesale traders cannot increase
their sales without selling goods on credit basis. But credit sales may lead to locking up of
capital. As a result, production may also be reduced. As banks are lending money by discounting
bills of exchange, business concerns are able to carry out the economic activities without any
interruption.
H. Finance to Government
Government is acting as the promoter of industries in underdeveloped countries for which
finance is needed for it. Banks provide long-term credit to Government by investing their funds
in Government securities and short-term finance by purchasing Treasury Bills.
I. Bankers as Employers
After the nationalization of big banks, banking industry has grown to a great extent. Bank’s
branches are opened in almost all the villages, which leads to the creation of new employment
opportunities. Banks are also improving people for occupying various posts in their office.
J. Banks are Entrepreneurs
In recent days, banks have assumed the role of developing entrepreneurship particularly in
developing countries like India. Developing of entrepreneurship is a complex process. It
includes the formation of project ideas, identification of specific projects suitable to local
conditions, inducing new entrepreneurs to take up these well-formulated projects and
provision of counseling services like technical and managerial guidance.

2. Briefly discuss on the basic difference between commercial bank and central bank

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The Central bank, as the name suggest is the apex body that regulates the entire banking
system of the economy The Central bank is not exactly same as a commercial bank, which is
the financial institution that provides banking services to individuals and firms. There is a big
difference between central bank and commercial bank in India, in the sense that the former is
the top financial institution in the country, whereas the latter is an agent of the Central Bank.
Check out the article in which we have compiled some differences in tabular form.

BASIS FOR
CENTRAL BANK COMMERCIAL BANK
COMPARISON

Meaning The bank which looks after the The establishment, which provides
monetary system of the country banking services to the public is
is known as Central Bank. known as Commercial Bank.

What is it? It is a banker to the banks and It is the banker to the citizens of the
the government of the country. nation.

Governing Statute Reserve Bank of India Act, Banking Regulation Act, 1949.
1934.

Ownership Public Public or Private

Profit motive It does not exist for making It exist for making profit for its
profit for its owners owners.

Monetary Authority It is the supreme monetary No such authority.

authority with wide powers.

Objective Public welfare and economic Earning Profits

development.

Money supply Ultimate source of money No such function is performed by it.

supply in the economy.

Right to print and Yes No

issue currency notes

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 BASIS FOR
CENTRAL BANK COMMERCIAL BANK
COMPARISON

Deals with Banks and Governments General Public

How many banks are Only one Many

there?

3. Write a brief notes on the features of:

I. Current account

Current bank account is opened by businessmen who have a higher number of regular
transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also
known as Demand Deposit Account.

Features of Current Bank Account

It is a non-interest bearing bank account. It needs a higher minimum balance to be maintained

as compared to the savings account. Penalty is charged if minimum balance is not maintained in
the current account. It charges interest on the short-term funds borrowed from the bank.

II. savings account

A savings account is a basic type of bank account that allows you to deposit money, keep it safe,
and withdraw funds, all while earning interest. Savings accounts offered by most banks, credit
unions, and other financial institutions are FDIC insured and typically pay interest on your
deposits.12 Some savings accounts offer higher interest rates than others.

Features Savings Account

 Bonus Incentives
 Promotional Interest Rate
 Minimum Opening Deposit
 Monthly Deposit Requirements
 Frequency of Withdrawals and ATM Facility……….

III. Time/fixed account

A time deposit or fixed deposit is an interest-bearing bank deposit with a specific maturity date
or a period to maturity. It is a money deposit at a banking institution that cannot be withdrawn
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for a specific term or period of time. When the term is over, it can be either withdrawn or held
for another term.

Features of time/ Fixed Deposits

 Tenure ranges between six months to 10 years.

 Guaranteed Returns.
 Interest income monthly, quarterly or annually.
 Reinvest interest income and gain the influence of compounding.
 Partial or full withdrawal facility is available with penalty interest rates.
 Loan against deposits
4. write a brief notes on the types of loan provided by commercial banks

I. Call/notice loan

Call money, also known as "money at call," is a short-term financial loan that is payable
immediately, and in full, when the lender demands it. Unlike a term loan, which has a set
maturity and payment schedule, call money does not have to follow a fixed schedule, nor does
the lender have to provide any advanced notice of repayment.

Call money is a short-term, interest-paying loan from one to 14 days made by a financial
institution to another financial institution. Due to the short term nature of the loan, it does not
feature regular principal and interest payments, which longer-term loans might. The interest
charged on a call loan between financial institutions is referred to as the call loan rate.

II. Cash credit

Cash credit is a facility to withdraw money from a current bank account without having credit
balance but limited to the extent of borrowing limit which is fixed by the commercial bank. The
interest on this facility is charged on the running balance and not the borrowing limit which is
given by bank. This is a very common facility by banks. It is one of the important short term
sources of finance for a business. The availability is also not very difficult.

III. Overdraft

An overdraft is an extension of credit from a lending institution that is granted when an account
reaches zero. The overdraft allows the account holder to continue withdrawing money even
when the account has no funds in it or has insufficient funds to cover the amount of the
withdrawal.

Basically, an overdraft means that the bank allows customers to borrow a set amount of
money. There is interest on the loan, and there is typically a fee per overdraft.

IV. Discounting of bill of exchange

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A discounting bill of exchange is a document acknowledging an amount of money owed in
consideration of goods received. It is a paper signed by the debtor and the creditor for fixed
amount payable on a fixed date.

Example: suppose a buys goods from B, h may not pay B immediately instead give B a bill of
exchange stating the amount of money owed and the time when A will settle the debt. Now, B
is in need of money immediately, so he will present this bill to the bank for discounting. The
bank will deduct its commission and pay B the present value of the bill. When the bill matures
after specified period, the bank will get payment from A.

V. Loan/term loan

A term loan is a loan from a bank for a specific amount that has a specified repayment schedule
and either a fixed or floating interest rate. A term loan is often appropriate for an established
small business with sound financial statements. Also, a term loan may require a substantial
down payment to reduce the payment amounts and the total cost of the loan.

Types of Term Loans

 A short-term loan, usually offered to firms that don't qualify for a line of credit,
generally runs less than a year, though it can also refer to a loan of up to 18 months or
so.
 An intermediate-term loan generally runs more than one—but less than three—years
and is paid in monthly installments from a company’s cash flow.
 A long-term loan runs for three to 25 years, uses company assets as collateral, and
requires monthly or quarterly payments from profits or cash flow. The loan limits other
financial commitments the company may take on, including other debts, dividends, or
principals' salaries and can require an amount of profit set aside for loan repayment.

5. Briefly discuss on the basic difference between investment bank and commercial banks

Definition of Investment Bank

The term investment bank is used to define a financial institution that performs intricate
financial transactions. These banks link the big corporations with the investors. The banks serve
its customers in a number of ways like assisting government and corporations in issuing
securities, helping the investors in buying stocks, bonds, etc. providing advisory services and so
on.

The banks generate its income by charging fees for its advisory services. Further, the bank’s
trading business is subject to profit or loss. These banks play a crucial role in aiding companies

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or government to take well-planned decisions and raise funds easily. The services provided by
an investment bank are given as under:

 Underwriting of Securities
 Raising of capital
 Asset management
 Wealth management
 Advisory services
 Merger and Acquisitions

Definition of Commercial Bank

The term commercial bank refers to an establishment which is engaged in providing banking
and financial services to the public as a whole. In earlier times, there was no such institution
where people can deposit their money safely or take loans. So they used to go to money sharks
to borrow funds, and they deposit their money in the post offices. Later on, banks are being
developed that works as a banker to all the citizens of the country.

The banks accept deposits from the citizens of the country at a nominal interest rate and use
that money in extending credit to other customers (borrowers), charging a higher rate of
interest from them. In this way, commercial banks make its income from the left over amount
of interest. In addition to this, one of the major sources of bank’s income is the fees charged by
them for offering various services to the public. The diverse range of services provided by the
commercial banks are:

 Accepting deposits
 Advancing loans
 Overdraft and cash credit facility
 Payment on standing instructions
 Withdrawal of money on demand
 Collection of bills and promissory notes
 Trading in shares and debentures on behalf of customer
 Locker facility
 ATM Card, Debit Card, Credit Card Facility
 Mobile banking
 Internet banking

6. Write on the procedures followed by the customer to open bank account; to make
deposit and to withdraw from customer account.

Go to the bank branch of your choice

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  Obtain one application form; Fill up the form and sign at appropriate places

Along with the application form, you have to submit the following:

 two passport size photos

 photocopy of address proof - any one of the following: voter id card; driving license;
passport; AADHAAR card
 photocopy of identity proof - anyone of the following: voter id card, driving license;
passport; AADHAAR card
 opening cash

Submit the application form along with the enclosures to the deposit section; the officer will
verify the details and the manager will permit opening of an account. Pay cash at the teller
counter and within an hour, you will be provided with one pass book and debit card.

To enter a Deposit or Withdrawal

Accounting > Financial Tasks > Deposit/Withdrawal

1. Choose either Deposit (money coming into your bank account) or Withdrawal (money

going out of your bank account).
2. Enter the Post Date.
3. Enter the user full name
4. Enter amount in word
5. Enter amount in number
6. Signature of the user
7. Briefly discuss on the principal bank management area:
I. Liquidity management
Liquidity means an immediate capacity to meet one’s financial commitments. The degree of
liquidity depends upon the relationship between a company’s cash assets plus those assets
which can be quickly turned into cash, and the liabilities awaiting payments could be met
immediately. The liquidity and the Investments are two corners opposite to each other.

II. Asset management

Asset management is the direction of all or part of a client's portfolio by a financial services
institution, usually an investment bank, or an individual. Institutions offer investment services

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along with a wide range of traditional and alternative product offerings that might not be
available to the average investor.
III. Liability management
Liability management is the practice by banks of maintaining a balance between the maturities
of their assets and their liabilities in order to maintain liquidity and to facilitate lending while
also maintaining healthy balance sheets. In this context, liabilities include depositors’ money as
well as funds borrowed from other financial institutions. A bank practicing liability management
looks after these funds and also hedges against changes in interest rates.
IV. Capital adequacy management
The capital adequacy management or capital adequacy ratio (CAR) is a measurement of a
bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures.
The capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to
protect depositors and promote the stability and efficiency of financial systems around the
world. Two types of capital are measured:
A. Capital, which can absorb losses without a bank being required to cease trading, and
B. Capital, which can absorb losses in the event of a winding-up and so provides a lesser
degree of protection to depositors.
8. What is none performing loan (NPL). Briefly discuss on the causes and consequences of
NPL.

A nonperforming loan (NPL) is a loan in which the borrower is in default due to the fact that
they have not made the scheduled payments for a specified period. Although the exact
elements of nonperforming status can vary depending on the specific loan's terms, "no
payment" is usually defined as zero payments of either principal or interest. The specified
period also varies, depending on the industry and the type of loan. Generally, however, the
period is 90 days or 180 days.

 To decrease the NPL ratio, it is important to analyze the root causes of bad loans. The
main causes of NPL are high-interest rate, Low GDP, Poor credit appraisal, Inflation,

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 unemployment and improper lending disbursement to agriculture sector. NPL have
negative impact on the economy and financial institutions.
 The rising trend of NPL will also have a negative impact on the banks' profitability.
Provisioning against defaulted loans will also the financial health of many institutions. ...
The huge amount of NPL will accelerate the operating costs of the banks, which will
increase the lending rates.

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