DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW
2014-2015

ECONOMICS
[FINAL DRAFT]
ON
COMMERCIAL BANKS: FUNCTIONS & PERFORMANCE
OF COMMERCIAL BANKING SYSTEM IN INDIA
SUBMITTED FOR THE PROJECT WORK UNDERTAKEN IN THE
PARTIAL FULFILLMENT OF B.A. LL.B. (HONS.) 5 YEARS
INTEGRATED COURSE OF DR. RAM MANOHAR LOHIYA NLU,
LUCKNOW.

UNDER THE GUIDANCE OF: SUBMITTED BY:

Dr. MITALI TIWARI SHREYA JASORIA

Dr. R.M.N.L.U. ROLL NO. -129

2nd SEMESTER

1
 ACKNOWLEDGEMENT
Apart from the efforts of me, the success of this project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my gratitude
to the people who have been instrumental in the successful completion of this project. I
would like to show my greatest appreciation to Prof. Mitali Tiwari. I can't say thank you
enough for your tremendous support and help. I feel motivated and encouraged every time I
attend your class. Your willingness to motivate me contributed tremendously to my project. I
also would like to thank you for showing me some example that related to the topic of my
project. Without your encouragement and guidance this project would not have materialized.
Besides, I would like to thank the authority of Dr. Ram Manohar Lohiya National Law
University for providing us with a good environment and facilities to complete this project.
Finally, an honourable mention goes to my family and friends for their understandings and
supports on me in completing this project. Without helps of the particular that mentioned
above, I would face many difficulties in completing this project.

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 TABLE OF CONTENT Page No.

1. Executive Summary 4
2. Introduction to Banking
 Rationale of the Study 5
 Objective 5
 Research Methodology 6
 Plan of the Study 6
 Learning Outcomes 6
3. Commercial Bank
 Meaning 8
 Definition 8
 Functions 8
4. Structure of Commercial Banks in India 13
5. Role of Commercial banks in Business & Industry 16
6. Challenges for Indian Commercial Banks 18
7. Future Prospects of Commercial Banks 22
8. Conclusion 23
9. References 24

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 EXECUTIVE SUMMARY

Commercial Banks occupy a dominant place in the money market. They, as a matter of fact,
form the largest component in the banking structure of any country. They are the oldest,
largest and fastest growing institutions in India. They are profit making institutions, dealing
in money and credit. Commercial banks play a major role in the growth and development of
the country due to the modern organization and functioning, huge funds and wide network all
over the country.

Thus, they are like a reservoir into which flow the savings, the idle surplus money of
households and from which loans are given on interest to businessmen and others who need
them for investment or productive uses.

Commercial banks are very important source of institutional credit as they are the major
depository of people’s savings. They are important devices for providing short term credit to
trade and commerce. Commercial Banks being repositories of deposits have played
significant role in garnering savings of the people particularly after the nationalization. Thus,
they have made praiseworthy efforts in pooling the savings.

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 CHAPTER-1
INTRODUCTION TO BANKING

The word ‘bank’ is used in the sense of a commercial bank. It is a Germanic origin though some
persons trace its origin in French word ‘Banqui’ and the Italian word ‘Banca’. It is referred to a bench
for keeping, lending, and exchanging of money or coins in the market place by money lenders and
money changers. Banks are the institutions involved in the buying and selling of money. They are the
most important unit of the financial sector of the economy. There are different types of banks such as
Commercial Banks, Exchange Banks, Industrial Banks, Agricultural Banks, Co-operative Banks and
Saving Banks. Each of the kind of bank is involved in its own different areas of activities. In this
project work light has been focused on the Commercial Banks specifically.

RATIONALE OF THE STUDY:

Today the economy is facing Inflationary pressures from each and every sector. Inflation
though is important since an economy cannot remain stagnant. But, inflation for a long period
of time can prove very harmful to the economic system of the country. The government thus
adopts certain measures for controlling inflation. It does this through its monetary and fiscal
policies. Banks are the most important part of the monetary policy of the Government which
is controlled by the Reserve Bank of India. Thus, this study is focused on the Commercial
Banks.

OBJECTIVE:

The objective of the study on the “Commercial Banks: Functions and Performance of
Commercial Banking in India” is to make a sincere attempt in:

 Learning the definition, functions & structure of the commercial banks.

 Determining the importance of these banks in the contemporary India as they occupy
a dominant place in the money market.
 Studying the role of the banks in the economic development of the developing
countries like India.
 Discussing the problems being faced by the commercial banks and structuring the
solutions to them.

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RESEARACH METHODOLOGY:

The method which will be followed for this study would be purely Doctrinal in nature. This
study would be a descriptive and analytical one describing the relevance of Commercial
Banks and analysing their influence in the contemporary world. The project is completed
with the help of use of books, articles and other web sources.

PLAN OF STUDY:

The plan of the study is to include essential core topics within it. It aims at giving a thorough
idea of the Commercial Banks. It includes the meaning, functions and structure of
commercial banks, their role in the business sector and the problems being faced by them.
The solutions to these problems have been forwarded in the concluding part of the project.
The study is comprehensive and helps to improve the research and investigation ability.

LEARNING OUTCOMES:

The study will contribute to give the understanding of the present scenario of commercial
banking and accordingly the banks can go for new innovative schemes. It will also specify
some recommendations and based on that banks can make suitable arrangements in a
particular sector. It will also make people aware about Commercial Banking.

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 CHAPTER II

COMMERCIAL BANK

MEANING:

A bank is an institution which deals with the demand and supply of money. Broadly
speaking, bank draw surplus money from the people who are not using it at the time, and lend
to those who are in a position to use it for the productive purposes. A commercial bank is a
private corporation, owned by its stockholders that provide services to the
public. CITATION Dew08 \l 16393 [ CITATION Lie06 \l 16393 ]

DEFINITION:

According to Section 5(c) of the Banking Regulation Act, 1949:

“Banking company means any company which transacts the business of banking in India.”

Section 5(b) of the act defines:

“Banking as accepting for the purpose of lending or investments of deposits of money from
the public repayable on demand or otherwise and withdrawable by cheque, draft, and order
or otherwise.” CITATION Dew08 \l 16393 [ CITATION Ban \l 16393 ]

According to Prof. Sayers, “Commercial Banks are institutions whose debts – usually
referred to as bank deposits- are commonly accepted in final settlement of other people’s
deposits.” CITATION Dew08 \l 16393 [ CITATION 20110 \l 16393 ]

FUNCTIONS OF COMMERCIAL BANKS:

Commercial banks perform several crucial functions to satisfy the needs of the various
sectors of the economy, which may be classified into two categories:

(I) Primary functions, and

(II) Secondary functions.
(I) PRIMARY BANKING FUNCTIONS of the commercial banks include:

CITATION Dew08 \l 16393

[ CITATION Lie06 \l 16393 ]
CITATION Dew08 \l 16393
[ CITATION Ban \l 16393 ]
CITATION Dew08 \l 16393
[ CITATION 20110 \l 16393 ]

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 1. Acceptance of deposits from public;
2. Lending of funds;
3. Use of cheque system; and
4. Remittance of funds.
1. Acceptance of Deposits from the Public:
Accepting deposits is the primary function of a commercial bank. By receiving
deposits from the public, commercial banks mobilise savings of the household sector.
Banks generally accept deposits in three types of accounts:
(i) Current Account
(ii) Savings Account, and
(iii) Fixed Deposit Account.
Deposits in Current Account are withdrawable by the depositors by cheques
for any amount to the extent of the balance at their credit, at any time without
any prior notice. Deposits of current accounts are, thus, known as Demand
Deposits. Such accounts are maintained by commercial and industrial firms
and businessmen, and the cheque system is the most convenient and very safe
mode of payment. No interest is provided for such deposits. In fact bank charge
certain commission for providing the facility.
Saving Accounts are maintained for encouraging savings of households.
Withdrawals from deposits from savings account are not freely allowed are not
freely allowed in the case of current account. There are some restrictions on the
amount to be withdrawn at a time and also on the number of withdrawals made
during a period. Indian commercial banks have, however, relaxed these rules of
savings account deposits as prescribed by the central bank. Presently, it is 5%
p.a. A nominal rate of interest is provided for such deposits.
Deposits in Fixed Account are time deposits. In the normal course, deposits
cannot be withdrawn before the expiry of the specified time period of the
deposits. A premature withdrawal is, however, permitted only at the cost of
forfeiture of the interest payable, at least partly. On these deposits commercial
banks pay higher rates of interest, and the rate becomes higher with the
increase in duration. Longer the time period, higher would be the rate of
interest and vice versa.
2. Lending of Funds:

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 Another major function of commercial banks is to extend loans and advances out of
the money which comes to them by way of deposits to businessmen and entrepreneurs
against approved such as gold or silver bullion, government securities, easily saleable
stocks and shares, and marketable goods. Thus, it is said that “loans create deposits.”
That is why it is said in modern times, deposits of cash have changed into deposits
of credit.1[ CITATION Dew08 \l 16393 ]
Banks advances to customers may be made in many ways:
(i) Overdraft: A commercial bank grants overdraft facility to an account holder
by which he is allowed to draw an amount in excess of the balance in the
account, up to the extent of stipulated limit. Overdrafts are permissible in
current account only.
(ii) Cash Credit: Bank gives credit in cash to business firms in industry and trade,
against pledge or hypothecation of goods, or personal guarantee given by the
borrowers. It is essentially a drawing account against credit sanctioned by the
bank and is operated like a current account on which an overdraft is
sanctioned.
(iii) Discounting Trade Bill: The banks facilitate trade and commerce by
discounting bills of exchange called trade bills. Traders often draw bill of
exchange to meet their obligations in business transactions. Such a trade bill is
payable in cash on maturity after a stipulated date. Discounting of bills by the
bank amounts to granting of credit to the party concerned till the maturity date
of the bill. This method of bank lending is widely adopted for two reasons:
(a) Such loans are self liquidatory in character; and
(b) These trade bills are rediscountable with the central bank.
(iv) Money at call or very short term advances: Banks also grants loans for a
very short period, generally not exceeding 7 days to the borrowers, usually
dealers or brokers in stock exchange markets against collateral securities like
stock or equity shares, debentures, etc., offered by them. Such advances are
repayable immediately at notice hence; they are described as money at call or
call money.
(v) Term Loans: Banks give term loans to traders, industrialists and now to
agriculturists also against some collateral securities. Term loans are so-called

1
[ CITATION Dew08 \l 16393 ]

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 because their maturity period varies between 1 to 10 years. Term loans as such
provide immediate or working capital funds to the borrowers. Sometimes, two
or more banks may jointly provide large term loans to the borrower against a
common security. Such loans are called participation loans or consortium
finance.
(vi) Consumer Credit: Banks also grant to households in a limited amount to buy
durable consumer goods such as television sets, refrigerators, etc; or to meet
some personal needs like payment of hospital bills, etc. such consumer credit is
made in a lump sum and is repayable in instalments in a short time. Under the
20-point programme, the scope of consumer credit has been extended to cover
expenses on marriage, funeral etc; as well.
(vii) Miscellaneous Advances: Among other forms of bank advances there are
packing credits given to exporters for a short duration, export bills purchased/
discounted, import finance- advances against import bills, finances to the self-
employed, credit to the public sector, credit to the cooperative sector and above
all, credit to the weaker sections of the community at concessional rates.
3. Use of Cheque System:
It is a unique feature and function of banks that they have introduced the cheque
system for the withdrawal of deposits.
There are two types of cheques:
(i) The Bearer Cheque and
(ii) The Crossed Cheque.

A Bearer Cheque is encashable immediately at the bank by its possessor. Since, it is

negotiable, it serves as good as cash on transferability.

A Crossed Cheque, on the other hand, is one that is crossed by two parallel lines on
its face at the left hand corner and such cheque is not immediately encashable. It has to
be deposited only in the payee’s account. It is not negotiable.

In modern business transactions, the use of cheques to settle debts is found to be much
more convenient than the use of cash. Commercial banks, thus, render an important
service by provided an inexpensive medium of exchange such as cheques. In fact, a
cheque is also considered as the most developed credit instrument.

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4. Remittance of Funds:
Commercial banks, on account of their network of branches throughout the country,
also provide facilities to remit funds from one place to another for their customers by
issuing bank drafts, mail transfers or telegraphic transfers on nominal commission
charges. As compared to the postal money orders or other instruments, bank drafts
have proved to be a much cheaper mode of transferring money and have helped the
business community considerably.
(II) SECONDARY BANKING FUNCTIONS of the commercial banks are also
known as non-banking functions. They perform a multitude of other non-banking
functions which may be classified as:
(1) Agency Services, and
(2) General Utility Services.
1. Agency Services:
Bankers perform certain functions for and on behalf of their clients, as:
(a). To collect or make payments for bills, cheques, promissory notes, interest,
dividends, rents; subscriptions, insurance premium, etc. For these services, some
charges are usually levied by the banks.
(b). To remit funds on behalf of the clients by drafts or mail or telegraphic
transfers.
(c). To act as executor, trustee and attorney for the customer’s will.
(d). Sometimes, bankers also employ income-tax exporters not only to prepare
income-tax returns for their customers but also to help them to get refund of
income-tax in appropriate cases.
(e). To work as correspondents, agents or representatives of their clients.
Often, bankers obtain passport, traveller’s tickets, and secure passages for their
customers, and receive letters on their behalf.
2. General Utility Services:
Modern commercial banks usually perform certain general utility services for their
community, such as:
(a). Letters of credit may be given by the banks at the behest of the importer in
favour of the exporter.
(b). Bank drafts and traveller’s cheques are issued in order to provide facilities for
transfer of funds from one part of the country to another.

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 (c). Banks may deal in foreign exchange or finance foreign trade by accepting or
collecting foreign bills of exchange.
(d). Shares floated by government, public bodies and corporations may be
underwritten by banks.
(e). Certain banks arrange for safe deposit vaults, so that customers may entrust
their securities and valuables to them for safe custody.
(f). Banks also compile statistics and business information relating to trade,
commerce, and industry. Some banks may publish valuable journals or bulletins
containing research on financial, economic and commercial matters.

 Commercial Banks play an important role in Modern Economy:

1). They constitute the very life-blood of modern trade, commerce and industry, as they
provide the necessary funds for their working capital such as to buy raw materials, to pay
wages, to incur current business expenses in marketing of goods, etc.

2). These banks encourage people’s savings habit through their various saving deposit
schemes.

3). They also mobilize idle saving resources from households to business people for
productive use.

4). They transmit money from place to place with economy and safety.

5). Their agency services are, no doubt, of immense value to the people at large, as they case
their difficulties, save their time and energy and provide them safety and security.

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 CHAPTER III

STRUCTURE OF COMMERCIAL BANKS IN INDIA

In general parlance, there are two types of Commercial Banks:

 SCHEDULED BANKS:
A scheduled bank is one which is registered in the second schedule of the Reserve
Bank of India. The following conditions must be fulfilled by a bank for inclusion in
the schedule:
i) The banker concerned must be in business of banking in India;
ii) It is either a company defined in Section 3 of the Indian Companies Act, 1956,
or corporation or a company incorporated by or under any law in force in any
place outside India or an institution notified by the central government in this
behalf;
iii) It must have paid-up capital and reserves of an aggregate role of exchangeable
value of not less than rupees five lakhs;
iv) It must satisfy the Reserve Bank of India that its affairs are not conducted in a
manner detrimental to the interests of its depositors.

Scheduled banks come under the purview of the various credit control measures of the
Reserve Bank of India. They are required to maintain a certain minimum balance in their
accounts with the RBI, and do certain things prescribed by law. The Scheduled Banks are
entitled to borrowings and rediscounting facilities from the RBI. CITATION Dew08 \l 16393

 NON-SCHEDULED BANKS:
Banks, which are not included in the Second Schedule of the RBI, are known as non-
scheduled banks. They may be classified into four groups:
a). Banks with paid-up capital and reserves in excess of Rs. 5 lakhs;
b). Banks with paid-up capital and reserves ranging between Rs. 50,000 and one lakh
of rupees.
c). Banks with paid-up capital and reserves ranging between one lakh of rupees and 5
lakhs.
d). Banks with paid-up capital and reserves below Rs. 50,000.
CITATION Dew08 \l 16393
[ CITATION Pur07 \l 16393 ]

13
 Non-Scheduled banks are not entitled to all those facilities that the scheduled banks
avail of from the Reserve Bank of India. Since the enactment of the Banking
Regulation Act in 1949, non-scheduled banks have also come under the ambit of RBI
control. It has become obligatory on the part of these banks to carry a portion of their
deposits with the RBI or in vault with the bank itself, and prepare their annual
accounts and balance sheets in accordance with the requirements stipulated in Section
29 of the Banking Companies Ac

NATIONALISATION OF COMMERCIAL BANKS:

In a free enterprise economy, commercial banks operate like any other business and are
mainly concerned with the maximisation of their private gains. Lacking any social
purpose they often channelize funds to business units in which the management has
interst and thus contribute in a big way to growth of monopolies and concentration of
economic and political power, while overall economic activity suffers because priority
sectors/industries fail to get adequate funds. CITATION Dew08 \l 16393 [ CITATION Pur07 \l 16393 ]

By the 1960’s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. With effect from July 19, 1969, 14 largest commercial
banks were nationalised. This was hailed as a historic event by the people of the country.
Some experts also supported it as a timely measure. Nonetheless, industrialists and some
other vested interests condemned it by calling it a political gimmick.

D.N. Ghosh viewed it in a larger perspective when he made the following observations:

“The decision of July 1969 was a complete break from the tradition; it was an explicit
recognition by the government that it could not absolve itself of its responsibilities of
controlling directly the banking system if it was to be shaped as an instrument of furthering
economic development in accordance with national objectives and
priorities.” CITATION Dew08 \l 16393 [ CITATION Gho79 \l 16393 ]

The main objectives of nationalization were as follows:

1. To introduce social banking by directing bank funds at concessional rates to the

weaker section of society for productive purposes.

CITATION Dew08 \l 16393

[ CITATION Pur07 \l 16393 ]
CITATION Dew08 \l 16393
[ CITATION Gho79 \l 16393 ]

14
 2. To prevent monopolies in the banking sector caused due to use of major share of
funds by a few private entrepreneurs.
3. To introduce and promote banking facilities in backward areas and reduce regional
disparities in branch expansion and growth of banking.
4. To expand the role of commercial banks in agricultural credit.

RESERVE BANK OF INDIA

[Central Bank and Supreme Monetary Authority of the country]

SCHEDULED BANKS

SCHEDULED COMMERCIAL BANKS SCHEDULED CO-OPERATIVE BANKS

Public Private Foreign Regional Scheduled Scheduled

Sector Sector Banks in Rural Urban State
Banks Banks India (40) Banks Cooperative Cooperative
(27) (30) (196) Banks (52) Banks (16)

Nationalise State Bank Old New

d Banks of India & Private Private
(19) its Banks (22) Banks (8)
associates
(8)

CHAPTER IV

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ROLE OF COMMERCIAL BANKING ON BUSINESS AND
INDUSTRY IN INDIA

Banking sector is called the “Nerve centres of the nation’s economy” and “Backbones of
modern Industries and Commerce”. Commercial Banks facilitate the growth of business in
India. The deposits from public is mobilised to fund the commercial activities. These
activities in turn generate income which is added to the gross domestic product of the nation.
Thus, banks are the most crucial sector that helps a nation grows
economically. CITATION Dew08 \l 16393

Besides performing the usual commercial banking functions, banks in developing countries
play an effective role in their economic development. The majority of people in such
countries are poor, unemployed and engaged in traditional agriculture. There is acute
shortage of capital. People lack initiative and enterprise. Means of transport are
underdeveloped. Industry is depressed. The commercial banks help in overcoming these
obstacles and promoting economic development. The role of commercial banks in a
developing country like India is discussed as under:

1. Mobilising Savings for Capital Formation- The commercial banks help in mobilising
savings through a network of branch banking. People in India have low incomes but
the banks induce them to save by introducing variety of deposit schemes to suit the
needs of the individual depositors. By mobilising savings, the banks channelize them
into productive investments. Thus they help in the capital formation of a developing
country.
2. Financing Industry- The commercial banks provide short-term, medium term and
long-term loans to the industrial sector of the country. In India, the commercial banks
undertake short-term and medium-term financing of small scale industries, and also
provide hire-purchase finance. Besides, they underwrite shares and debentures of
large scale industries.
3. Financing Trade- The commercial banks help in financing both internal and external
trade. The banks provide loans to retailers and wholesalers to stock goods in which
they deal. They also help in movement of goods from one place to another by
providing all types of facilities such as discounting and accepting bills of exchange,

CITATION Dew08 \l 16393

[ CITATION Rud08 \l 16393 ]

16
 providing overdraft facilities, issuing drafts, etc. Moreover, they finance both exports
and imports of developing by providing foreign exchange facilities to importers and
exporters of goods.
4. Financing Agriculture- The commercial banks help the large agricultural sector in
India in a number of ways. They provide loans to traders in agricultural credit. They
open a network of branches in rural areas to provide agricultural credit. They provide
finance directly to agriculturists for marking their produce, for the modernisation and
mechanisation of their farms, for providing irrigation facilities, for developing land,
etc.
5. Financing Consumer Activities- People in underdeveloped countries being poor and
having low incomes do not possess sufficient financial resources to buy durable
consumer goods. The commercial banks advance loans to consumers for the purchase
of such items as houses, scooters, fans, refrigerators, etc. In this way, they also help in
raising the standard of living of the people in developing countries by providing loans
for consumptive activities.
6. Financing Employment Generating Activities- The commercial banks finance
employment generating activities in developing countries. They provide loans for the
education of young person’s studying in engineering, medical and other vocational
institutes of higher learning. Such loan facilities are being provided by a number of
commercial banks in India. Thus the banks not only help in human capital formation
but also in increasing entrepreneurial activities in developing countries.
7. Help in Monetary Policy- The commercial banks help in economic development of a
country by faithfully following the monetary policy of the central bank. In fact, the
central bank depends upon the commercial banks for the success of its policy of
monetary management in keeping with requirements of a developing economy.
Thus, the Commercial Banks contribute much to the growth of a developing economy
by granting loans to agriculture, trade and industry, by helping in physical and
human capital formation and by following the monetary policy of the country.

CHAPTER V

17
 CHALLENGES FOR INDIAN COMMERCIAL BANKS

Major challenges which Indian commercial banks are facing today and which are likely to be
more poignant in the ensuing years in the view of the irreversible process of the reforms and
resultant verisimilitude of more players entering the banking sector are discussed below.

 PROBLEM OF PRESSURE ON PROFITABILTY:

The greatest challenge which Public Sector Banks are facing in recent years arises out of
pressure on their profitability. With continuous expansion in number of branches and
manpower, thrust on social and rural banking, directed sector lending, maintenance of
higher reserve ratios, repayment defaults by large industrial corporate and other
borrowers etc. had their telling impact on the profitability of the banks.

 PROBLEM OF LOW PRODUCTIVITY:

Another furious challenge which Indian commercial banks are confronting is low
productivity. The low productivity has been due to huge surplus manpower, absence of
good work culture, and absence of employees’ commitment to the organisation.

The management have continued to prefer not to see the problem in its proper perspective
due to fear of strong unions. They have camouflaged the issue by diverting their attention
to such apparent face saving devices like redeployment, repositioning, retraining, etc.
There are various ways of minimizing the staff, such as voluntary retirement scheme or
golden shake hand. The problem before the management at present is how to cut size of
the staff and improve productivity of the bank.

 PROBLEM OF NON-PERFORMING ASSETS:

A serious threat to the survival and success of Indian banking system is uncomfortably
high level of non-performing assets. In its report on Trend and Progress of Banking in
India, 1997-98, the RBI reported that gross NPAs as percentage of advances of PSBs was
16% as on March 31, 2000 with a colossal amount of about Rs. 52,00 crore being locked
up. This might have recently recorded further increase due to default in repayment by the
industrial units affected by the six year old recession. This is much bigger than the
international level of below 5%. Spiralling non-performing assets are hurting bank’s

18
profitability and even the basic inability of the banking system by way of both non-
recognition of interest income and loan loss provisioning.

 PROBLEM FROM CUSTOMERS:

In view of unleashing of competitive forces and fast changing life styles and values of
customers who are now better informed and more sophisticated and discerning and who
have a wide choice to choose from various banking and non-banking intermediaries have
become more demanding and their expectations in terms of products , delivery and price
are increasing, the PSBs lacking in customers’ orientation are finding it difficult to even
retain their highly valued customers what to talk of attracting the new clients particularly
when the foreign banks are also the new breed of private sector banks have embarked
upon aggressive marketing programme aiming at niche markets. The telebanking,
anywhere banking, virtual or internet banking, ATM, credit cards and newly introduced
interest rate swap, forward rate agreements, etc. are some of the products innovated by
the new players. Although, the PSBs are trying to computerize their operations, the pace
of progress in this direction has been decidedly slow. The rather tardy progress in the area
has been due to the initial reservation of the staff unions against computerization for the
lurking fear of employment cut, as also the existence of huge number of branches in the
rural areas, where suitable logistics are not available. Market share of PSBs both in
deposits and lending has declined. This has already become a serious cause of concern for
PSBs regulating strategic efforts for thwarting the challenges from the new players.

 COMPETITION FROM NEW BANKS:

The commercial banks in India which enjoyed monopoly position until recently are facing
perilous challenges particularly on quality, cost and flexibility fronts from the newly
emerging players who by dint of their invigorating ambience and work culture supported
by pragmatic leadership committed, courteous, affable and trained staff and modern ultra
gadgets are offering excellent customer services and making inroads in the business
centres.

The market has become highly competitive and largely customers centric. This calls for
an ability to reach the client at his door step and his requirements of products and services
in a customized manner. The race for customers could at times lead to adverse selections.

19
 This situation demands aggression lace with caution, in turn, calls for highly efficient
management by the banks of both liabilities and assets.

These banks have to work in a market which will not know any geographical barriers and
therefore will have to develop abilities of product innovation and delivery comparable to
the best in the world.

 COMPETITION FROM GLOBAL MAJORS:

Globalisation and integration of Indian financial market with world and consequent entry
of foreign players in domestic market has infused, in its wake, brutal competitive pressure
on the Indian commercial banks. Foreign players endowed with robust capital adequacy,
high quality assets, world-wide connectivity, benefits of economies of scale and
stupendous risk management skills are posing serious threats to the existing business of
the Indian banks. In order to compete successfully with new entrants, Indian banks need
to possess matching financial muscle, as fair competition is possible only along the
equals. Average size of an Indian bank is niggardly low in comparison to a foreign bank.
The question before the major Indian Commercial Banks, therefore, is how to acquire
competitive size.

 PROBLEM OF MANAGING DUALITY OF OWNERSHIP:

Managing duality of ownership is a peculiar problem which the PSBs have to encounter
because of participation of the private shareholders in their capital. A public sector bank
to survive and grow successfully is expected to operate according to the expectations if
one of its principal shareholders. In the changed scenario, there would be two major
group of shareholders, viz., the government of India and RBI on the one hand and the
private shareholder, on the other. Since the expectations of these two categories of owners
are not necessarily identical, the bankers will have to manage conflicting interests.

RECOMMENDATIONS:

Banking in India has made a remarkable progress in its growth and expansion, as well as
business with social perspective in the fulfilment of national objectives. Indian Commercial
banking has developed, but, its perfection is yet to be seen. There still remain many tasks to
be fulfilled.

20
 1. Still there are villages left without banking facilities, so many more rural banks
branches need to be opened.
2. Quality of Commercial banking facilities should be improved to the almost
satisfaction of the customer.
3. Operational costs of Commercial banks should be reduced to minimum profitability
and working results must be maximized.
4. Banking staff should be adequately trained.
5. More lending should be made in favour of priority sectors.
6. Malpractices, fraud, corruption and red-Tapism must be done away with.
7. More attention should be paid to the development of exports.
8. Nationalised banks should give more technical assistance to the small industrialists.
9. Interest rates on deposits should be enhanced reasonably up to 12-13% so that savers
get their legitimate returns.
10. The high level of over dues of banks has become a matter of concern.

Thus, in order that the association of banks with industry is more fruitful and rewarding,
many innovations have to be planned and introduced systematically and greater degree of
managerial competence will have to be developed in Commercial banking sector.

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 CHAPTER VI

FUTURE PROSPECTS OF COMMERCIAL BANKING

Indian banking has developed. But, its perfection is yet to be seen. There still remain many
tasks to be fulfilled. Historically, profitability from lending activities has been cyclic and
dependant on the needs and strengths of loan customers. In recent history, investors have
demanded a more stable revenue steam and banks have therefore place more emphasis on
transaction fees, primarily loan fees but also including service charges on array of deposit
activities and ancillary services ( international banking, foreign exchange, insurance,
investments, wire transfers, etc). However, lending activities still provides and in future, too
will provide bulk of a Commercial bank’s income.

As part of the financial services industry, commercial banking are worldwide attempting to
compete better by improving core operations and differentiating the customer experience.
The banking sector has been consolidating; it is worth noting that far more people are
employed in the Commercial banking sector than any part of the financial services industry.
Jobs in banking can be exciting and offer excellent opportunities to learn about business,
interact with people and build up a clientele. In future, if we are well prepared and
enthusiastic about entering the field, we are likely to find a wide variety of opportunities to
us.

Thus, we can predict the future of Commercial bank, to be spread worldwide. They will be
providing an unprecedented level of service to a wide range of business clients, from small
business, through to multi-national corporate clients. In future, Commercial bank will come
up with more innovative and experienced depth knowledge of specific sectors, to meet all of
our banking requirements.

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CONCLUSION:

Over five decades the Commercial banks in India achieved astounding success by
enormously spreading banking services in far-flung and unbanked areas of the country
through their massive branch network are garnering burgeoning amount of savings which
represent half of the GDP of the country. A major portion of these resources had been
deployed to meet the needs of priority sectors which are critical to the economy.

However, it is crucial for the commercial banking industry to meet the increasingly complex
savings and financial needs of the economy by offering a wider and flexible range of
financial products tailored for all types of customers. In recent years, it is being felt widely
that the commercial banking system has not actually grown as sound and vibrant as it needed
to be.

In banking, there is no such thing as “one size fits all.” But today’s commercial banks are
more diverse than ever. One can find a tremendous range of opportunities in commercial
banks, starting at branch level because commercial bankers now are highly experienced in
working with businesses to develop the right financial package to meet your unique business
needs. The face of Commercial banking is changing rapidly. Competition is going to be
tough. Banks should avail of the existing and upcoming opportunities as well as address the
above discussed issues if they have to succeed, not just survive, in the changing environment.

Thus, Commercial Banks occupy a dominant place in the money market, they are like a
reservoir into which flow the savings, the idle surplus, money of households and from which
loans are given on interest to businessmen and others who need them for investment or
productive uses.

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 REFERENCES:

SECONDARY SOURCES:

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1. Datt, Ruddar, & Sudharam, K.P.H. (2008). Indian Economy. New

Delhi: S.Chand & Company Ltd.
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3. Dewett, K.K. (2008). Modern Economic Theory. New Delhi: S.Chand
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4. Stonier, Alfred, W., & Hague, Douglas, C. (2008). A Textbook of
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5. Hall, Robert, E., & Lieberman, Marc. (2006). Economics: Principles
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commercial-banks-economy.asp.

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