COMMERCIAL BANKING

 INTRODUCTION TO COMMERCIAL BANKING

 ROLE OF RBI
• INTRODUCTION TO BANKING

• Definition of banks,

• Evolution of commercial banks in India,

• Functions of commercial banks,

• Competitive landscape of banks in India

Learning outcomes

• Discuss banking institutions into developmental and

commercial nature

• Discuss the products and services offered by commercial

banks

• Summarize the role played by commercial banks in financial

inclusion
What is Bank ?
• What Is a Bank?

• A bank is a financial institution licensed to

receive deposits and make loans. Banks may
also provide financial services, such as wealth
management, currency exchange, and safe
deposit boxes.
 Current Market Size
• The Indian banking system consists of

• 12 public sector banks, 21 private sector banks,

49 foreign banks, 56 regional rural banks,
• 1,562 urban cooperative banks and 94,384
rural cooperative banks, in addition to
cooperative credit institutions s 
 What is commercial Bank
• A commercial bank is a type of financial
institution that accepts deposits, offers checking
account services, makes various loans, and
offers basic financial products like certificates of
deposit (CDs) and savings accounts to
individuals and small businesses
 Evolution of Indian Banking
• Among the first banks were the Bank of Hindustan, which
was established in 1770 and liquidated in 1829–32; and the
General Bank of India, established in 1786 but failed in
1791.
• The Nedungadi Bank was the first private sector bank in
India which was founded in 1899 by Rao Bahadur T.M. in
Kozhikode, Kerala
• The commercial banking industry in India started in
1786 with the establishment of the Bank of Bengal in
Calcutta

• British India at the time established three Presidency

banks, namely,
1)Bank of Bengal (established in 1809)
2)Bank of Bombay (established in 1840)
3)Bank of Madras (established in 1843)
• In 1921, the three Presidency banks were
amalgamated to form the Imperial Bank of India,
which took up the role of a commercial bank, a
bankers’ bank and a banker to the Government.
• The Imperial Bank of India was established mainly
with European shareholders.
• After the establishment of the Reserve Bank of India
(RBI) as the central bank of the country in 1935, the
role of the Imperial Bank of India came to an end.
•  The imperial bank was renamed as STATE
BANK OF INDIA on 1st July 1955.
• SBI was formed on the recommendation of A D
Gorewal committee
• In 1865, the Allahabad Bank was established
purely by Indian shareholders. Punjab National
Bank came into being in 1895.
• Between 1906 and 1913, other banks like Bank
of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore
were set up.
• The following banks were Nationalized in 1969:
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Central Bank of India
• Canara Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Punjab National Bank
• Syndicate Bank
• UCO Bank
• Union Bank
• United Bank of India
• The following banks were Nationalised in 1980:

• Punjab and Sind Bank

• Vijaya Bank
• Oriental Bank of India
• Corporate Bank
• Andhra Bank
• New Bank of India
1.Fixed Rate – 
2.Floating Rate – 
3.Which one is better and why
 MCQ
• Oudh Commercial Bank was founded in
_______.

a) 1913
b) 1917
c) 1894
d) 1881
• Oudh Commercial Bank was founded in
_______.

a) 1913
b) 1917
c) 1894
d) 1881
• Which was the second bank in India
with limited liability?

a) Punjab National Bank

b) Imperial Bank of India
c) New Bank of India
d) State Bank of India
• Which was the second bank in India
with limited liability?

a) Punjab National Bank

b) Imperial Bank of India
c) New Bank of India
d) State Bank of India
• Which movement encouraged the
formation of commercial banks?

a) Swadeshi movement
b) Quit India Movement
c) Non Cooperation Movement
d) Civil Disobedience Movement
• Which movement encouraged the
formation of commercial banks?

a) Swadeshi movement
b) Quit India Movement
c) Non Cooperation Movement
d) Civil Disobedience Movement
•  In which year was the Banking
Regulation Act passed?

a) 1949
b) 1955
c) 1959
d) 1969
•  In which year was the Banking
Regulation Act passed?

a) 1949
b) 1955
c) 1959
d) 1969
1.Fixed Rate – 
2.Floating Rate – 
3.Which one is better and why
• MCLR v/s base rate

• What is the difference?????

 Functions performed by banks

• ???????
Accepting deposits: The most significant and
traditional function of commercial bank is
accepting deposits from the public. ...
Providing loans: ...
Credit Creation: ...
Transfer of funds: ...
Agency functions: ...
Other functions:
 Functions of Commercial Bank
https://businessjargons.com/commercial-bank.html
 Agency Functions
• Banks collect cheques, drafts, bills of exchange and dividends
of the shares for their custom­ers.
• 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.
• Banks pay insurance premium of their customers. Besides this,
they also deposit loan installments, income-tax, interest etc. as
per directions.
 Agency Functions

• Banks purchase and sell securities, shares

and debentures on behalf of their
customers.
• Banks arrange to send money from one
place to another for the convenience of
their custom­ers.
 Miscellaneous Functions
• Banks make arrangement of lockers for the safe custody of valuable assets
of their custom­ers such as gold, silver, legal documents etc.
• Banks give reference for their customers.

• Banks collect necessary and useful statistics relating to trade and industry.

• For facilitating foreign trade, banks undertake to sell and purchase foreign
exchange.
• Banks advise their clients relating to investment decisions as specialist

• Bank does the under-writing of shares and debentures also.

• Banks issue letters of credit.

• During natural calamities, banks are highly useful in mobilizing funds and
donations.
• Credit can be created by:
• (A) RBI
• (B) Foreign banks
• (C) Commercial banks
• (D) Private banks
• Credit can be created by:
• (A) RBI
• (B) Foreign banks
• (C) Commercial banks
• (D) Private banks
•  Repo Rate means?
• (A) Rate offered by banks to their premium customers.
• (B) Rate at which RBI offers loan facilities to commercial
banks against government securities, with the condition
that banks need to repurchase the securities in a short
period.
• (C) Banks having excess cash can buy securities from
RBI with a condition of reselling securities to RBI on a
prefixed day and price.
• (D) Banks can discount bills of exchange and avail loan
from RBI at times when cash is needed.
•  Repo Rate means?
• (A) Rate offered by banks to their premium customers.
• (B) Rate at which RBI offers loan facilities to commercial banks
against government securities, with the condition that banks need to
repurchase the securities in a short period.
• (C) Banks having excess cash can buy securities from RBI with a
condition of reselling securities to RBI on a prefixed day and price.
• (D) Banks can discount bills of exchange and avail loan from RBI at
times when cash is needed.
•  Increase in cash reserve ratio (CRR) by the RBI
will result in:
• (A) Initially increase the supply but later on
decrease automatically.
• (B) No impact on the supply of money in the
economy
• (C) Decrease the supply of money in the
economy
• (D) Increase the supply of money in the economy
•  Increase in cash reserve ratio (CRR) by
the RBI will result in:
• (A) Initially increase the supply but later on
decrease automatically.
• (B) No impact on the supply of money in
the economy
• (C) Decrease the supply of money in the
economy
• (D) Increase the supply of money in the
economy
• Flat rate
• Reducing rate

• For your car loan which one would you

choose and why
Classification of Banking
Development Banks
 Wholesale Banking
• banking services that are offered to institutional customers, government
agencies, local governments, companies with huge balance sheets etc.
• interbank lending and borrowing.
• large trade transactions,
• working capital,
• underwriting,
• M&A (mergers and acquisition),
•  currency conversion,
• fleet and equipment leasing,
• loan participation,
• merchant banking,
• trust services.
 Wholesale Banking
• large-scale corporate customers or high-revenue institutions, managing
their funds and providing other quintessential financial or non-financial
services.
• To achieve a competitive edge, they are constantly evaluating the effect of
technological development on the banking business to reorganize at the
current level of technology and competitiveness.

• Customized services

• significant discount on their services for big companies in exchange for

them to deposit huge amounts in their vault.

• Managing government projects and bodies demands more detailed banking

than commercial activities. provide banking and financial solutions that do
not violate government protocols or create conflicts of interest.
 HDFC as Wholesale Banker
• HDFC Bank Limited is a banking and financial services
company and India’s largest private sector bank by assets and
the world’s 10th largest bank by market capitalization as of
April 2021. The bank’s operations include treasury, retail,
wholesale, and other banking operations. The HDFC
bank’s wholesale banking segment provides loans, non-fund
facilities, wholesale net banking, and transaction services to
large corporates, emerging corporates, public sector units,
government bodies, financial institutions, and medium-scale
enterprises.
• The firm’s strategy of a balanced combination of
retail and wholesale is paying dividends
brilliantly. When retail growth in the sector is a little
subdued, the bank’s wholesale segment engine is
blazing on all terms. Hence the combination is
yielding a sustainable growth rate. From 2020 to
2021 bank’s wholesale share has increased from 49%
to 53%. Loans increased by more than 20% in the
wholesale category, which comprises high-rated
corporates, MNCs, and PSUs, in FY20 and FY21.
Wholesale v/s Retail Banking
 Competitive Landscape
• https://www.ibef.org/industry/banking-
presentation
Role of RBI
 MONERATY POLICY
CRR 4%

SLR 19%

REPO RATE 5.75%

REVERSE REPO RATE 5.50%

MSF RATE 6%

BANK RATE 6%
Competitative Landscape of Banks in India
• Banks face competition from a wide range of financial
intermediaries in the Public and Private sectors.
• Diverse group in terms of size & nature

• Play an important role in the financial system by

providing a wide range of financial services
 Some of these intermediaries include:
• Term-lending Institutions
• Non-banking Financial companies
• Insurance companies
• Mutual funds
• at both state and all-India levels.

• They provide term loans (i.e.,

loans with medium to long-term maturities) to
various industry, service and infrastructure
sectors for setting up new projects and for the
expansion of existing facilities and thereby
compete with banks.
• (EXIM Bank),

• (SIDBI),

• Tourism Finance Corporation of India Limited (TFCI),

• Power Finance Corporation Limited (PFCL)

• various State Financial Corporations (SFCs)

• State Industrial Development Corporations (SIDCs),

• North Eastern Development Financial Institution

Ltd. (NEDFI)
 NBFC
• More than thousands NBFC

• NBFCs are required to register with RBI in Act, 1997.

• Activities include equipment-leasing, hire purchase, loan and

investment and asset finance.
• NBFCs have been competing with commercial banks

• Housing and Urban Development Corporation

Limited (HUDCO)
 INSURANCE COMPANIES

Life Insurance Corporation of India (LIC),

General Insurance Corporation of India (GIC),
• Provide substantial long-term financial
assistance to the industrial and housing sectors
and to that extent, are competitors of banks.
LIC is the biggest player in this area
• MUTUAL FUNDS
It offer competition to banks in the area of fund
mobilization,
• they offer alternate routes of investment to
households.
Banks have sponsored AMC to undertake mutual fund
business.
•
Banks have thus entered the asset management
business, sometimes on their own and other
times in joint venture with others