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COMMERCIAL BANKING IN INDIA

CBs are premier financial institutions - Play vital role in countrys economy 1947 till 1989 DFIs were given more importance since rebuilding and revival of Indian Economy was treated as top most priority and huge funds could be facilitated only by DFIs for Infrastructure, Capital Goods, etc. Commercial Banks 2 major functions are accepting deposits and employing the funds thus mobilised in lending or investing in securities. Banks being financial institutions, planning and management of funds are essential elements of bank management Commercial Banks are Administered by Central Bank (ie) RBI in India as per Banking Norms, Rules and Regulations, Credit Policies CRR / SLR, Repo Rates, Licensing Policies, FEMA ( Act), etc. However, Banks operating as Insurance Partners are governed in addition by IRDA (Act) Norms, rules and regulations (ie) Banks doing Insurance business known as BANCASSURANCE

CHANGES / TRANSFORMATIONS
In the early 90s, the forces of Globalisation were unleashed on the hitherto protected Indian Environment The branch banking concept with which we were familiar and practiced since inception was basically on certain protected fundamentals The economy till 90s provided comfort to PSBs in areas of liquidity management in an administered interest regime, direction of management was limited and the risk parameters in these spheres were hazy and not quantifiable. Globalisation, liberalisation and Deregulation of financial markets in many developed and developing countries have resulted in increased disintermediation and has made Commercial Banks vulnerable to Interest Rate Risks. The position was further aggravated with the relaxation of exchange controls, adoption of uniform accounting practices, asset classification and provisioning norms and prescribing capital adequacy norms.

Contd
The development of information technology and telecommunications are allowing international pooling of financial resources thereby spreading the risk across more than one market. As a result there is severe strain on interest spread and bottom line of banks Like in Developed & Advanced countries, Banks in India are now involved in creating more subsidiary Cos to sell various products apart from traditional activities like accepting deposits and lending Various products today are credit cards, Insurance, ATM, Debit Cards, Home Loans, Vehicle Loans, Venture Capital, Project Finance, Merchant Banking, Trading in Capital and Financial Markets, Stock Markets Globally. After 1990 the DFIs were transformed by giving scope in various areas and commercial banks were also given more scope, keeping in view the LPG process which would create a global competitive environment.

Contd..
Financial Reforms were implemented in a phased manner RBI constituted on 8th December, 1997, a working group under the chairmanship of Shri Khan to bring about clarity in the respective roles of banks and financial institutions for greater harmonisation of facilities and obligations Also report of the committee on banking sector reforms on Narasimhan committee has major bearing on the issue considered by Khan working group. Mergers were also suggested to bring down the no of PSU Banks but the same did not materialise due to the LEFT parties objections to protect and prevent employment and banking sector as a whole. However sick banks / non profit making banks are being taken over by good banks in the past as a facilitation process. Co-operative Banking has failed miserably in India due to political involvements and various risk factors

PLANNING OF FUNDS OF COMMERCIAL BANKS


Commercial banks are expected to serve not only the multifunction needs of the economy but also fulfill their social obligations. The planning of funds in banks consists of the following activities : (i) Estimating the amount of funds required by the bank for a specified period of time in future. (ii) Deciding the appropriate sources of funds and their relative proportion in the total funds. (iii) Formulating policies, and programmes for the effective utilization and administration of funds. (iv) Developing criteria for the efficient monitoring and control of funds utilisation. Sound planning of funds enables a bank to meet its various objectives e.g., Statutory requirements, assisting various sectors of the economy, fulfilling social obligations through priority sector lending and maintaining efficiency and profitability.

SOURCES OF FUNDS OF COMMERCIAL BANKS


The main source of funds for a commercial bank are as follows : (i) Share capital consisting of the funds contributed by the shareholders (ii) Reserve funds, other funds, statutory funds, dividend equalisation reserve, capital reserve and other reserves. (iii) Deposits and other accounts consisting of savings deposits, fixed deposits and account deposits. (iv) Borrowings from other banks, agents including refinancing, rediscounting, etc., (a) Bills Payable (ie) Letters of credit or Bank Drafts issued by banks (b) Bills for collection, bills receivable as per contra (c) Other liabilities including unclaimed dividends, advanced payment received, unexpired discounts, etc.

USES OF FUNDS OF COMMERCIAL BANKS


Funds of a commercial bank are spread over the following heads : (1) Cash in hand (2) Cash with RBI under the statutory requirement ( CRR) (3) Balance with other banks (4) Money at call and short notice consisting of loans given to other banks (5) Investment in government securities, shares, debentures, stock, gold, etc. (6) Advances (secured and Unsecured ) consisting of cash credit, overdrafts, bills discounted, bills purchased, etc. (7) Bills receivable and bills for collection as per contra (8) Constituent liabilities for acceptance, endorsements and other obligations as per contra. (9) Fixed assets consisting of premises, furniture, equipment, etc. these are the least liquid and non-income yielding assets.

Contd..
(10) Profit & Loss A/c. Debit Balance (11) Non-Banking Assets representing the assets a bank has taken over from a customer who has failed to repay the loan on time. These assets should be disposed off by a bank within seven years of acquisition The funds should be so spread over that the banker can meet its obligation towards the depositors : (a) (b) Obligation to pay back the amount of the deposit Obligation to pay interest at the prescribed rates

In order to meet these twin obligations, a banker has to strike an appropriate balance between the considerations of liquidity and profitability.