Marketing Aptitude: Commercial Banks

These are those financial institutions that accept deposits from the people and give loans for the purpose of consumption or investment and contribute in accelerating the rate of economic development in underdeveloped and developing countries like India. According to Culbertson, “Commercial Banks are the institutions that make short term loans to business and in the process create money.”

According to Reed and Gill, “A commercial bank is a financial institution that accepts demand deposits and makes commercial loans and is regulated by a bank regulatory agency.” In India, there are following types of commercial banks:-

• Public Sector Banks (PSBs): – These are those banks where the majority of stake (i.e. more than 50%) is held by the Government of India (GoI). Currently, there are 27 PSBs in India out of which 19 are nationalized banks and 6 are SBI and its associate banks and rest two are IDBI Bank and Bharatiya Mahila Bank (BMB), which are categorized as other public sector banks. Examples are Punjab National Bank (PNB), Central Bank of India (CBI), Bank of Baroda (BoB), Indian Overseas Bank (IOB), etc.
• Private-Sector Banks: – In these banks, the majority of their share capital or equity are held by the private shareholders and not by the Government of India (GoI). Some of the Indian private sector banks are Karur Vysya Bank (KVB), Kotak Mahindra Bank (KMB), Lakshmi Vilas Bank (LVB), DCB Bank, Federal Bank, HDFC Bank, ICICI Bank, IDFC Bank, etc.
• Foreign Banks: – These are registered banks with their headquarters in a foreign country but operate their branches in India. Some of them are Abu Dhabi Commercial Bank Ltd., BNP Paribas, Citibank, J.P. Morgan Chase Bank, etc.
• Regional Rural Banks (RRBs): – These banks were established in 1975 with the purpose of facilitating the promotion of rural business in India. Some of them are Uttar Bihar Gramin Bank, Karnataka Vikas Grameena Bank, Allahabad UP Gramin Bank, Prathama Bank, etc. Some of the functions of RRBs are to provide banking facilities to rural and semi-urban areas, to carry out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc. and to provide para-banking facilities like locker facilities, debit and credit cards.

Functions of commercial banks

The functions of commercial banks are classified into two types: – Primary Functions and Secondary Functions.

a) Primary Functions: –

• Accepting deposit: – The commercial banks accept deposits from the public through various means such as saving accounts, fixed deposits, current deposits, recurring deposits, etc. In it, banks provide safe custody as well as interest to the depositors. Thus, they are also called custodians of public money. The money so accepted is in turn used by the banks for granting loans and advances.
• Advancing Loans: – Here, the money i.e. accepted by commercial banks from public for safe keeping is used to grant loans and advances to the needy ones such as traders, industrialists, entrepreneurs, etc., for business or other purposes and charges a higher rate of interest from them. The various types of loans and advances are as follows: – Overdraft, Cash Credits (CC), discounting of bills of exchange, etc.

b) Secondary functions: –

• Agency Services: – These are those services that are rendered by commercial banks as agents of the customers. These services include:
  • Collection and payment of cheques and bills on behalf of customers.
  • Collection of dividends, interests, rents, etc. on behalf of customers, if so instructed by them.
  • Purchase and sale of shares and securities on behalf of customers.
  • Payment of subscription, rent, insurance premium, etc, on behalf of customers, if so instructed by them.
  • Acting as executor, trustees, attorneys, etc.
  • Acting as agents or correspondents, on behalf of customers for other banks and financial institutions at home and abroad.
• General utility functions: – These are those services that are rendered by commercial banks to both the customers and the general public. Some of them are described below:
• Issue of letter of credit :-Letter of credit acts as an assurance that in case the borrower defaults in making the payment, bank will make the payment up to the amount mentioned in letter of credit
• Provide locker facility.
• Provide underwriting of shares, debentures, bonds, etc. to their customers.
• Provide facility of transfer of money, both domestic and foreign, from one place to another by way of issuing demand drafts, banker’s cheque, money orders, etc.
• Deal in foreign exchanges.