Commercial Banks in India

Commercial Banks
 Commercial Banks are those profit seeking institutions which accept
deposits from general public and advance money to individuals like
household, entrepreneurs, businessmen etc. with the prime
objective of earning profit in the form of interest, commission etc.
 The operations of all these banks are regulated by the Reserve
Bank of India.
 The main source of income of a commercial bank is the difference
between these two rates which they charge to borrowers and pay to
depositers.
 Examples of commercial banks – ICICI Bank, State Bank of India,
Axis Bank, and HDFC Bank.
Structure of Commercial Banks
 Reserve Bank of India (RBI)

 The country had no central bank prior to the

establishment of the RBI. The RBI is the
supreme monetary and banking authority in
the country and controls the banking system
in India.
 It is called the Reserve Bank’ as it keeps the

reserves of all commercial banks.

 Scheduled & Non –scheduled Banks
 A scheduled bank is a bank that is listed under the
second schedule of the RBI Act, 1934.
 In order to be included under this schedule of the RBI Act,
banks have to fulfill certain conditions such as:
 having a paid up capital and reserves of at least 0.5
million and,
 satisfying the Reserve Bank that its affairs are not being
conducted in a manner prejudicial to the interests of its
depositors.
 Scheduled banks are further classified into commercial
and cooperative banks.
 Non- scheduled banks are those which are not included
in the second schedule of the RBI Act, 1934.
 At present these are only three such banks in the country.
 Commercial Banks
 Commercial banks may be defined as, any banking
organization that deals with the deposits and loans of
business organizations.
 Commercial banks issue bank checks and drafts, as well
as accept money on term deposits. Commercial banks
also act as moneylenders, by way of installment loans
and overdrafts.
 Commercial banks also allow for a variety of deposit
accounts, such as checking, savings, and time deposit.
These institutions are run to make a profit and owned by
a group of individuals.
 Scheduled Commercial Banks (SCBs):
 SCBs in India are categorized into the five groups based
on their ownership and/or their nature of operations.
 State Bank of India and its six associates (excluding
State Bank of Saurashtra, which has been merged with
the SBI with effect from August 13, 2008) are recognised
as a separate category of SCBs, because of the distinct
statutes (SBI Act, 1955 and SBI Subsidiary Banks Act,
1959) that govern them.
 Nationalised banks and SBI and associates together
form the public sector banks group.
 IDBI ltd. has been included in the nationalised banks
group since December 2004.
 Cont..
 Private sector banks include the old private sector banks
and the new generation private sector banks- which
were incorporated according to the revised guidelines
issued by the RBI regarding the entry of private sector
banks in 1993.
 Foreign banks are present in the country either through
complete branch/subsidiary route presence or through
their representative offices.
 Types of Scheduled Commercial Banks
 Public Sector Banks
These are banks where majority stake is held by the
Government of India.Examples of public sector banks are:
SBI, Bank of India, Canara Bank, etc.
 Private Sector Banks

These are banks majority of share capital of the bank is

held by private individuals. These banks are registered as
companies with limited liability. Examples of private sector
banks are: ICICI Bank, Axis bank, HDFC, etc.
 Foreign Banks

These banks are registered and have their headquarters in

a foreign country but operate their branches in our country.
Examples of foreign banks in India are: HSBC, Citibank,
Standard Chartered Bank, etc
 Regional Rural Banks
 Regional Rural Banks were established on 26th
September 1975 as per the RRB Act, 1976, with an
objective to ensure sufficient institutional credit for
agriculture and other rural sectors.
 The area of operation of RRBs is limited to the area as
notified by GoI covering one or more districts in the
State.
 RRBs are jointly owned by GoI, the concerned State
Government and Sponsor Banks (27 scheduled
commercial banks and one State Cooperative Bank);
 The issued capital of a RRB is shared by the owners in
the proportion of 50%, 15% and 35% respectively.
 Prathama bank is the first Regional Rural Bank in India
located in the city Moradabad in Uttar Pradesh.
 Type of Commercial Major Shareholders Major Players
Banks

SBI, PNB, Canara

Public Sector Banks Government of India Bank, Bank of Baroda,
Bank of India, etc
ICICI Bank, HDFC
Private Sector Banks Private Individuals Bank, Axis Bank, Kotak
Mahindra Bank, Yes
Bank etc.
Standard Chartered
Foreign Banks Foreign Entity Bank, Citi Bank, HSBC,
Deutsche Bank, BNP
Paribas, etc.

Central Govt, Andhra Pradesh

Concerned State Govt Grameena Vikas Bank,
Regional Rural Banks and Sponsor Bank in Uttranchal Gramin
the ratio of 50 : 15 : 35 Bank, Prathama Bank,
etc.
 Cooperative Banks
 A co-operative bank is a financial entity which belongs to its
members, who are at the same time the owners and the
customers of their bank.
 Co-operative banks are often created by persons belonging to
the same local or professional community or sharing a
common interest.
 Co-operative banks generally provide their members with a
wide range of banking and financial services (loans, deposits,
banking accounts, etc).
 They provide limited banking products and are specialists in
agriculture-related products.
 Co-operative banks function on the basis of “no-profit no-loss”.
 Anyonya Co-operative Bank Limited (ACBL) is the first co-
operative bank in India located in the city of Vadodara in
Gujarat.
co-operative banking structure in India

Primary Urban Co-op Banks

1

2 Primary Agricultural Credit Societies

3 District Central Co-op Banks

4 State Co-operative Banks

5 Land Development Banks

 Regulatory Requirements
 A bank has to set aside a certain percentage of total funds
to meet regulatory requirements. The primary regulatory
ratios are Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR). RBI uses both these instruments to
regulate money supply in the economy.
 CRR is the percentage of net total of deposits a bank is
required to maintain in form of cash with RBI. Currently this
ratio is at 5.5%. This is used to control the liquidity in the
economy. Higher the CRR, the lower is the amount that
banks will be able to use for lending activities and vice
versa.
 SLR is the minimum percentage of deposits that the bank
has to maintain in form of gold, cash and/or other approved
securities. Currently, the SLR is 24%. This is used to
regulate the credit growth
How Commercial Banks Works
Cost and Income of Commercial Banks
 Types of commercial banks
 Scheduled banks :- Banks which have been included in the
Second Schedule of RBI Act 1934. They are categorized as follows:
 Public Sector Banks :- are those banks in which majority of

stake is held by the government. Eg. SBI, PNB, Syndicate Bank,

Union Bank of India etc.
 Private Sector Banks :- are those banks in which majority of

stake is held by private indivisuals. Eg. ICICI Bank, IDBI Bank,

HDFC Bank, AXIS Bank etc.
 Foreign Banks :- are the banks with Head office outside the

country in which they are located. Eg. Citi Bank, Standard

Chartered Bank, Bank of Tokyo Ltd. etc.
 Non scheduled commercial banks :- Banks which are not
included in the Second Schedule of RBI Act 1934.
 :
Primary Functions of Commercial Banks
 Deposit Acceptance: Being a short term credit dealer,
the commercial banks accept the savings of public in the
form of following deposits:
 Fixed term deposits
 Current A/c deposits
 Recurring deposits
 Sving A/c deposits
 Tax saving deposits
 Deposits for NRIs
 Secondary Functions of Commercial Banks

 Agency functions: Bank pays on behalf of its customers

as an agent and gets paid fee for agency functions such
as:
 Payment of taxes, bills
 Collection of funds through bills, cheques etc.
 Transfer of funds
 Sale-purchaseof shares and debentures
 Collection/Payment of dividend or interest
 Acts as trustee & executor of properties
 Forex Transactions
 General Utility Services: locker facility
 Types of Businesses of Banks

Business Segmentation

Loans to individuals (Housing loan, Auto loan,

Retail Banking Education loan and other personal loan) or
small businesses.

Loans to mid and large corporate (Project

Wholesale banking Finance, Working Capital Loans, Terms
Loans, Lease Finance, etc.)

Investment in bonds, equity, Mutual Funds,

Treasury Operations commodities, derivatives; trading and forex
operations

Other Banking Activities Hire purchase activities, leasing business,

merchant banking, Syndication services, etc.
 Retail banking
 Retail banking also known as Consumer Banking is
the provision of services by a bank to individual
consumers, rather than to companies, corporations or
other banks.
 Services offered include savings and transactional
accounts, mortgages, personal loans, debit cards,
and credit cards.
 Retail banking segment is the highest margin
business as compared to other business segments in the
banking industry.
 Currently, ICICI Bank is the largest players in this
segment in India. Other major players in this segment
are SBI, PNB, HDFC Bank, etc.
 Products offered by a retail bank include
 Savings /Current accounts
 Debit cards

 ATM cards

 Credit cards

 Traveler’s cheques

 Mortgages

 Home equity loans

 Personal loans

 Certificates of deposit/Term deposits

 Wholesale banking
 Wholesale banking is the provision of services
by banks to organizations such as Mortgage Brokers,
large corporate clients, mid-sized companies, real estate
developers and investors, international trade finance
businesses, institutional customer(such as pension
funds and government entities/agencies), and services
offered to other banks or other financial institutions.
 Wholesale finance refers to financial services conducted
between financial services companies and institutions
such as banks, insurers, fund managers, and
stockbrokers.
 Modern wholesale banks engage

 Finance wholesaling
 Underwriting
 Market making
 Consultancy
 Mergers and acquisitions
 Fund management
 Wholesale banking segment in India is largely dominated
by large Indian banks – SBI, ICICI Banks, PNB, BoB,
etc.
 Treasury management
 Treasury management (or treasury operations)
includes management of an enterprise’s holdings, with
the ultimate goal of managing the firm’s liquidity and
mitigating its operational, financial and reputational risk.
 Treasury Management includes a firm’s collections,
disbursements, concentration, investment and funding
activities.
 In larger firms, it may also include trading in
bonds, currencies, financial derivatives and the
associated financial risk management.
 Most banks have whole departments devoted to treasury
management and supporting their clients’ needs in this
area
 Bank Treasuries may have the following
departments

 A Fixed Income or Money Market desk that is devoted to

buying and selling interest bearing securities
 A Foreign exchange or “FX” desk that buys and sells
currencies
 A Capital Markets or Equities desk that deals in shares
listed on the stock market.