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Essay on Commercial Banks
Essay Contents:
- Essay on the Introduction to Commercial Banks
- Essay on the Role of Commercial Banks
- Essay on the Functions of Commercial Banks
- Essay on the Role of Commercial Banks in Developing Countries
- Essay on the Commercial Banks in India
- Essay on the Nationalisation of Commercial Banks
- Essay on the NPA of Commercial Banks
- Essay on the Challenges before Commercial Banks
- Essay on the Conclusion to Commercial Banks
Essay # 1. Introduction to Commercial Banks:
The origin of commercial banking can be identified in the early times of human history.
According to Crowther, modern banking has three ancestors:
(a) The merchant;
(b) The goldsmith, and
(c) The money-lender.
Agriculture Refinance Corporation (ARC) was set up in 1963 to refinance Central Land Mortgage Banks, State Co-operative Banks and Scheduled Commercial Banks. In 1964, ceiling on interest rates on both deposits and advances was imposed to avoid unhealthy competition in the sector. The concept of social control over banks was introduced in December 1967 through Banking Laws (Amendment Act) 1968 which came into force on 1st February 1969.
Credit Guarantee Corporation was established in 1971, to reduce the risk in lending to the small borrowers. Differential Rate of Interest scheme was instituted in 1972 to provide cheaper credit to certain sections of the society. An important development in priority sector lending was the introduction of Service Area Approach in 1988.
The Government appointed Banking Sector Reforms Committee 56 (Chairman Sri. Narasimham) in 1998, to review the banking reforms progress and to design a program for further strengthening the financial system of India.
Financial stability is an essential prerequisite for the sustainable economic growth of any country. Ensuring efficient and stable financial system has gained greater importance in view of the systemic failures in some of the developing and transitional economies. It needs no emphasis that the financial system plays a crucial role in achieving the objectives of the reforms program or globalisation, as popularly known.
The banking sector, being the largest component of the financial system should take care to immunise itself from the macro economic shocks. It is against this backdrop, the prudential standards have been introduced in many countries including India.
‘Banking experts in developed countries defines a commercial bank as a profit-oriented financial institution (Definition, Function and Role of Commercial Banks in the Economy, 2014).’ it is a business organisation, which deals in money, i.e., borrowing and lending of money. In this borrowing and lending of money, it makes profit.
The lending role of interest is higher than it pays to its depositors. The functions of the commercial banks are now wide and diverse. A commercial bank is like any other business enterprise. Hence, its prime motive is to make profit in countries where commercial banks are owned by the government.
According to Crowther, a bank collects money from those who have it to space or who are saving it out of their incomes and it lends this money to those who require it.
According to John Paget, “Nobody can be a banker who does not (i) Take deposit accounts, (ii) Take current accounts, (iii) Issue and pay cheques, and (iv) Collects cheques-crossed and uncrossed-for its customers.”
According to Kinley, “A bank is an establishment which makes to individuals entrust money when not required by them for use”
Essay # 2. Role of Commercial Banks:
In the modern world, banks perform such a variety of functions that is not possible to make an all-inclusive list of their functions and services. Every country needs the services of financial institutions for accelerating the pace of development. Commercial banks have played a critical role in the economic development of a country.
Now a day’s commercial banks are important not just from the point of view of economic growth, but also financial stability. In emerging economies, commercial banks are special for three important reasons. First, they take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.
The commercial bank primarily lending and borrowing of money, accepted deposit from the public and payable on demand and withdrawn able by cheque, draft etc. They provide and maintained different type of account like current account, saving account, and fixed deposit and also provide different type of loan, cash credit etc.
According to the Indian Companies Act, 1949, banking means “the accepting from the purpose of Indian Companies lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise.”
The commercial banks can play a vital role in the process of economic development and achievement of social justice. This can be facilitated through extension and expansion of banking facilities in unbanked and under-banked areas, mobilisation of savings to meet investment requirement of an economy, allocation of credit for developmental purposes with focus on priority sector lending so as to relieve the farmers from clutches of money lenders and to improve growth of employment, diversification of banking activities based on the changing needs of the customers, and improvement in productivity, profitability and quality of customer care to grow and face the challenges over time.
Essay # 3. Functions of Commercial Banks:
Commercial Banks these days provide a variety of services. They provide both short-term credit and long-term credit. Their customers come from all walks of life from small business to a multinational corporation having its business activities all around the world. The banks have to satisfy the requirements of different customers belonging to different social group.
The banking business has therefore become complex and requires specialised skills. As a result, different types of banks have come into existence to suit specific requirements. The first important function of a bank is to accept deposits from those who can save but cannot profitably utilise this savings themselves.
Money can be save in various accounts, like as fixed deposit account, current deposit account, saving deposit account, recurring deposit account, and home safe account. Other most important function is lending money to the needed persons. Banks collects interest on it.
Loans can be classified as various ways, like as money at call, cash credit, overdraft, discounting of bills of exchange, term loans. Another function is credit creation. Banks helps their customers in transferring funds from one place to another through cheques, drafts etc. Banks undertakes purchase and sale of various securities like shares, stocks, bonds, debentures etc., on behalf of their customers.
Banks also many times gives information and advice to customer when needs.
In addition to agency services, modern banks also give various services, like as:
i. Locker facility,
ii. Traveler’s cheques,
iii. Letter of credit,
iv. Collection of statistics,
v. Underwriting securities, gift cheques etc.
The commercial banks help in mobilising savings through network of branch banking. People in developing countries have low incomes but the banks induce them to save by introducing variety of deposit schemes to suit the needs of individual depositors. The commercial banks finance the industrial sector in a number of ways. They provide short-term, medium-term and long-term loans to industry. 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. Such banks help the large agricultural sector in developing countries in a number of ways. They provide loans to traders in agricultural commodities. The commercial banks advance loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way, they help in raising the standard of living of the people in developing countries by providing loans for consumptive activities.
The commercial banks finance employment generating activities in developing countries. The commercial banks help the economic development of a country by faithfully following the monetary policy of the central bank.
Essay # 4. Role of Commercial Banks in Developing Countries:
Commercial banks play vital role in developing countries. In those countries the main problem for the government is the shortage of capital. Poverty and unemployment are the major problem. Banks creates more job opportunities by lending to people. Capital formation is more important for economic development and banks helps in formation.
Capital formation has three stages:
(a) Generation of saving;
(b) Mobilisation of savings;
(c) Canalisation of savings.
Banks also helps to the new entrepreneurs for starts their business and helps in innovation.
Bank influences the society by changing of the rate of interest and credit. A decrease of rate of interest stimulates investment and investment creates development. By increasing rate of interest bank can discourage investment. Bankers affect the economic activities by availability of credit. Banks coordinates with various monetary authorities for implementations of monetary policy. Development of trade and business are not possible without the banking facility.
The use of bank cheque, bank draft, and bill of exchange is useful in this direction. By giving loans banks help for development of rights types of industry in the nations. Banks can play an important role for development of backward areas, i.e. balance development of the nation. Surplus funds will be shifts to the deficits areas. Agriculture and cottage industries are most neglected areas in India since independence. After the nationalisation of commercial banks (1969 and 1980) loans distribute in those areas increased.
Essay # 5. Commercial Banks in India:
There are large number of commercial banks in India, whose aim is to sell financial products like short term and long term loans for construction of house, paying personal expenses and buying of cars, bikes and other vehicles and mutual funds and insurance products. State Bank of India (SBI) is the largest bank in India. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent.
The Commercial banks are considered as the dominant financial intermediaries in India as it channelises large amount of savings into investment and consumption. In the financial system it occupies the second position as a financial institution next to the Reserve Bank of India.
In this contest, it may be essential to touch upon some of the conceptual issues associated with banking, namely commercial bank, Scheduled Commercial Banks (SCBs) and various categories of SCBs. Commercial banks can be broadly classified into Scheduled Commercial Banks and non-Scheduled Commercial Banks; with proportionately larger share contributed by the former.
In March 2004, out of total 291 commercial banks 289 are Scheduled Commercial Banks and the remaining five are non-scheduled Commercial Banks. Of the total 289 SCBs, a majority (196) are Regional Rural Banks. The Scheduled Commercial Banks in India can be broadly classified into five different groups according to their ownership and / or nature of operation.
These bank groups are:
(i) State Bank of India and its associates,
(ii) Nationalized Banks,
(iii) Regional Rural Banks,
(iv) Foreign Banks and
(v) Other Indian Scheduled Commercial Banks in the private sector.
Commercial bank fulfills investment requirements of savers and credit needs of both the investors and consumers. The banking sector is considered as one of the major organs of the financial system. It acts as a catalyst to economic growth by mobilising adequate savings which in turn is allocated into productive channels.
In addressing the nationalisation of commercial banks it may be mentioned that the Imperial Bank, treated as the largest bank in India in those days, was nationalised in 1955 and merged with the government owned banks of some of the princely states to become the State Bank of India. The first phase of major bank nationalisation was introduced in July 1969 when 14 largest privately owned commercial banks, each having a deposit liability of Rs. 50 crores and above were nationalised.
It followed nationalisation of six more commercial banks in 1980, each having a deposit liability of Rs. 200 crores and above. Prior to economic reforms introduced in 1991, the Indian banking and financial system made commendable progress in extending its geographical spread and expanding branch network.
Essay # 6. Nationalisation of Commercial Banks:
The history of nationalisation of Indian banks dates back to the year 1955 when the Imperial Bank of India was nationalised and re-christened as State Bank of India (under the SBI Act, 1955). Later on July 19, 1960, the seven subsidiaries of SBI viz. State Bank of Hyderabad (SBH), State Bank of Indore, State Bank of Saurashtra (SBS), State Bank of Mysore (SBM), State Bank of Bikaner and Jaipur (SBBJ), State Bank of Patiala (SBP), and State Bank of Travancore (SBT) were also nationalised with deposits more than 200 crores.
The main aim of nationalising the banks in India was to make it reach its clients in rural areas and be able to provide them with quality services and this occurred more in 1969, in this year only 14 more banks were nationalised and in 1980 seven more banks were also nationalised, the state bank is always the best commercial bank in India and it is also rated the top five banks in the whole world. Nationalised banks in India offer great and quality services to their customers; they also offer insurance services like health insurance which enables a person to save money for any accidents that may occur.
Nationalisation is in accordance with our national policy of adopting socialistic pattern of society. Some may say that industries which provide proper place for exploitation should have been nationalised first. They forget that the control of the capital is necessary because it gives power to exploit. Another objection raised against nationalisation is that it has resulted in inefficient working of the banks. No denying the fact the initiative which the private entrepreneur can take is not possible in a nationalized organisation.
Essay # 7. NPA of Commercial Banks:
Non-performing asset means an asset or account of borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the direction or guidelines relating to asset classification issued by RBI.
Despite the overall progress made by the financial system, poor capital base, inefficient organisational structure, declining profitability and very high and ever-growing nonperforming assets (NPA) had become the major stumbling blocks in the banking sector during the post- nationalisation decades.
It was against this background that the Financial Sector Reforms became inevitable and were initiated in India.’
‘A non-performing asset is an advance where:
(a) Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of term loans;
(b) The account remains out of order for a period or more than 90 days, in respect of an overdraft/cash credit (OD/CC);
(c) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted;
(d) Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose;
(e) Any amount to be received remains overdue for a period of more than 90 days.
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.
Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant.
A reduction in the total gross and net NPAs in the Indian financial system indicates a significant improvement in management of NPAs. This is on account of various resolution mechanisms introduced in the recent past which include the SRFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, one time settlement schemes, setting up of the Corporate Debt Restructuring mechanism, strengthening of Debt Recovery Tribunals.
From the data available of Public Sector Banks as on March 31, 2003, there were 1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50 million in all the public sector banks in India. The total gross value of these NPAs amounted to Rs. 215 billion.’
One of the reasons for the accumulation of large portfolio of NPAs with banks is that the lending is not linked to productive investment and the recovery of credit is not linked to product scale. The borrowers are mainly farmers and small scale industries owner whose financial condition are generally weak.
The volume of bank credit tacked in sick industries is the evidence of this malady. Sometimes it is found that an advice is given by BIFR or the directions are given by the various courts to the banks that they should provide loans to sick industries. This type of practice is aggravating NPAs situation.
Another reason for high NPAs is the faulty lending policy and making lending compulsory to priority sector by banks. There are many other causes which are responsible for accumulation of NPAs. The problem of non-performing asset in the Indian banking system is one of the foremost and the most formidable problems that have shaken the entire banking industry. NPA is a double- edged weapon.
On the one side bank cannot recognize interest on NPAs accounts and on the other, it is a drain of the banks’ profitability due to high funding cost. Higher NPAs ratio shakes the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment of credit.
The total NPAs of banks are classified into three categories viz. Priority Sector, Public Sector and Non-priority Sector. The Sectorial distribution of NPAs showed a growing proportion of priority sector NPAs between 2009 and 2010. Priority sector NPAs, which constituted approximately half of the total NPAs of domestic banks up to 2008, exhibited a steep decline in 2009 attributable primarily to the Agricultural Debt Waiver and Debt Relief Scheme of 2008.
Between 2009 and 2010, the share of priority sector NPAs increased for domestic banks, partly a reflection of the impact of the financial crisis and the economic slowdown that had set in thereafter. The proportion of NPAs in Priority Sector to the total NPAs of the SBI has significantly increased from 44.44 percent to 50.87 percent and the total amount of NPAs in Public sector decreased from Rs. 1090.40 crores in 2000-01 to Rs.235 crores in 2009-10.
At the end of March 2010, the percentage of Priority sector NPAs in Total NPAs was 50.87 per cent for State Bank of India The sharp rise in NPAs of non-priority sector was reflective of the slowdown in the economy and stressed financial conditions of corporate. The NPAs in the priority sector increased during 2007-08; mainly due to increase in NPAs of the agriculture sector.
Essay # 8. Challenges before Commercial Banks:
Financial sector reforms and liberalisation of prudential regulations have thrown in a lot of opportunities for Indian bank to grow and diversify their areas of business operations. There is no doubt that deregulation has opened up new vistas for banks to augment revenues but it has entailed greater competition and consequently greater risks and a chain of challenges.
These challenges emerged as a result of emergence of new banks, new financial institutions, new instruments and new opportunities in the environment (Indian banking sector: emerging challenges, 2014). Developing countries like India have a huge number of people who don’t have access to banking services.
Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. India has a better banking system in place than other developing countries, but there are several issues that need to be ironed out. The best indicator of the health of the banking industry in a country is its level of NPAs.
Given this fact, Indian banks seem to be better placed than they were in the past. A few banks have even managed to reduce their net NPAs to less than one percent (before the merger of Global Trust Bank into Oriental Bank of Commerce, OBC was a zero NPA bank). But as the bond yields start to rise the chances are the net NPAs will also start to go up.
The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporates. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from.
The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/acquisitions do not really work.
India critically needs at least 3 to 4 large banks that are globally competitive and can meet the growing demands for cross- border acquisitions by the Indian corporate and take on larger ticket risks on their balance sheets without hitting limits ceilings. As per The Banker in 2012, there is no Indian bank in the top 10 amongst the list of top 1000 banks of the world, whereas China has four banks in the top 10 list.
Given the fact that over 70 percent of the market is dominated by PSBs, the Government of India and the RBI will have to drive consolidation amongst the large PSBs to create ‘large banks’ by mandating the merger of identified banks.
One of the most critical challenges of any mandated merger will be linked to the integration of the two teams in the merged entity. As on March 2012, there were 41 foreign banks operating in India with 323 branches and 46 foreign banks had their representative offices in India. Top five foreign banks have over 250 branches.
The banking sector has woken to the fact that there is potential in the unbanked areas, and to enter uncharted territories and capture unsaturated segments, the banking sector will have to come up with innovative operating models which will be different from the conventional ones. Technology-driven models such as mobile banking will inevitably change banks’ operating models and help banks in lowering their cost-income ratio.
Essay # 9. Conclusion to Commercial Banks:
Commercial bank is a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to individual members of the public.
Generally, the functions of commercial banks are divided into two categories:
i. Primary functions and
ii. The secondary functions.
Along with primary functions, commercial banks perform several secondary functions, including many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.
Commercial banks form a significant part of the country’s Financial Institution System. 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.
Credit Creation is one of the most outstanding functions of commercial banks. A bank creates credit on the basis of its primary deposits. It further lends the money which people have deposited with the bank also charge interest on this money, which is much higher than what it actually pays to depositor.