CPT Section C General Economics Chapter 8 Unit 2 Commercial Banks. CA.Shweta Poojari

CPT Section C General Economics Chapter 8 Unit 2 Commercial Banks. CA.Shweta Poojari

Meaning of Commercial Banks Role of Commercial Banks Functions of Commercial Banks Causes of Nationalisation of Commercial Banks Objectives of Nationalisation Nationalized Banks Progress of commercial Banks after Nationalisation (1969 to 2012) Shortcomings of commercial banking in India:

A commercial bank is an institution that operates for profits. It accepts deposits from general public and grants loans to the household, firms and the government. Though borrowing and lending constitute the main business of banks, commercial banks perform a variety of functions. Examples of commercial banks are Punjab National Bank and State Bank of India.

Encourage saving and capital formation Mobilization of Savings Optimum utilization of savings Increase the rate of investment and credit creation

More savings with the banks would make more money available in the market for productive purposes, hence more capital formation. i.e.,the economic development depends upon the rate of savings. Banks offer facilities for keeping savings and thus encourage the habit of saving in the society.

Banks encourage savings and mobilize savings into productive investments. Without banks these savings would have remained idle and would not have been utilized for productive and investment purposes. i.e., Banks facilitate the flow of money from one individual/entity having excess funds to another who is in need of it, giving an opportunity of earning to both.

After nationalization, commercial banks also allocate resources in the way that would maximize production or social welfare, such as extending credit for agriculture, small scale industries and weaker sections of society. The Concept of Credit Rationing as a Monetary Measure imposed by the RBI ensures fare allocation of Credit to all sections of the economy.

By encouraging savings and mobilizing them from public, banks help to increase the rate of investment in the economy. The Same has been explained in the following slide.

Mr.A has excess funds of Rs.100000 which he deposits with the bank. Bank Lends Rs. 60000 to Mr.B (bank now has 40000) Mr.B uses the funds to buy goods worth Rs.30000 from Mr.C and Mr.D 20000. Now Mr.C and Mr.D Deposit Rs.15000 & Rs. 10000 resp. into bank Now Bank has 40000+15000+10000=65000 Say it lends Rs.25000 to Mr.E. Therefore with just Rs.100000, the transactions that took place were: Saving of Rs.125000, Lending Rs.85000 Purchases of Rs.50000.

Acceptance of Deposits Lending of Money Agency Services General Utility services

The most important function of bank is to accept deposits from the public. Such deposits may be different types- a) Demand deposits: It includes current deposits and saving deposits. Deposits which are withdrawable on demand are called demand deposit. b) Time deposits : Deposits withdrawable after the expiry of fixed time period called fixed deposit.

Banks lend money for industrial, households and other commercial purposes. These lending may take different forms like- a) Cash credits b) Overdrafts c) Loans and advances d) Discounting of bills of exchange

A bank renders various services to its customers as an agent, such as: a) collection of bills, promissory notes and cheques. b) Collection of dividends, interests, premiums, etc. c) Purchase and sale of shares and securities. d) Acting as trustee or executor when so nominated. e) Making regular payments such as insurance premiums etc.

A modern bank performs following general services to the public: a) Issue of letters of credit, Travelers cheques, Bank drafts, circular notes. b) Safe keeping of valuables in safe deposit vaults( Lockers). c) Supplying trade information and statistics. d) Conducting economic surveys. e) Preparation of feasibility studies, project reports etc. f) Underwriting of shares and make loans for long term purposes.

Public Sector Banks: Banks in which majority of stake are held by the Govt. (State or Central). (Eg. SBI, Union Bank of India). Private Sector Banks: Banks in which majority of stake are held by Private Individuals. Eg. ICICI, HDFC, etc Foreign Banks : Bank with Head Office situated outside India. Eg. CITI Bank, Bank of America, etc. Scheduled Bank: Banks which are included in the Second schedule of RBI ACT 1934.

1. To remove private ownership of commercial banks and concentration of economic power. 2. Urban-bias : Banks preferred setting up branches in Urban areas neglecting the rural population.

3. Neglect of agriculture sector :There was no concept of Priority sector lending, therefore the risky and less profitable areas were neglected. 4. Violation of norms : The accountability of banks were not spelled out. 5. Speculative activities : In absence of restrictions the banks in speculation of higher profits invested the public money in risky investments.

Removal of control by a few hands. Provision of adequate lending for agriculture sector, small industry and exports. Giving a professional bent to management. Encouragement of a new class of entrepreneurs and The provision of adequate training as well as redefining terms of services for banks staff.

Name of the Bank before nationalization. The Central bank of India Ltd The Bank of India Ltd The Punjab National Bank Ltd The Bank of Baroda Ltd The United Commercial Bank Ltd The Canara Bank Ltd The United Bank of India Ltd The Dena Bank Ltd The Union Bank of India Ltd The Allahabad Bank Ltd The Syndicate Bank Ltd The Indian Overseas Bank Ltd The Indian Bank Ltd The Bank of Maharashtra Ltd Name after nationalization The Central bank of India The Bank of India The Punjab National Bank The Bank of Baroda The United Commercial Bank The Canara Bank The United Bank of India The Dena Bank The Union Bank of India The Allahabad Bank The Syndicate Bank The Indian Overseas Bank The Indian Bank The Bank of Maharashtra

Name of the Bank befor nationalization. The Andhra Bank Ltd, The Corporation Bank Ltd, Udupi The New Bank Of India Ltd, The Oriental Bank Of Commerce Ltd, The Punjab and Sindh Bank Ltd, The Vijaya Bank Ltd., Magalore Name after nationalization The Andhra Bank The Corporation Bank The New Bank Of India The Oriental Bank Of Commerce The Punjab and Sindh Bank The Vijaya Bank

The statistical Data discussed in the following slides are applicable for June & Dec, 2013 attempt.

Expansion of branches: 8262 branches in 1969 to 97111 branches in 2012. Population per bank office: 55000 in 1969 to 12500 in 2012. Branches in Rural Areas: 22% of Branches were in rural area in 1969 & now 37% of the Branches are in Rural areas.

Deposit mobilization: The aggregate of Scheduled commercial banks : 4665 cr in 1969 To approx. 60,00,000 Cr. in 2012 State wise data: Maharashtra contributes 23% of aggregate deposites, followed by Delhi, Uttar Pradesh, West Bengal, Karnataka, Tamil nadu and Andhra Pradesh.

Lending: 3399cr in June 1969 increased to 46,00,000Cr. in June 2012. Special care of priority sector. Lending to Agriculture & Small scale sector was 15% in 1969 To 35% of total credit in march 2011.

The statistical Data discussed in the following slides are applicable for June & Dec, 2013 attempt.

Only 37% branches in Rural area, whereas 70% of population resides in Rural areas. Only few states have a developed banking system. States like Jammu & Kashmir, Arunachal Pradesh, Uttaranchal, Manipur,etc have lesser branches as compared to metropolitan cities.

Increasing advances to unemployed & weaker sections results in NPA s (Non Performing Assets) ie bad and doubtful debts. In 2001-02 NPA s were apprx 10.5% of advances. However due to stringent credit norms introduced, they have fallen to 2.3% in 2010-11.

The Credit norms include rescheduling, restructuring at the bank level, recovery through Lok Adalats, civil courts and Debts Recovery Tribunals.

MCQ s

a. Commercial banks b. RBI c. Private banks Answer: A Explanation: It is one of the Functions of Commercial Banks. d. Foreign banks

a. Demand deposit b. Fixed deposit Answer.: D Explanation: Deposits are of two types: Demand Deposits(Saving & Current Deposits) Time Deposits (Fixed / Term Deposits) c. Saving deposit d. All of the above

a. Purchase and sale of shares and securities b. making regular payments such as insurance premium c. collection of cheques and bills Answer:d d. All of the above

a. Credit creation. b. Transfer of Funds. Answer.: C Explanation: RBI has the authority to Issue Currency. c. Issuing Currency d. all of the Above

a. Did not work for nation s interest b. Catered to the needs of few big industrial houses c. Ignored small scale industries and agriculture d. All of the above Answer. D. The above factors are discussed as the causes of Nationalisation of Commercial Banks.

a. Encourage new class of entrepreneurs b. Give professional touch to management c. Remove control by few d. All of the above Answer.: D (Refer slide no.: 18)

a. Rise in branches operating in unbanked and rural areas b. Rise in bank lending c. Diversification of funds d. All of the above Answer.: d (Refer Slide No.22 to 24 )

a. 14 b. 19 c. 20 d. None of the Above. Answer.: B Explanation:14 banks were nationalised in 1969 & 6 in 1980. In 1993 New Bank of India was merged with the Punjab National Bank.

a. Banking Regulation Act b. Reserve Bank of India Act c. Companies Act d. None of the above Answer.: C Explanation.: Companies Act does not regulate the Banking Companies.

a. Demand Deposit b. Recurring Deposit c. Time Deposit d. None of the above Answer.: C Explanation.: Fixed Deposits mature after a fixed time period.

a. Trade Information and statistics b. Project reports c. Safe keeping of Valuables d. All of the above Answer.: D Explanation.: As discussed earlier the above mentioned services are the General utility services provide by commercial Banks.

a. Below 10000 b. Above 97000 c. 10000 d. Above 150000 Answer.: B Explanation.: The total no. of bank branches in India till june 2012 was 97111.

a. 55000 b. Below 10000 c. 12500 d. None of the above Answer.: C Explanation.: Till 2012 one branch office serves approximately 12500 persons.

a. 50% b. 70% c. 37% d. 10% Answer.: C Explanation.: 37 % serving almost 70% of the total population.

a. 10% b. 2.3% c. 5% d. None of the above Answer.: B Explanation.: As compared to 10% of total Credit in 2001-02, due to introduction of stringent norms the NPA s have fallen to 2.3% in 2010-11.

a. 35% b. 27% c. 40% d. None of the above Answer.: A Explanation.: Due to Introduction of Credit control measures by the RBI, the credit flow towards the priority sectors has increased over the years.

a. Maharashtra b. West Bengal c. Kerala d. None of the above Answer.: A Explanation.: Maharashtra contributes approximately 23% of the aggregate deposits in India.