Commercial banks

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Commercial Bank:

Meaning: A commercial bank is a financial institution that operates with the primary objective of earning profits by accepting deposits from the public and providing loans for various purposes such as business investment, personal expenses, and more.

Functions of Commercial Banks:

  • Accepting Deposits:
    • Commercial banks offer various types of deposit accounts including:
      • Current Accounts: Used for daily transactions; generally, no interest is paid.
      • Savings Accounts: Designed for saving money; interest rates are lower than fixed deposits.
      • Fixed Deposits: Offer higher interest rates with a fixed tenure; funds cannot be withdrawn before maturity without penalty.
  • Lending Money:
    • Banks provide loans and advances to individuals, businesses, and other entities. Types of loans include:
      • Cash Credit: Borrowers can withdraw funds up to a certain limit based on collateral.
      • Term Loans: Loans with a fixed repayment schedule and interest rate.
      • Overdrafts: Allows account holders to withdraw more money than they have in their accounts, up to an agreed limit.
  • Investments:
    • Commercial banks invest in various financial instruments such as government securities, corporate bonds, and other approved securities to earn additional income through interest and dividends.

Types of Commercial Banks:

  • Scheduled Commercial Banks:
    • These banks are listed in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. They are further categorized into:
      • Public Sector Banks (PSBs): Owned and operated by the government, e.g., State Bank of India (SBI), Punjab National Bank (PNB).
      • Private Sector Banks: Owned by private individuals or corporations, e.g., HDFC Bank, ICICI Bank.
      • Foreign Banks: Headquartered outside India but operate branches within the country, e.g., Standard Chartered Bank, Citibank.
  • Regional Rural Banks (RRBs):
    • Established to provide banking services in rural areas through collaboration between central and state governments and sponsor banks.
  • Cooperative Banks:
    • Owned and operated by their members, serving specific communities or regions. They include urban cooperative banks and rural cooperative banks.
  • Payment Banks:
    • Focus on providing basic financial services such as deposits and payments, without offering loans or credit cards. Examples include Airtel Payments Bank and Paytm Payments Bank.
  • Small Finance Banks:
    • Cater to the financial needs of small businesses and low-income households, promoting financial inclusion. Examples include Ujjivan Small Finance Bank and Equitas Small Finance Bank.
  • Development Banks:
    • Specialize in financing industrial and infrastructure projects to promote economic development. The Industrial Development Bank of India (IDBI) is an example.

Importance and Role of Commercial Banks:

  • Economic Growth: They mobilize savings from individuals and channel them into productive investments, thus promoting economic growth.
  • Financial Intermediation: By accepting deposits and providing loans, they facilitate the flow of funds between savers and borrowers.
  • Monetary Policy Transmission: Banks play a crucial role in the implementation of monetary policy through mechanisms like repo rates, CRR, and SLR set by the central bank.
  • Financial Inclusion: Banks promote financial inclusion by offering banking services to rural and underserved areas, contributing to broader economic participation.

Overall, commercial banks are fundamental to the functioning of an economy, supporting businesses, individuals, and governments in managing their finances and driving economic progress.

Structure of Commercial Banks in India:

1. Scheduled Banks:

Scheduled banks are those that are included in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. This classification denotes their regulatory status and compliance with RBI guidelines.

  • Public Sector Banks (PSBs):
    • Ownership: These banks are owned and controlled by the government of India.
    • Objective: While profit-making is important, PSBs also serve social objectives like financial inclusion and supporting priority sectors.
    • Examples: State Bank of India (SBI) and its associate banks (e.g., State Bank of Hyderabad, State Bank of Patiala) before their merger, and other nationalized banks like Punjab National Bank (PNB), Bank of Baroda (BOB), etc.
  • Private Sector Banks:
    • Ownership: Owned by private shareholders, including individuals and corporations.
    • Objective: Primarily profit-driven, focusing on innovation, customer service, and efficiency.
    • Examples: ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, etc.
  • Foreign Banks:
    • Ownership: Headquartered outside India but operate branches in the country.
    • Objective: Bring global banking practices, expertise, and financial services to India.
    • Examples: HSBC, Citibank, Standard Chartered Bank, Deutsche Bank, etc.
    • Expansion: Increased significantly post-1991 economic reforms, contributing to banking sector diversity and competition.

2. Non-Scheduled Banks:

These banks are not included in the Second Schedule of the RBI Act, 1934, meaning they do not meet certain regulatory criteria set by the RBI.

Types of Commercial Banks:

1. Public Sector Banks (PSBs):

  • Role: Serve as instruments of government policy, promoting social welfare alongside economic growth.
  • Functions: Provide banking services across diverse sectors, including agriculture, small industries, and rural development.
  • Regulation: Governed by RBI guidelines and directives to ensure stability and accountability.

2. Private Sector Banks:

  • Ownership: Controlled and managed by private individuals or corporations.
  • Characteristics: Known for their agility, innovation, and customer-centric approach.
  • Competitiveness: Compete with PSBs and foreign banks by leveraging technology and customer service excellence.

3. Foreign Banks:

  • Role: Bring international banking practices, global standards, and diverse financial products to India.
  • Market Presence: Operate through branches or subsidiaries, catering to multinational corporations, high-net-worth individuals, and global trade.
  • Regulation: Governed by both RBI regulations and regulations in their home countries.

Importance and Contribution:

Commercial banks in India play a crucial role in the economy:

  • Financial Intermediation: Mobilize savings and channel them into productive investments through loans and advances.
  • Promotion of Economic Growth: Facilitate economic activities by providing credit to businesses, supporting infrastructure development, and fostering entrepreneurship.
  • Financial Inclusion: Expand access to banking services, especially in rural and underserved areas, through branch networks, technology, and government initiatives.
  • Stability and Regulation: Regulated by the RBI to maintain financial stability, manage risks, and protect depositor interests.

Conclusion:

The structure and types of commercial banks in India reflect a dynamic banking sector that serves diverse economic needs. From public sector banks focused on social objectives to private and foreign banks driving innovation and competition, each contributes uniquely to India's financial ecosystem and economic growth.