BANK

Definitions
 A firm which collects money from those who
have spare and lends to those who need it.

A Bank is an intermediate between the


borrower and the lender. Bank borrows
money from one party and lends to another.
 Origin & Growth Of Commercial
Banking
 There are various views about the origin of the
word “banking”
 1. The Merchants
 The earliest stage in the growth of banking can be
traced to the working of merchants, these were
traders in commodities. The trading activities were
carried on by them from one place to another. It
was risky for the traders to carry metallic money
with themselves for payment. The traders with
high reputation began to issue receipts or letters
which were accepted as titles of money, the
merchant banking thus forms the earliest stage in
the evaluation of modern banking.
 2. The goldsmiths
 The second stage in the growth of banking is
normally traced to earlier goldsmiths. These
goldsmiths also called seths in India used to
receipts gold & silver for safe custody. The
goldsmiths began to issue receipts for
metallic money (gold & silver) kept with
them. These letters converted to notes with
the passage of time on demand. Thus the
goldsmiths, can be termed as the fore-
runners of the modern notes.
 3. The money lenders
 The third stage in the stage in the development
of banking arose when the goldsmiths/lender
became the money lenders.
 By experience the goldsmiths (who were called
money lenders) came to know that they could
keep a small proportion of the total deposits for
meeting the demands of customers for cash &
the rest they could easily lend.
 Most of them allowed overdraft facilities, there
was then too much confusion in the banking
system.
 The first central bank was formed in
Geneva in 1578.
 Bank of England was established in 1694.

 The modern commercial banking system

actually developed in the nineteenth

century.
with the passage of time the scope of
commercial banks have greatly increased.
They now deal with large number of
matters such as obtaining funds,
advancing loan to businesses, farmers,
households etc
 Functions of a Commercial
Bank
What is Commercial Bank?
 According to Crowther, “A bank is a firm
which collects money from those who
have it spare. It lends money to those who
require it.”
 According to Mr. Parking, “A bank is a
firm that takes deposits from households
and firms and makes loans to other
households and firms
 Functions of banks
A Commercial banks perform a variety of
functions, these functions are classified
under two main heads.

 Basic Functions
 Secondary Functions
 Basic Functions
The basic functions of a commercial banks
is?

 Accepting of deposits and

 Advancing of money
 Accepting of Deposits
 The bank accepts or collects money from
the peoples by the following three ways
or accounts.

• Current Account
• Saving Account
• Fixed Deposit Account
 1. Current Accounts
 Customers withdraw money at any time
he wish to draw
or
 Money is withdraw able at any time by
the customers
 Bank usually do not pay interest on
current deposits
 Current account holders receive a cheque
book and regular statements containing
details of money paid in and paid out.
 The businesses and traders usually
maintain their funds in current account
 2. Saving account
 Saving account is generally opened by persons
of small income.
 The aim this account to encourage and
mobilize saving of the peoples.
 The banks pay interest on this type of deposits.
 Customers can withdraw money with in certain
limit decided by the bank.
 Fixed Account
 Fixed deposits are kept by the bank for a
specified period of time.
 The rate of interest of fixed deposits are fairly
high.
 The longer the period, the higher is the interest
rate.
 B: Making Loans
 The second major function of a commercial
bank is to make loans to businessmen, traders,
exporters, households etc
 These loans are made against any securities.
 The strength of a bank is primarily judged by
the soundness of its advances or loans.
 The lending of money may be in any of the
following forms.
 1: Loans
 The commercial banks grant short & long term
loans to individuals, firms, companies mostly
against securities.
 The amount of loan is credited to the
borrowers account, who
 Withdraws it as per his/her requirements.
 2: Cash Credit
 It is a very common form of borrowing by
business concerns.
 The bank advances long term loans to the
commercial & industrial units against the
securities.
 The borrower is permitted to draw with in cash
credit limit sanctioned by the bank.
 3: Over-Draft
 It is a short term loans, provided by the banks
to the current account holders.
 Under this system the banks allows the
customers to overdraw his/her account up to
certain limit.
 For example : A person have 20000AFS in
bank and the bank allows him/her to over draw
up to 30000.
 Small interest is charged on overdraft.
 4: Discounting of Bills
 The banks also makes loans to their customers
by discounting the bill of exchange
 Discounting bill of exchange refers to making
the payment of bill before its maturity.
 The discount charged is the earning of the
bank
 Secondary Functions
1: Special Financial Services
2: Agency Functions
 1: Special Financial Services
 The Business of today is highly competitive, it
is not enough for the banks now to only
accepts deposits & make loans.
 Banks are now offering international services
such as?
 Currency exchange
 Bankers acceptances
 Letters of Credit
 ATMs – Automated Teller Machine
 EFT – Electronic Fund Transfer
 Agency Functions
 Banks act as agents of their customers in
various ways as?
 Collection of Cheques
 Collection of Dividends
 Purchase or Sale of Securities
 Acting as Trustee
 Execution of Standing Instructions.
 Role of Commercial Banks in the
Economic Development
 Investment in new Enterprises
 Promotion of trade & industry
 Development of Agriculture
 Influencing economy activity
 Implementation of monetary policy
 Export promotion cells
 Test Efficiency of a good Bank
 The efficiency or performance of a commercial
bank is judged as to how it manages its assets
and liabilities in order to earn highest possible
profit.
 A manager while managing the assets and
liabilities of a bank has the following four
main Concerns.
 Concerns of a banker?
 1. Liquidity management
 The banker has to keep a portion of total
deposits in the form of cash for
 To fulfill the customers demands and do no
loose the confidence of the customer
 The liquidity is necessary for maintaining
confidence of the depositors of the bank
 2. Assets Management
 Minimizing the risk of failure of the borrower
to repay the loan
 The loan should be given to a large number of
individuals or businesses and not to a few
 Loans must be given to trustful customers
against the securities
 3. Liability Management
 Liability management is an important concerns
for an efficient banking