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Will Commercial Banking Survive ?

Puja Bedi


Rachit Jain


Rahul Mandloi


Shruti Ray




Primary functions of commercial banks
Disruptive Innovation in Banking
Future trends in Banking Industry
E-Transfers replacing Currency

A commercial bank is a type of bank that provides services such as

accepting deposits, making business loans, and offering basic

investment products.
They are the most important credit institutions in the country in the
business of lending and borrowing of money and credit creation.
Types of Commercial BanksDeposit Banks
Industrial Banks
Savings Banks
Agricultural Banks
Exchange Banks
Miscellaneous Banks

regarding the sale and purchase of shares and

debentures. The industrial banks play a vital role in
accelerating industrial development. In India, after
1.Deposit Banks:
The ofmost
of deposit banks is the
were started
large paid up
commercial banks.
have with
commercial class of
are, The Industrial Finance Corporation (I.F.C.), The
people. These banks
deposits (S.F.C.),
from the
public and lend them to
State Financial
Credit and
(ICICI)period only, these
needy parties. Since
are of
and Industrial
Bank of India
banks extend loans
only for
a short period.
these banks lend

money for a period between 3 to 6 months. They do not like to lend

money for long periods or to invest their funds in any way in long term

2.Industrial Banks: Industries require a huge capital for a long period

to buy machinery and equipment. Industrial banks help such
industrialists. They provide long term loans to industries. Besides, they
buy shares and debentures of companies, and enable them to have
fixed capital. In India, after attainment of independence, several
industrial banks were started with large paid up capital. They are, The
Industrial Finance Corporation (I.F.C.), The State Financial Corporations

3.Savings Banks: These banks were specially established to

encourage thrift among small savers and therefore, they were willing to
accept small sums as deposits. They encourage savings of the poor and
middle class people. In India we do not have such special institutions,
but post offices perform such functions. After nationalisation most of
the nationalised banks accept the saving deposits.
4.Agricultural Banks: Agriculture has its own problems and hence
there are separate banks to finance it. These banks are organised on
co-operative lines and therefore do not work on the principle of
maximum profit for the shareholders. These banks meet the credit
requirements of the farmers through term loans, viz., short, medium
and long term loans.
There are two types of agricultural banks, (a) Agricultural Co-operative
Banks, and (b) Land Mortgage Banks. Co-operative Banks are mainly
for short periods. For long periods there are Land Mortgage Banks. Both

5.Exchange Banks: These banks finance mostly for the foreign

trade of a country. Their main function is to discount, accept and
collect foreign bills of exchange. They buy and sell foreign
currency and thus help businessmen in their transactions. They
also carry on the ordinary banking business. In India, there are
some commercial banks which are branches of foreign banks.
These banks facilitate for the conversion of Indian currency into
foreign currency to make payments to foreign exporters.
6.Miscellaneous Banks:There are certain kinds of banks
which have arisen in due course to meet the specialised needs of
the people. In England and America, there are investment banks
whose object is to control the distribution of capital into several
uses. American Trade Unions have got labour banks, where the
savings of the labourers are pooled together.

Primary Functions of Commercial Banks

Options(Cheques , DD)
Modern(Net banking, etransfers)

Deposits from public
including saving
account deposits,
recurring account
deposits, and fixed
Credit Creation
loans and advances
cash credit, bill
discounting, money at

Financial Services
Investment banking
Wealth Management

Credit Creation
It is the process of creation of credit by commercial banks. More use of DD

and cheques is CC and not cash.

Cheques and deposit money are as good as legal tender money on account
of their acceptability by the general public .
Adjusts assets balance between deposit liability and cash reserves
Cash reserve ratio remains same

Amount of cash of banks. Greater is amount, larger is its capacity for c.c.
Cash reserve ratio: lower is crr, higher is credit creation capacity
External drain: larger is amount of money withdrawn from bank, lower is its cc.
Extent of borrowing of funds by business. More c.c. when business is prospering.

Present Scenario of Commercial

Commercial Bank share of total financial institution assets in the United

States has fallen dramatically, from more than 70 percent around the
turn of the century to just around 30 percent today
Bank share of corporate debt in the United States has declined from
19.6 percent in 1979 to 14.5 percent in 1994.
Depositors are moving away from banks to money market mutual funds
and large firms are issuing public debt to meet their financing needs
rather than borrowing from banks.
Competition on both sides of the bank balance sheet has increased
On the banks Asset side, the growth of the commercial paper and junk bond

markets has given large firms an alternative to borrowing from the bank.
On the liability side, new technologies and deregulation have given
customers choices like mutual funds

Non Traditional Products

It appears that banks continue to provide their traditional functions, albeit through

nontraditional products.
For example:
It appears that dramatic increase in volume of commercial paper issuances is impacting

the role of banks in providing liquidity to borrowers which is declining

Instead of providing liquidity directly to a large firm, a bank provides a backup line of
credit that can be drawn down in case the firm commercial paper cannot be refinanced
With contingent guarantees, the same unit of liquid reserves can back the needs of
multiple firms
By contrast, with direct funding, a unit of liquid reserve is fully locked up in meeting the
liquidity needs of a single firm.
Two important functions of Bank
Liquidity Provision
Fund Complex Positions

Liquidity Provision
Bank provides liquidity on both sides of the balance sheet to both

depositors and borrowers. (ATM, line of credit, loans)

Banks can achieve economies of scale by underlying reserves of
liquid assets and institutional arrangements (access to central bank
discount window and to other banks) to meet the unexpected
demands on both sides
Banks ability to take advantage of diversification is what gives
them an advantage in servicing the various demands.
Banks have to maintain a store of very liquid assets in order to
meet unexpected demand for liquidity. However, these liquid assets
can be invested at short notice against the interests of financiers.

Fund Complex Positions

To fund complex, illiquid positions, i.e. making term loans

to borrowers who are difficult credits

The bank specific lending skills and knowledge have to be
brought into play when the bank wants to coax repayment.
As a result, the loans are hard to sell to other potential
lenders without similar skills or knowledge.
Many of the transactions between the bank and its
borrower may be governed by an implicit understanding
rather than by explicit contracts. If explicit contracts are
incomplete, then implicit arrangements can be more
flexible and allow for superior transactions.

Disruptive Innovation in Banking

Innovative technology is substituting current practices in
Still, banks have since then survived challenges from
personal-finance software, early virtual banks and the
Internet. Now, there again is talk about banking being
disrupted. Money is pouring into financial technology
The likes of Bitcoins, Google wallet and peer to peer
lending put the current banking industry on the edge.
Take Apple Pay or PayPal. Both essentially operate on
top of incumbent banking and credit-card systems.
All bank branches and other brick-and-mortar financialservices locations will shrink or close in the next few
years to be replaced by virtual offerings.

Digital Era in Banking

HSBC only 8 branches in UAE, being
brick & mortar
A study by Accenture found 27% of
bank customers in India would
consider switching to a branchless
digital bank. Among 18- to 34-yearolds, that number is 39%.
It also says that global Fin Tech.
venture investments have tripled
from 2008 to 2013 to 2.97 billion

Future trends in banking Industry

Margins may be squeezed by new technology competitors in commercial

banking field.
People will move to conglomerate banking
This puts local and regional banks in a bind since they have fewer resources to
build up their own networks and lack bargaining power to drive hard deals with
third-party platforms.
The declining value of the physical footprint also will mean they are less
attractive takeover targets.
Bigger banks will see better rewards from investing in technology rather than
new branches.
Widespread adoption of mobile payments and digital banking will change the
climate, possibly submerging some smaller banks.
The biggest ones, though, arent likely to succumb to a rising technology tide.

e-transfers replace the use of currency?

E-transfers have facilitated, and proliferated, record-keeping of

agents' expenditure patterns.

With e-purses, the transaction can involve a transfer of value
from payer to payee without information on that transfer
immediately going to the financial institution involved.
This latter is important because the most important distinction
(on this view) between the characteristics of currency on the one
hand and e-transfers on the other is that currency is completely
Currency is anonymous in the sense that the recipient of a cash
payment neither has to know, nor learns, anything about
thecounter-party in the process of trade.
The only information required is whether the note, i.e. the
instrument itself, is genuine or counterfeit.
By contrast most e-transfers immediately provide a record of
what a customer has bought, i.e. exactly what goods/assets, to

No matter how successful Apple Pay is, customers will still

need to link it to credit cards or bank accounts.

e-transfers are both to the end consumer and to the
issuing commercial bank. When publicly sees or e-money
fraud occurs consumers may not then be comfortable
committing to this technology, and if they do, it may be for
small transactions, to eliminate the coins and small bank
notes in their wallets.
The theory that we have discussed suggests we cannot get
many of the good things banks do, such as liquidity
creation, credit origination, and financial innovation,
without banks issuing claims susceptible to runs and thus
being financially fragile