Commercial banks: Introduction: These are the profit seeking institutions which accept deposits from general public

and advance money to people like businessmen , entrepreneurs etc. with the prime objective of earning profit in the form of interest ,commission etc. They generally finance trade & commerce with short term loans. They charge high rate of interest from their borrowers and pay much less rate of interest to their depositors. The difference between these two rates becomes their main source of income. Examples of commercial banks SBI, Canara Bank, Punjab National Bank etc. These commercial banks are also called joint stock banks because they are organized as joint stock companies. Functions of commercial banks:PRIMARY FUNCTIONS:
1. Accepting deposits: since it is a dealer in short term credit, the first

task is collection of the savings of public by accepting the following deposits: Fixed term deposits: these are time deposits and can be withdrawn only after the expiry of specified period of time ranging from 1 day to n no. of years. Current a/c deposits: these carry no rate of interest and can be withdrawn at any point of time by the depositors. These are generally preferred by businessmen. Recurring deposits: a depositor can deposit a fixed amount, say RS. 100 for a fixed period of time. Sving a/c deposits: these are suitable for individual household and the main objective is to save. 2. Lending: - a second major function is to give loans and advances and thereby earn interest on it. This function is the main source of income for the bank.

 Overdraft facility: a customer having current a/c is allowed to with draw more than he has deposited and interest is charged on the amount actually withdrawn by him. Cash credit : under this arrangement, a customer is allowed to withdraw a certain sum of money on a given security(current assets & other securities) Loans & advances: a bank offers various types of secured and unsecured loans but generally bank people prefer to give loan against some kind of security. Discounting of bill of exchange: in case a person wants money immediately, he/she can present the B/E to the respective commercial bank and can get it discounted. SECONDARY FUNCTIONS: 1. agency functions : bank act as a agent of its customers and get commission for performing agency functions such as: transfer of funds Collection of funds through bills, cheques etc. payment of taxes , bills purchase & sale of shares & securities collection of dividend or interest acts as trustee & executor of properties letters of references 2. general utility services: locker facility purchase & sale of foreign currency Issues gift cheques,travellers cheques etc. 3. credit creation : It is one of the most outstanding function of commercial banks . a bank creates credit on the basis of its primary deposits. FOR EXAMPLE: Suppose a person MR. A deposits 1000 rupees with the bank. Bank on the basis of its experience knows that the depositor is likely to withdraw only 20% of his deposit i.e. RS.200 and so the bank can advance the remaining Rs. 800 to another person say MR. B. again 20% of Bs deposits , which is considered a safe limit is kept for him by the bank

and the balance rupees 640 is advanced to another person MR. C. in this way, the process of credir creation goes on . Classification of commercial banks : Non scheduled commercial banks Scheduled commercial banks

Non scheduled commercial banks :- are those banks which are not included in the Second Schedule of RBI Act 1934. Scheduled commercial banks :- are those banks which have been included in the Second Schedule of RBI Act 1934. Scheduled commercial banks are divided into three parts: Public Sector Banks :- are those banks in which majority of stake is held by the government. Eg. SBI, PNB, Syndicate Bank, Union Bank of India, etc. Private Sector Banks :- are those banks in which majority of stake is held by private indivisuals. Eg. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank, etc. Foreign Banks :- are the banks with Head office outside the country in which they are located. Eg. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd., etc.

Management of commercial banks : Balancing Profitability with Liquidity Management Interest Rate Risk Management Credit Risk Management

 Asset - Liability Management

Balancing Profitability with Liquidity Management :- the objective of commercial banks is to make profits. But they have to balance the principal of profit maximization with certain other principles. Thus, they need to pay much more attention to balancing profitability with liquidity. All businesses have to devote considerable attention to liquidity manaement but with banks thr need for maintenance of liquidity is much greater because of nature of their liabilities. That is why, for banks liquidity management is as important as profitability management. This is reflected in the management and control of reserves of commercial banks. Interest Rate Risk Management :- IRR is the risk where changes in market interest rates might adversely affect a banks financial condition. The banks lending, funding, and investment activities give rise to IRR. The immediate impact of variation in interest rate is on banks net interest income while a long term impact is on bank net worth. So, there aretwo common perspectives for the assessment of IRR: Earning Pespective :- this is a traditional approach obtained by neasuring changes in the Net Interest Income. Economic Value Perspective :- it reflects the impact of fluctuations in the interest rate on economic value of the bank.

Credit Risk Management :- credit risk emanates from a banks dealing with individuals, corpoprate, financial institutions or a sovereign. Credit risk arises from the potential that an obligor is either unwilling to performon an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank. For most banks loans are the obvious source of credit risk. It is overall responsibility of banks board to banks credit risk strategies and significant policies relating credit risk.

Asset - Liability Management :- ALM is a comprehensive and dynamic framework for measuring, monitoring, and managing the market risk of a bank. It is the management of structure of balance sheet in such a way that the net earning from interest is maximized within the overall risk preference of the banks.