BANKING

FUNCTIONS OF BANKS
COMMERCIAL &
CENTRAL BANK
MONETARY POLICY OF
RBI
 BANKS
• Banks are like reservoirs
• They collect the savings of some people
and give them to others who use them
productively. In the process, they earn a
commission, out of which they pay interest
to those who save and deposits fund with
them
• A bank is an institution in which those
people who have spare cash deposit it
and those who need funds borrow from it
 TYPES OF BANKS
• COMMERCIAL BANKS
• EXCHANGE BANKS
• INDUSTRIAL BANKS
• AGRICULTURAL OR CO-OPERATIVE
BANKS
• SAVINGS BANK
• CENTRAL BANK
• EACH TYPE SPECIALIZE IN A
PARTICULAR KIND OF BUSINESS
 COMMERCIAL BANKS
• Their business mainly
consists of receiving deposits
and giving loans and financing
trade of a country.
• They provide a short term
credit i.e , lend money for
short periods.
 EXCHANGE BANKS
• Exchange banks finance mostly the
foreign trade of a country. Their main
function is to discount, accept and
collect foreign bills of exchange. They
also buy and sell foreign currencies
and help businessmen to convert their
money into any foreign money they
need.
• In addition, they carry on ordinary
banking business also.
 INDUSTRIAL BANKS.
• Industries require capital for a long
period for buying machinery and
equipment. Industrial banks provide
capital for a long period for buying
machinery and equipment. Industrial
banks provide this type of block
capital.
• They also receive deposits for longer
periods. They are thus in a position to
advance long term loans.
• Examples of industrial banks:-
• Industrial Finance Corporation of India
(IFCA)-1948- By Central Government
• State Financial Corporations – State owned
• Industrial Credit &Investment Corporation
of India (ICCI)
• National Industrial Development
Corporation (NIDC)
• Industrial Development Bank of India (IDBI)
 AGRICULTURAL or
Co-operative Banks
• Provide funds to farmers.
• Long-term capital is provided by Land
Mortgage Banks, nowadays called land-
development banks, while short-term loans
are given by co-operative societies or co-
operative banks. Long term loans are
provided for purchasing lands and
machineries while short term loans help
them in purchasing implements, fertilizers,
seeds etc.
 SAVINGS BANKS
• Collect small savings.
• Commercial banks too run
‘savings departments’ to
mobilize the savings of people of
small means.
• Post Office Savings Banks in India
are doing the same functions.
 CENTRAL BANKS
• Central Banks exists in almost
all countries and it is owned and
controlled by the government of
the country.
• In India, Reserve Bank of
India (RBI) is functioning as
Central Bank
 COMMERCIAL BANKS
FUNCTIONS OF
COMMERCIAL BANKS
2. ACCEPTING DEPOSITS
3. GIVING LOANS
4. CREDIT CREATION
5. UTILITY FUNCTION
ACCEPTING DEPOSITS
• To receive deposit and to
advance loans are the two
main functions of all
commercial banks
• They borrow to lend. They
borrow in the form of deposits
and lend in various forms of
advances.
 • DEPOSITS
CURRENT DEPOSITS
OR DEMAND DEPOSITS
•Payable on demand
without any notice.
•No interest is paid
because bank cannot
utilize as it is short term.
•A little commission is paid
For services rendered by
Bank. A small interest is
Paid to people who keep
Large balance
FIXED DEPOSIT OR SAVINGS BANK DEPOSIT.
TIME DEPOSIT These Midway between current
and fixed deposit. There is
deposits can be
withdrawn only after the a limit for number of
expiry of the period. withdrawal and amount.
The rate of interest is less
Interest is paid than that on the
depending upon the time Fixed Deposit
– period and amount
 GIVING LOANS
• After collecting money by way of
deposits , a bank invests it or
lends it out. Money is lent to
businessmen and traders usually
for short periods only. This is
because the bank must keep itself
ready to meet the demands of the
depositors, who have deposited
money for short periods.
 Giving loans--
• Money is advanced by the banks
in any one of the following ways:-
• BY ALLOWING AN OVERDRAFT
• BY CREATING A DEPOSIT
• DISCOUNTING BILLS
• REMITTING FUNDS
 ALLOWING OVERDRAFT
• Customer’s of standing are given the
right to withdraw their accounts. In
other words, they can get more than
they have deposited, but they have to
pay interest on the extra amount which
has to be repaid within a short period.
The amount of permissible over-draft
varies with the financial position of the
borrower.
 BY CREATING A DEPOSIT –
CASH CREDIT
• Is another way of lending by bank.
• When a person wants a loan from a bank,
he has to satisfy the manager about his
ability to repay
• Bank may demand security (tangible
or personal)
• The loan is advanced after scrutiny.
• The borrower opens a current a/c with the
bank , if he has no a/c
• (cont’d)
• The borrower rarely wants to draw the whole amount
of his loan.
• Once the a/c is started , it is exactly as if that sum
had been deposited by him. This is how a deposit
is created by the bank
• That is why, it is said “every loans creates a deposit”
• A cheque book is given to the borrower with the
right to draw cheques up to the full amount of the
loan, but interest is charged on the whole sum even
though only a part is withdrawn.
• After the period, for which the money has been
borrowed, is over, the borrower returns the amount
with interest to the bank. Banks make their profits
thus.
 DISCOUNTING BILLS
• The banks purchase the bills through bill brokers
and discount companies or discount them directly
for the merchants. The banks immediately pay cash
for the bill after deducting the discount (interest),
and wait for the bill to mature when they get back its
full value.

• The investment in bills is considered quite safe,

because a bill bears the security of two
businessmen, the drawee as well as the drawer.
This is a best investment by the banks
 REMITTING FUNDS
• Banks remit funds for their
customers through bank draft to
any place where they have
branches or agencies. This is the
cheapest way of sending money .
It is quite safe. Funds can be
remitted to foreign countries.
 MISCELLANEOUS
FUNCTIONS
• SAFE CUSTODY
• AGENCY FUNCTIONS
• REFERENCES
• LETTERS OF CREDIT
 SAFE CUSTODY
• Ornaments, valuable
documents can be kept in
safe custody with a bank, in
its strong room fitted with
lockers, on payment of small
sum per year
 AGENCY FUNCTION
• Dividends
• Insurance premium
• Bills payments
 LETTERS OF CREDIT
• In order to help the travelers, the banks
issue letters of credit traveler's
cheques. A man going on a tour takes
him a letter of credit from his bank. It is
mentioned there that he can be paid
sums up to a certain limit. He shows
this letter to banks in other places
which make the payment to him and
debit the bank which has issued the
letter of credit.
 UTILITY OF BANKS
• An efficient banking system is absolutely
necessary for a country for economic
progress. The banking system can be useful
in the following ways, in addition to what has
been mentioned in the functions of banks
• THE BANKS CREATE INSTRUMENTS
OF CREDIT
• THE BANKS INCREASE THE MOBILITY
OF CAPITAL
• THEY ENCOURAGE THE HABIT OF THRIFT
• ACCUMULATION OF LARGE CAPITAL
 CREDIT CREATION
• A unique function of the bank is to create credit .
• Credit creation is the natural outcome of the process
of advancing loan. When a bank advances a loan to
its customer, it does not lend cash but opens an
account in the borrower’s name and credit the
amount of loan to this account.
• Thus whenever a bank grants loan, it creates an
equal amount of bank deposit. Creation of such
deposits is called credit creation which results in a
net increase in the money stock of the economy.
• Banks have the ability to create credit many times
more than their deposit and this ability of multiple
credit creation depends upon the cash reserve ratio
of the banks.
 BANKS AND ECONOMIC
DEVELOPMENT
• A sound banking system mobilizes the small
and scattered savings of the community, and
makes them available for investment in
productive enterprise.
• In this connection, the banks perform two
important functions
3. They mobilize deposits by offering attractive
rates of interest, thus converting savings, which
otherwise would have remained inert, into active
capital.
4. They distribute these savings through loans among
enterprises which are connected with economic
development. In this way, they promote the
development of agriculture, trade and industry.
 BANKS AND ECONOMIC
DEVELOPMENT
• Difficult to think how could small savings be
stimulated or even possible in the absence
of banks.
• It is also difficult to see who would distribute
these savings among entrepreneurs.
• In India, the period of economic development
has coincided with phenomenal increase in
bank deposits and bank offices.
• Thus the banks have come to play a
dominant and useful role in promoting
economic development by mobilizing
the financial resources of society.
CENTRAL
BA NK ING
• DEWETT 426/431
 CEN TRAL BA NK
• It is essential for every country to
have a central bank
• The banking system of a country
without central bank at the top is
like a human body without head
 FUNCTIONS OF CENTRAL
BANK
• MONOPOLY OF NO TE ISSUE
• GOVERNME NT BANBER
• BANKER’S BANK
• LENDER OF LAST R ESORT
• CONTROL OF CREDIT
• MAINT ENA NCE OF EXCHANGE
RATE
• CUSTODIAN OF NATIONA L
RESERVE
• PROVISION OF CLEARING HOU SE FACIL
ITIE S
• DEVELOPMEN TAL FUNCTION S
MONOPOLY OF NOTE ISSUE

• Note issue is the sole privilege of the

central bank
• In India, the Reserve Bank of India
(RBI) which is the central bank is
required to keep a minimum reserve of
Rs 200 crores, of which not less than
Rs 115 crores must be gold.
 BANKER’S BANK
• All banks in the country are bound either by law or
convention to keep a certain proportion of their total
deposits as reserve with central bank. They also
keep their spare cash with central bank on which
they draw as and when needed.

• Under the Banking Regulation Act of 1949, the RBI

has been empowered with the right to supervise and
control the activities of various scheduled
commercial banks. These powers are related to give
licensing, branch expansion, management of banks,
inspection, liquidity of assets.
 LENDER OF LAST RESORT
• The other banks in the country depend
upon the Central Bank in times of
emergency. This may be in the form of a
loan on the security or rediscount of bills of
exchange.
• In India, the scheduled banks have to keep in
deposit as reserve as reserve with Reserve
Bank of India not less than 3% of their total
deposit liabilities.
 CONTROL OF CREDIT
• The most important function of a
Central Bank is to control the credit.
The central bank ensures price
stability and avoids inflationary and
deflationary tendencies by raising or
lowering bank rate, by purchase or
sale of securities in the open market
 MAINTAI NING
EXCHANGE RA TE
• A stable exchange rate is necessary to
maintain or promote a country’s foreign
trade and to encourage foreign investments,
which is necessary for economic growth.

• In order to maintain a stable rate of

exchange, central bank buys and sells
foreign currencies at rates fixed by it.
 CUSTODIAN OF NATIONAL
RESERVE
• It is central bank which serves
as the custodian of nation’s
reserves of gold and
international currency
 PROVISION OF CLEARING
HOUSE FACILITIES
• Performs the duty of a Clearing House for
cheques. It settles the account of
commercial banks and enables them to
settle their dues.
• Central bank does not come in competition
with other banks. That is why it does not
pay interest on the money kept with it. It is
a government owned and whatever be the
profits , they go to government treasury.
 DEVELOPMENT
FUNCTION
• RBI concentrates on the economic
development of under developed
countries. The main task of central
banks in such countries is to bring
about a rapid expansion of banking
facilities and also to make adequate
funds available to finance
development programs.
 CONTROL OF CREDIT
• OBJECTIVES OF CREDIT CONTROL
2. To safe guard its gold reserve against
internal and external drains
3. To maintain stability of internal prices
4. To achieve stability of foreign
exchange rate
5. To eliminate fluctuations in
production and employment and
6. To assist in economic growth
 METHODS OF CREDIT
CONTROL

1.Quantitative
2.qualitative
 QUANTITATIVE
CONTROLS
1. MANIPULATION OF BANK
RATE
2. OPEN MARKET OPERATIONS
3. VARYING RESERVE
REQUIREMENTS
4. CREDIT RATIONING
QUALITATIVE CONTROLS
• VARYING MARGIN
REQUIREMENTS FOR CERTAIN
BANK ADVANCES
• REGULATION OF CONSUMER CREDIT
FOR REGULATING VOLUME OF
INSTALMENT CREDIT BUYING

• ISSUING DIRECTIVES TO
RESTRICT BANK ADVANCE
BANK RATE OF INTEREST
• Bank rates and other rat es in the
market have a cl os e rel ati onshi p.
• Let us see how central bank can
control credi t by m ani pulat ing bank
rate.
• If central bank want to control credi t,
it wi ll rai se the bank rat e?
• Borr owi ng t hen w il l be discouraged
• Those who hol d stock wi th borrow ed
money wi ll unl oad thei r stock due to
hi gh i nterest payabl e and consequentl y
they wil l pay back the l oan.
• Thus rai sing interest wi ll cont ract the
credi t.
• Conversel y a f al l in bank rate wi ll low er
interest rate whi ch wi ll sti mul ate
indus trial acti vi ty, and expand credi t
 OPEN MARKET
OPERATIONS
• Means pur chas e or sal e of secur iti es/ bi ll s by
cent ral bank
• SA Y SA LE BY CEN TRA L B ANK – i t
recei ves payment i n the form of cheque on a com
merci al bank and cash is
reduced in the com merci al bank t o thi s
extend. Wi th reducti on in cash the
commer ci al banks hav e to r educe
lending
• SA Y PU RCH AS E BY CEN TRA L B ANKS– It
pay s thr ough cheque and the cash
bal ance i n the central bank lying in t he
account of com merci al bank wi ll be
increased. Thi s wi ll increse the lending
 VARYING RESERVE
REQUIREMENTS
• The central bank can vary reserve ratio when
it wants to control credit.
• In 1960, the RBI required scheduled
banks to maintain with it additional
reserve equivalent to 25% of their
increase in Deposits and later increased
to 50%.
• The raising of reserve requirements is an
anti- inflationary measure
 CREDIT RATIONING
• The credit is rationed by
limiting the amount available
to each applicant
 DIRECT ACTION

• Direct action like refusal on the part of

central bank to rediscount for banks
whose credit policy is not in
accordance with the wishes of central
bank or whose borrowing from central
bank are excessive in relation to their
capital and reserve.
REGARDS à gaurav