Commercial Banking Structure

-Prof Deepak S. Sharma

MBA, M.Com, LL.B, CS (Final), Ph.D (Reg).

Meaning:
y Commercial bank is the term used for a normal bank to

distinguish it from an investment bank or retail bank.

y Commercial banking can also refer to a bank or a division

of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).

Role of the Bank:

y Processing of payments by way of telegraphic transfer, internet banking, or

other means.
y Issuing bank drafts and bank cheques. y Accepting money on term deposit. y Lending money by overdraft, installment loan, or other means. y Providing

documentary and standby letter of credit, guarantees,

performance bonds, securities underwriting commitments and other forms of off balance sheet exposures.

Contd
y safekeeping of documents and other items in safe deposit boxes y sale, distribution or brokerage, with or without advice, of insurance, unit trusts and

similar financial products as a financial supermarket

y cash management and treasury services y merchant banking and private equity financing y Traditionally, large commercial banks also underwrite bonds, and make markets in

currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

Functions of Commercial Banks

y The functions of a commercial banks are divided into two y y

y y

categories: i) Primary functions, and ii) Secondary functions including agency functions. i) Primary functions: The primary functions of a commercial bank include: a) accepting deposits; and b) granting loans and advances;

y ii) Secondary functions

Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary
y functions.These are as follows y a) Issuing letters of credit, travellers cheques, circular notes etc. y b) Undertaking safe custody of valuables, important documents, and

securities by providing safe deposit vaults or lockers;

y c) Providing customers with facilities of foreign exchange.

y d) Transferring money from one place to another; and from y y y y

one branch to another branch of the bank. e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc. f) Collecting and supplying business information; g) Issuing demand drafts and pay orders; and, h) Providing reports on the credit worthiness of customers.

Liabilities & assets of the Banks

y A balance sheet (statement of condition, statement of

financial position) is a financial report that shows the value of a company's assets, liabilities, and owner's equity at a specific period of time, usually at the end of an accounting period, such as a quarter or a year. An asset is anything that can be sold for value. A liability is an obligation that must eventually be paid, and, hence, it is a claim on assets. The owner's equity in a bank is often referred to as bank capital, which is what is left when all assets have been sold and all liabilities have been paid. The relationship of the assets, liabilities, and owner's equity of a bank is shown by the following equation: y Bank Assets = Bank Liabilities + Bank Capital

y Assets: Uses of Funds Assets earn revenue for the bank and includes cash, securities, loans, and property and equipment that allows it to operate.

Cash Securities Loans Loans include the following major types: business loans, usually called commercial and industrial (C&I) loans y real estate loans
y y y y
y residential mortgages y home equity loans y commercial mortgages

y consumer loans y credit cards y auto loans y interbank loans

Liabilities: Sources of Funds

Liabilities are either the deposits of customers or money that banks borrow from other sources to use to fund assets that earn revenue. Deposits are like debt in that it is money that the banks owe to the customer but they differ from debt in that the addition or withdrawal of money is at the discretion of the depositor rather than dictated by contract. y Checkable Deposits y Nontransaction Deposits:
Nontransaction deposits include savings accounts and time deposits, which are basically certificates of deposits (CDs)

y Borrowings y Bank Capital

Non-banking financial company/Corporations

Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. Operations are, regardless of this, still exercised under bank regulation. Services provided: act as suppliers of loans and credit facilities supporting investments in property trade money market instruments fund private education provide wealth management such as managing portfolios of stocks and shares underwrite stock and shares. provide retirement planning advise companies in merger and acquisition prepare feasibility, market or industry studies for companies provide discounting services e.g., discounting of instruments

y y y y y y y y y y

Classification
y Depending upon their nature of activities, non- banking finance y y y y y y y

companies can be classified into the following categories: Development finance institutions Leasing companies Investment companies Modaraba companies House finance companies Venture capital companies Discount & guarantee houses

Regulations & RBI Control

y Amendments to NBFC Regulations
As you are aware, Reserve Bank has put in place a comprehensive regulatory and supervisory framework in January 1998, in terms of which certain measures were taken for protecting the interests of depositors and for ensuring that the NBFCs function on sound and healthy lines. eserve Bank has since received a number of suggestions for fine tuning the regulations with a view to enhancing the protection to the interests of the depositors and ensuring that the NBFCs continue to play their legitimate role in the Indian Financial System.Accordingly, the following changes are being effected in the regulations

y A. Statutory changes y Un-notified nidhi companies(Like MF) y Government NBFCs y Change in management and mergers/amalgamation

y B. Amendments to NBFC Directions on

Acceptance of Public Deposits y C. Amendments to NBFC Directions on Prudential Norms

Retail banks
y Retail banking is a banking service that is geared primarily toward

individual consumers. Retail banking is usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking entities provide a wide range of personal banking services, including offering savings and checking accounts, bill paying services, as well as debit and credit cards. Through retail banking, consumers may also obtain mortgages and personal loans. Although retail banking is, for the most part, mass-market driven, many retail banking products may also extend to small and medium sized businesses. Today much of retail banking is streamlined electronically via Automated Teller Machines (ATMs), or through virtual retail banking known as online banking.

y Retail Products
y Business loan y Cheque account y Credit card y Home loan y Insurance advisor y Mutual fund y Personal loan y Savings account

ATM:y An automated teller machine (ATM), also known as a

automated banking machine (ABM) or Cash Machine etc. y On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smart card with a chip, that contains a unique card number and some security information such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN). y Using an ATM, customers can access their bank accounts in order to make cash withdrawals, credit card cash advances, and check their account balances as well as purchase prepaid cellphone credit. If the currency being withdrawn from the ATM is different from that which the bank account is denominated in (e.g.: Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be converted at a wholesale exchange rate. Thus, ATMs often provide the best possible exchange rate for foreign travelers and are heavily used for this purpose as well.

Alternative uses:
y y y y

y Deposit currency recognition, acceptance, and recycling y Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal

fees, taxes, etc.) Printing bank statements Updating passbooks Loading monetary value into stored value cards Purchasing
y y y y y y

Postage stamps. Lottery tickets Train tickets Concert tickets Movie tickets Shopping mall gift certificates.

y y y y y

Games and promotional features Donating to charities Cheque Processing Module Adding pre-paid cell phone / mobile phone credit. Paying (in full or partially) the credit balance on a card linked to a specific current account.

y Mobile Banking :Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments, credit applications etc. via a mobile device such as a mobile phone or Personal Digital Assistant (PDA). The earliest mobile banking services was offered via SMS. With the introduction of the first primitive smart phones with WAP support enabling the use of the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their customers. Mobile banking has until recently (2010) most often been performed via SMS or the Mobile Web. Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) has led to increasing use of special client programs, called apps, downloaded to the mobile device.

y Mobile Banking Services y y y y y y y y y y y y y y y y

Mobile banking can offer services such as the following: Account Information Mini-statements and checking of account history Alerts on account activity or passing of set thresholds Monitoring of term deposits Access to loan statements Access to card statements Mutual funds / equity statements Insurance policy management Pension plan management Status on cheque, stop payment on cheque Ordering cheque books Balance checking in the account Recent transactions Due date of payment (functionality for stop, change and deleting of payments) PIN provision, Change of PIN and reminder over the Internet Blocking of (lost, stolen) cards

y Online Banking :-

Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.

A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a designated account in favor of the payee's designated bank account. The card can be used as an alternative payment method to cash when making purchases. In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card. y In many countries the use of debit cards has become so widespread that their volume of use has overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards, debit cards are used widely for telephone and Internet purchases. y However, unlike credit cards, the funds paid using a debit card are transferred immediately from the bearer's bank account, instead of having the bearer pay back the money at a later date. y Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash and as a check guarantee card. Merchants may also offer cashback facilities to customers, where a customer can withdraw cash along with their purchase.
y

y CREDIT CARD:-

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.[1] The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. Most credit cards are issued by banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as 85.60 53.98 mm (3.370 2.125 in) (33/8 21/8 in) in size.