Topic I Commercial Banking

TOPIC 1: COMMERCIAL BANKS IN INDIA
Commercial Banks are those profit making institutions which accept deposits from general public and gives
money (loan) to individuals like household, entrepreneurs, businessmen etc. The prime objective of these
banks is to earn profit in the form of interest, commission etc. The operations of all these commercial banks
are regulated by the Reserve Bank of India, which is the central bank and supreme financial authority in India.
Some commercial banks in India are – ICICI Bank, State Bank of India, Axis Bank, and HDFC Bank, Punjab
national bank, Central bank of India.
At present, there are 20 Public Sector Banks in India including SBI.
Classification of commercial banks

1. Scheduled Banks:- Banks which have been included in the Second Schedule of RBI Act 1934. They
are categorized as follows:
a. Public Sector Banks:- These are those banks in which majority of stake is held by the
government. Eg. SBI, PNB, Syndicate Bank, Union Bank of India etc.
b. Private Sector Banks:- These are those banks in which majority of stake is held by private
individuals. ie. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc.
c. Foreign Banks:- These 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.
d. Regional Rural Bank: They have been created with a view of serving primarily the rural
areas of India with basic banking and financial services.
2. Non-scheduled commercial Banks:- Those banks which are not added in the Second Schedule of
RBI Act 1934.
Functions of Commercial Banks

A. Primary Functions of Commercial Banks:
1. Deposit Acceptance: Being a short term credit dealer, the commercial banks accept the savings of
public in the form of following deposits:
● Fixed Term deposits
● Current A/c deposits
● Recurring deposits
● Saving A/c deposits
● Tax saving deposits
● Deposits for NRIs
2. Lending Money: A second major function is to give loans and advances and thereby earn interest on
it. This function is the main source of income of the banks.
3. Overdraft facility: its permission to a current A/c holder of withdrawal more than to what he has
deposited in his/her account.
4. Loans & Advances: A kind of secured and unsecured loans 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.
5. Cash Credit: It is a facility to withdraw a certain amount of money on a given security.
B. Secondary Functions of Commercial Banks:

1. Agency functions: Bank pays on the behalf of its customers as an agent and gets fee for agency
functions such as:
● Payment of taxes, bills
● Collection of funds through bills, Cheques etc.
● Transfer of funds
● Sale-purchase of shares and debentures
● Collection/Payment of dividend or interest
● Acts as trustee & executor of properties
● Foreign exchange Transactions
● General Utility Services: locker facility
2. Credit Creation: It is one of the most important functions of commercial banks. A bank creates
credit on the basis of its primary deposits. It further lends the money to common borrowers/
corporate/investors .This landed money is deposited by those people to have excess money and want
to earn a fix return on their money. Commercial banks charges more rate of interests from customers
(borrowers) as compared to given to the depositors of the money.
List of Commercial Banks in India

SBI & Associates: Foreign Banks:
● State Bank of India ● ABN Amro Bank
Nationalized Banks: ● Abu Dhabi Commercial Bank
● Allahabad Bank ● American Express Banking Corporation
● Andhra Bank ● AB Bank
● Bank of Baroda ● Bank International Indonesia
● Bank of India ● Bank of America
● Bank of Maharashtra ● Bank of Bahrain & Kuwait
● Canara Bank ● Bank of Ceylon
● Central Bank of India ● Barclays Bank
● Corporation Bank ● BNP Paribas
● Dena Bank ● Chinatrust Commercial Bank
● Indian Bank ● Citibank
● Indian Overseas Bank ● DBS Bank
● Oriental Bank of Commerce ● Deutsche Bank
● Punjab & Sind Bank ● Hongkong & Shanghai Banking Corporation
● Punjab National Bank ● JP Morgan Chase Bank
● Syndicate Bank ● Standard Chartered Bank
● UCO Bank ● UBS AG
● Union Bank of India
● United Bank of India
● Vijaya Bank
Case Study
Yes Bank Subscribes to Non-convertible Debentures of SKS Microfinance
Yes Bank, one of India's leading private sector banks, announced in March 2009 that it has subscribed to 250
millions of rated Non-convertible Debentures (NCD) issued by SKS Microfinance, India's largest and the
world's fastest growing Microfinance Institution (MFI). The bond has a tenor of one year from the date of
allotment with a coupon rate of 10.50% per annum. Yes Bank thus became the lead manager to the issue a
first of its kind issuance of rated paper by an Indian micro-finance institution. Microfinance has been
recognized as an efficient poverty alleviation tool, its expansion in India is significantly impeded by its
relatively limited access to capital markets resulting in MFIs continuing to face challenges of high cost of
funds. On successful completion of the transaction, Suresh Gurumani, MD and CEO of SKS Microfinance
said, "SKS is the only MFI in the country to raise funds through non-convertible debenture. The funds will be
utilised to provide financial services to a larger section of the poor." Somak Ghosh, group president, corporate
finance and development banking, YES Bank, on fully subscribing to the issue said, "Yes Bank’s
microfinance initiatives/approach/focus is centred on using structured capital market products to provide MFIs
access to a broader base of investors and lenders thus reducing cost of funds and lowering transaction costs for
the sector. The successful closure of SKS’s rated bond issue is the fruition of such efforts at Yes Bank and
SKS Microfinance and will help the MFI tap sophisticated capital market investors opening up additional,
cost-effective sources of funds." Announcing this landmark transaction, S. Dilli Raj, CFO of SKS
Microfinance said, "SKS becomes the first Indian MFI to issue a rated bond. This showcases SKS’s
structuring and financial innovation skills. The fact that the Bond is a stand alone issuance with no credit
enhancement in the form of any 3rd party guarantee or collateral speaks volumes of SKS’s Balance Sheet
strength".
Questions 1. How do you think has the move helped Yes bank?
Question 2. What other innovative tools do you think Yes Bank could have employed to yield similar results?

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TOPIC 1: COMMERCIAL BANKS IN INDIA

Classification of commercial banks

Functions of Commercial Banks

B. Secondary Functions of Commercial Banks:

List of Commercial Banks in India

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