Commercial Banks: Classification, Functions and Working Results

In this article we will discuss about:- 1. Classification of Commercial Banks 2. Functions of Indian Commercial Banks 3. Working Results.

Classification of Commercial Banks:

Indian joint stock banks or commercial banks are classified on statutory and ownership basis. On the statutory basis, they are further classified into scheduled banks and non-scheduled banks. A scheduled bank is one which has been included in the second schedule of the Reserve Bank of India Act, 1934.

To be a scheduled bank, it must be financially and economically sound and satisfy the following three conditions:

(i) It must have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs;

(ii) Its affairs are not being or likely to be conducted in a manner detrimental to the interests of its depositors;

(iii) It must be a joint stock company and not a sole trader or partnership firm.

Besides, it is required to keep a certain percentage of its cash reserves with the RBI and submit periodical returns to the latter under the Banking Regulation Act, 1949. In return, the scheduled bank receives concessional remittance and borrowing facilities from the RBI or its agents.

On the other hand, a non-scheduled bank is that which has not been included in the second schedule of the RBI Act, 1934. But is subject to the statutory cash reserve requirements which it is required to keep with itself and not with the RBI.

It is not entitled to concessional remittance and borrowing facilities from the RBI. There were 95 scheduled commercial banks in India having 51,970 branches as on 30 June 2003. Of these, 8 were State Bank of India and its associate banks with 13,499 branches – 19 nationalised banks with 32,643 branches; 32 Indian private sector banks (23 old + 9 new) with 5,624 branches; and 36 foreign banks with 204 branches. There are also 196 Regional Rural Bank which are sponsored by scheduled commercial banks but they are considered as rural banks even though they perform as commercial banks also. There is no non- scheduled bank in India.

On the basis of ownership, banks are classified into public sector banks and private sector banks. A public sector bank is a Government of India undertaking and a private sector bank is owned by the shareholders. Both types of banks perform the same functions, pay and charge the same rates of interest, and also pay the same salary and allowances to their staff, except the non-scheduled banks.

The first public sector bank was established in India on 1 July, 1955 with the nationalisation of Imperial Bank of India as State Bank of India. It has seven subsidiaries which were nationalised in 1959. These seven associate banks are State Bank of Hyderabad, State Bank of Jaipur and Bikaner, State Bank of Travancore, State Bank of Mysore, State Bank of Patiala, State Bank of Indore, and State Bank of Saurashtra.

On 19 July 1969, fourteen major scheduled banks were nationalised. They are: Allahabad Bank-, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank of India, and United Commercial Bank. Six more scheduled banks were nationalised on 15 April 1980. They are Andhra Bank, Corporation Bank, New Bank of India) Oriental Bank of Commerce, Punjab and Sind Bank and Vijaya Bank. New Bank of India was merged with Punjab National Bank with effect from 4 September 1993.

The regional rural banks which have been sponsored by the nationalised banks are also public sector banks which at present number 196. Thus the total public sector banks in India are 223 comprising State Bank of India arid its 7 subsidiaries, 19 nationalised banks and 196 regional rural banks.

Functions of Indian Commercial Banks:

The Indian joint stock banks are in fact commercial banks which perform a number of functions and render a variety of ancillary services.

The Banking Regulation Act, 1949 lists them as under:

(1) The borrowing raising or taking of deposits of money;

(2) The lending or advancing of money either with or without security;

(3) The drawing making accepting discounting buying selling collecting and dealing with bills of exchange, bundis, promissory notes, coupons, drafts, bills of lading railway receipts, warrants, debentures, certificates, scrips and other securities whether transferable or negotiable or not;

(4) The granting and issuing of letters of credit, travellers’ cheques and circular notes;

(5) The buying selling and dealing in bullion and species;

(6) The buying and selling of foreign exchange, including foreign bank notes;

(7) the acquiring, holding issuing on commission, underwriting and dealing in stock, funds, shares, debentures, stock, bonds, obligations, securities and investments of all kinds;

(8) the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others;

(9) The negotiation of loans and advances;

(10) The receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise;

(11) The providing of safe deposit vaults for custody of valuables of customers;

(12) The collecting and transmitting of money and securities;

(13) The acting of agents for any government or local authority or any other person or persons, but not as managing agent or secretary and treasury of a company;

(14) The contracting of private and public loans and negotiating and issuing them;

(15) the insuring guaranteeing underwriting participating in managing and carrying out of any issue of loans or securities made by state, municipality, company, corporation or any other association, and also lending for the purpose;

(16) The carrying on and transacting every kind of guarantee” and indemnity business;

(17) The managing selling and realising any property which may come into its possession in satisfaction of its claims;

(18) The acquiring holding and dealing with any property or any .right, title-or interest therein which forms the security for any loans or advances sanctioned;

(19) The undertaking and executing of trusts, as also administering estates as executor, trustee or otherwise;

(20) the establishing and supporting or aiding in the establishment of associations, institutions, funds, trusts and conveniences for the benefit of its present and past employees and their dependents, and granting or guaranteeing moneys for charitable purposes;

(21) The acquiring constructing maintaining and altering of any building or works necessary for its purposes;

(22) The selling, improving managing developing, exchanging, leasing, mortgaging, disposing of or otherwise dealing with any of its properties and rights;

(23) The taking over and undertaking the whole or any part of the business of any person or company when such business is of a nature described above;

(24) The doing of all such other things as are incidental or conducive to the promotion and advancement of its business, such as giving an opinion as to its customer’s financial standing as a referee; and

(25) The engaging in any other form of business which the Central Government specifies to be lawful. Besides, the Indian joint stock banks have started performing a number of other functions in recent years, such as issuing credit cards, setting of mutual funds, engaging in merchant banking, giving advances to priority sectors like agriculture, small scale industries, retail trade, small business, professional and self-employed persons, consumption loans, education loans, housing loans, etc.

Working Results of Scheduled Commercial Banks:

The total deposits of scheduled commercial banks accounted for 79.8 per cent of their total liabilities and their loans and advances 43.6 per cent of their total assets as on 31 March 2003. The total income of 95 scheduled commercial tanks was 10.1 per cent, total expenditure 9.1 per cent, operating profit 2.4 per cent and net profit 1.0 per cent of their total assets in 2002-03.

The credit-deposit ratio of these banks was 59.4 per cent, cash balance-deposit ratio 6.35 per cent and investment-deposit ratio 51.17 per cent during this year. The ratio of net non-performing assets (NPAs) to net advances was 4.4 per cent and to total assets 1.9 per cent as on 31 March 2003.