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A modern industrial society cannot be run by self-financing of entrepreneurs. Some institutional assistance is necessary to mobilize the savings of the community and to make them available to the entrepreneurs. The people, a large majority of who save in small odd lots, also want an institution which can ensure safety of their funds together with liquidity. Banks assure this with a further facility – that the funds can be drawn back in case of need.
Form a broader social angle, banks act as a bridge between the users of capital and those who save but cannot use the funds themselves. The idle resources of the community are thus activated and brought to productive use.
Besides, the banking system has capacity to add to the total supply of money by means of credit creation. The bank is a dealer in credit – its own and other people’s. it is because of the ability to manipulate credit that banks are used extensively as a tool of monetary policy.
Role of commercial banks
Banks play a very useful and dynamic row in the economic life of every modern state. Their economic importance may be viewed in the followed points:
1. A developing economy needs a high rate of capital formation to accelerate the tempo of economic development. But the economic development depends upon the rate of savings. Banks offer facilities for keeping savings and thus encourage the habits of thrift in the society.
2. Not only do the banks encourage savings but they also mobilize savings done by several households and make them available for production and investment to the entrepreneurs in various sectors of the economy. Without bans these savings would have remained idle and would not have been utilized for productive and investment purposes.
3. Allocation of funds or economic surplus among different sectors, users or producers so as to make maximum social return and thus to ensure optimum utilization of savings is another important function performed by the banks. However, it may be mentioned, that commercial banks do not always work and allocate resources in the way that maximizes production or social welfare. For example, before nationalization in 1969, the commercial banks in India neglected socially highly desirable sectors such as agriculture, small scale industries and weaker sections of the society. Therefore, it was thought necessary to nationalize them so that they should allocate resources in socially desirable directions.
4. By encouraging savings and mobilizing them from public, banks help to increase the aggregate rate of investment in the economy in the economy. Banks not only mobilize saved funds from the public, but they also themselves create deposits or credit which serve as money. The new deposits are created by the banks when they lend money to the investors or other users. These deposits are created by the banks in excess of the cash reserves they obtain through deposits from the public. These days, the bank deposits, especially demand deposits are as much good money as the currency issued by the government or the central bank. This creation of credit, if it is used for productive purpose greatly enlarges production and investment and thus promotes economic growth.
Functions of a bank
The functions of a bank can be summarized as follows:
a. Receipt of deposits: A bank receives deposits from individuals, firms, and other institutions. Deposits constitute the main resources of a bank. Such deposits may be of different types. Deposits which are withdrawal on demand are called demand or current deposits, others are called time deposits. Savings deposits are those form which withdrawals are not restricted as regards the amount and the period. Deposits withdraw able after the expiry of an agreed period are known as fixed deposits, interest paid by banks is different for each kind of deposit – highest for fixed deposits and lowest or event nil for current deposits.
b. Lending of money: banks lend money mainly for industrial and commercial purposes. This lending may take the form of cash credits, overdrafts, loans and advances, or discounting of bills of exchange. Interest charged by banks on such lending varies according to the amount and period involved, social priority-nature of security offered the standing of the borrower, etc.
c. Agency services : A bank renders various services to consumers, such as:
i. Collection of bills , Promissory notes and cheques
ii. Collection of dividends, interests, premiums etc.
iii. Purchase and sale of shares and securities
iv. Acting as trustee or executor when so nominated
v. Making regular payments such as insurance premiums
d. General services: A modern bank performs many services of general nature to the public, e.g.
I. issue of letters of credit, traveler’s cheques, bank drafts, circular notes; etc
II. safe keeping of valuables in safe deposit vaults
III. supplying trade information and statistics, conducting economic surveys
IV. Preparation of feasibility studies, project and implimentation reports, etc.
Banks in some foreign countries also underwrite issue of shares and make loan for long-term purposes.
COMMERCIAL BANKING IN INDIA
At the time of independence, India had a fairly well-developed banking system with more than 645 banks having more than 4800 branch offices. These banks although developed but they could not conform to social needs of the society. These banks generally catered to the needs of industries and that too big ones. Other priority sectors like agriculture, small-scale industries, exports etc. were almost neglected. To overcome these deficiencies, the government announced the nationalization of 14major commercial banks with effect from July 10969. The objectives of nationalization were to control the heights of the economy and to meet progressively the needs of development of the economy, in conformity with national policy and objectives. Six more banks were nationalized in 1980. (2 banks were merged in 1993, so at present there are 19 nationalized banks).
NATIONALIZATION OF COMMERCIAL BANKS
The following factors were responsible for nationalization of commercial banks in 1969.
i. Private ownership of commercial banks and concentration of economic power: until nationalization, all major banks were controlled by one or more business houses. These business houses used the resources contributed by the mass of the people for their own personal benefits. They financed those project and implimentations which ultimately enhance their own financial resources. Thus, private ownership of banks resulted in concentration of income and wealth in few hands.
ii. Urban-bias: prior to nationalization, commercial banks had shown no interest in establishing offices in semi- urban and rural areas. More and more branches were opened in cities resulting in concentration of banking facilities in urban areas. For example, out of about 5.6lakh villages in India only 5000 were being served by commercial banks and major cities like (Ahmadabad, Bombay, Calcutta, Delhi and madras) together has one-seventh share in the number of bank offices and about fifty percent share of bank deposits and bank credit. This urban biased nature of commercial banks led to slow rate of growth in the rural areas.
iii. Neglect of agricultural sector: there was a total neglect of the agricultural sector and its finance prior to nationalization of banks. The banks increasingly advanced finances to commerce and industry with the result their share in the scheduled banks advances increased from 70 percent in 1951 to 87 percent in 1968. Agricultural accounted for only 2.2 per cent of the total advances.
iv. Violation of norms: commercial banks often violated the norms and priorities laid down in the plans and granted loans to event those industries which figured nowhere in the priority list.
v. Speculative activities: private commercial banks earned large profits and indulged in speculative activities. They even extended advances to hoarders and black marketers against high rates of interest.
vi. Neglect of priority sectors: Not only there was a complete neglect of agricultural sector other sectors such as export, small-scale industries etc. were also completely neglected.
In order to discipline the commercial banks so that they do not over look the national priorities nationalization of banks was undertaken first in 1969 and then in 1982.
Objectives of nationalization: nationalization was meant for and early realization of the objectives of social control which were as follows:
i. Removal of control by few;
ii. Provision of adequate credit for agriculture and small industry and export;
iii. Giving a professional bent to management;
iv. Encouragement of a new class of entrepreneurs; and
v. The provision of adequate training as well as terms of services for bank staff.
PROGRESS OF COMMERCIAL BANKS AFTER NATIONALIZATION
After the nationalization of banks in 1969, commercial banking operations have become an integral part of India’s economic policy. Following development have taken place since nationalization in 1969.
i. Expansion of branches: there has been an unprecedented growth in the branch network since nationalization. Compared to just 8262 branch offices in 1969, the number of branch office in 2008 has increased to 76885 indications a greater access to banking facilities to the common man. As a result, the population per bank office has reduced from 55,000 in 1969 to around 15,000 in 2008.
ii. Branch opening in rural and unbanked areas: there has been a qualitative change in branch expansion programmed ever since the nationalisaton of banks. Before nationalization, there was a clear urban bias in the operations of banks. But after nationalization they have started moving towards rural and less developed areas. This will be clear from the fact that compared to just 22 per cent bank offices in rural areas in 1969, the percentage of rural branches bank improved to about 41 percent in June, 2008. This has helped in checking imbalances in disbursement of banking finance in India.
iii. Deposit mobilization: there has been a substantial rise in the rate of deposit mobilization since nationalization. The aggregate deposits of commercial banks have increased form Rs. 4,665 crore in 1969 to around Rs. 31, 97,000 crore in December, 2008 forming more than 80 percent of the national income. Considering state-wise deposit mobilization, we find Maharashtra leads all other states and accounts for around one –fifth of the aggregate deposits received by the banks. It is followed by Delhi, Uttar Pradesh, west Bengal, Tamil nadu, Karnataka and Andhra Pradesh. These all together account for 65 percent of the aggregate deposits of the banks.
iv. Promotion of new entrepreneurship: banks, of late, have been financing the schemes which promote entrepreneurship.
SHORTCOMINGS OF COMMERCIAL BANKING IN INDIA.
i. Although the commercial banks have spread their wings to every corner of the country but considering the huge population of India, their growth in numerical terms in insufficient. This is especially so with regard to rural areas that has just 41% of the bank branches but where more that 70% of the population of the country reside.
ii. There are regional imbalances in the coverage of bank offices. Only few states have well developed banking facilities: Arunachal Pradesh, Jammu and Kashmir, Uttaranchal, Manipur, Tripura on an average has lesser number of banks compared to other states. Even from the states which are well banked like Maharashtra, west Bengal and Tamil nadu, if big metropolitan cities are excluded the population per bank office is larger than the average for these states.
iii. The public sector banks although entered into merchant banking and agricultural financing, yet they lack expertise in these areas. There is a need for professional touch in these areas.
To sum up, although after nationalization the commercial banks have played an important role in achieving national goals of the economy yet these is a need for :-
a. Spreading their activities to the untouched remote corners of the country.
b. Keeping up their profitability.
c. Looking after the growing needs of the priority sectors of the economy.
d. Improving the quality of loan portfolio.
A bank has many functions to perform-receipt of money lending of money, collection and payment of bills, cheques etc. preparation of feasibility studies, project and implimentation reports, issue of letters of credit, traveler’s cheques and so on. Lending and borrowing functions of banks result in a credit creation in the economy. Credit creation helps in improving money circulation without resortion to any increasing or decreases in the quantity of currency or legal tender money.
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