Banking

Commercial Banking:-

Functions of Commercial Banks:

1. Accepting Deposits: Banks accept deposits from the public, including savings, fixed, and current deposits.
2. Providing Loans and Advances: They lend money to individuals, businesses, and governments in various forms such as personal loans, overdrafts, and
mortgages.
3. Credit Creation: Banks create credit through the process of lending, thereby increasing the money supply in the economy.
4. Agency Functions: Banks act as agents for their customers by providing services such as payment of bills, collection of cheques, and portfolio management.
5. General Utility Services: These include safe deposit lockers, issuance of letters of credit, and foreign exchange services.

Credit Creation Process:-

Credit creation is a fundamental function of commercial banks where they increase the money supply by issuing loans and advances. This process can be
demonstrated through a series of steps as banks lend out a portion of their deposits while retaining a fraction as reserves.

Steps:-

1 .Bank receives a deposit of $1,000.

2. With a reserve requirement of 10%, the bank keeps $100 as reserves and lends out $900.
3.The $900 loan is deposited in another bank, which then keeps $90 as reserves and lends out $810.
4.This process continues, with each subsequent bank retaining a fraction of the deposits as reserves and lending out the remainder.
5.The total amount of credit created can be calculated using the money multiplier formula: 1 / Reserve Ratio. In this case, the money multiplier is 10, leading to
a total credit creation of $10,000 from an initial deposit of $1,000.

Commercial Banking in India:-

Structure of Commercial Banking in India:

1. Scheduled Banks: These are banks included in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. They include:
- Public Sector Banks: Majority-owned by the government. Examples include State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda
(BoB).
- Private Sector Banks: Majority-owned by private entities. Examples include HDFC Bank, ICICI Bank, and Axis Bank.
- Foreign Banks: Operate in India but are headquartered abroad. Examples include Citibank, HSBC, and Standard Chartered Bank.
- Regional Rural Banks (RRBs): Created to serve rural areas, supported by central and state governments and sponsored by public sector banks.
- Cooperative Banks: Operate at both urban and rural levels to provide credit to agriculture and allied activities.
Nationalization of Banks in India:
1. Objectives of Nationalization:
- Ensuring Credit Accessibility: Making credit facilities accessible to large sections of the society.
- Reducing Concentration of Economic Power: Preventing the concentration of wealth and economic power in the hands of a few.
- Promoting Balanced Regional Development: Ensuring that banking services reach underdeveloped regions.
- Boosting Agricultural and Small-Scale Industries: Providing adequate credit to agriculture, small-scale industries, and other priority sectors.

2. Performance and Evaluation:

- Expansion of Branch Network: Significant increase in the number of bank branches, especially in rural areas.
- Credit to Priority Sectors: Improved access to credit for agriculture, small industries, and other priority sectors.
- Financial Inclusion: Enhanced financial inclusion by bringing more people into the formal banking system.
- Challenges: Issues like political interference, rising non-performing assets (NPAs), and operational inefficiencies.

Central Banking:-

Meaning and Functions of Central Bank:

A central bank is the primary monetary authority in a country, responsible for managing currency, money supply, and interest rates. In India, the Reserve Bank
of India (RBI) serves as the central bank.

Functions of Central Bank:

1. Monetary Authority: Formulates and implements monetary policy to control inflation, manage interest rates, and stabilize the currency.
2. Issuer of Currency: Sole authority to issue and regulate currency notes in the country.
3. Banker to the Government: Manages the government’s banking transactions and public debt.
4. Banker’s Bank: Acts as a banker to commercial banks by providing liquidity and clearinghouse facilities.
5. Custodian of Foreign Exchange: Manages the country’s foreign exchange reserves and facilitates external trade and payments.
6. Regulator of Financial System: Regulates and supervises banks and non-banking financial institutions to ensure stability and consumer protection.
7. Developmental Role: Promotes financial inclusion and development of banking infrastructure.

Techniques of Credit Control with Special Reference to India:-

1. Quantitative Credit Control:

- Bank Rate Policy: Adjusting the rate at which the central bank lends to commercial banks to influence money supply.
- Open Market Operations (OMOs): Buying and selling government securities to regulate liquidity in the banking system.
- Cash Reserve Ratio (CRR): Mandating a percentage of deposits that banks must hold as reserves with the central bank.
- Statutory Liquidity Ratio (SLR): Requiring banks to maintain a certain percentage of their net demand and time liabilities in the form of liquid assets.
2. Qualitative Credit Control:
- Selective Credit Control: Imposing restrictions on lending against certain commodities to curb speculative activities.
- Moral Suasion: Persuading banks through discussions and advisories to conform to the central bank’s policy objectives.
- Margin Requirements: Setting minimum margin requirements for loans against securities to control speculative credit.

Credit Policy in India:

The credit policy of the Reserve Bank of India (RBI) aims to manage the availability and cost of credit to achieve economic objectives like controlling inflation,
stimulating growth, and ensuring financial stability. It involves:
1. Monetary Policy Statements: Issued periodically, outlining the central bank’s stance on monetary and credit measures.
2. Repo Rate Adjustments: Changing the rate at which banks borrow from the RBI to influence lending rates and money supply.
3. Liquidity Management: Conducting OMOs, CRR adjustments, and other tools to manage liquidity in the banking system.
4. Regulatory Measures: Implementing regulations to ensure the soundness and stability of the banking system.

Conclusion:-

Understanding the functions and theories of commercial banking, the process of credit creation, the structure and performance of commercial banking in India,
and the role and techniques of the central bank is crucial for comprehending the banking sector's impact on the economy.

The commercial banking system plays a vital role in financial intermediation, credit creation, and economic growth. The nationalization of banks in India aimed
to democratize access to credit and promote balanced regional development. However, challenges like rising NPAs and operational inefficiencies persist.

The central bank, particularly the Reserve Bank of India, is instrumental in regulating the banking sector, formulating monetary policy, and ensuring financial
stability. Its tools for credit control, such as bank rate policy, open market operations, CRR, and SLR, are essential for managing liquidity and inflation.

By understanding these concepts, one can appreciate the complex interplay between banking institutions, monetary policy, and economic outcomes, thereby
contributing to more informed analysis and decision-making in the financial sector.

Diagrams:-

1. Credit Creation Process: Follow the link for the diagram

(https://cdn.economicsdiscussion.net/wp-content/uploads/2018/06/clip_image002_thumb.jpg)

2. Structure of Commercial Banking in India: Follow the link for the diagram
(https://cdn.economicsdiscussion.net/wp-content/uploads/2018/06/clip_image004_thumb.jpg)

3. Monetary Policy Tools:Follow the link for the diagram

(https://cdn.economicsdiscussion.net/wp-content/uploads/2018/06/clip_image006_thumb.jpg)

By visualizing these processes and structures, one can better understand the intricate workings of the banking system and its