Commercial Banking Structure

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-Prof Deepak S. Sharma MBA, M.Com, LL.B, CS (Final ), Ph.D (Reg). Commer cial Banking Structure

Transcript of Commercial Banking Structure

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-Prof Deepak S. SharmaMBA, M.Com, LL.B, CS (Final), Ph.D (Reg).

Commercial Banking Structure

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M eaning:

y C ommercial bank is the term used for a normal bank todistinguish it from an investment bank or retail bank.

y C ommercial banking c an also refer to a bank or a divisionof a bank that mostly deals with deposits and loans fromc orporations or large businesses, as opposed to normal

individual members of the public (retail banking).

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R ole of the Bank:y P roc essing of payments by way of telegraphic transfer, internet banking, or

other means.

y Issuing bank draftsand bank c heques.

y Acc epting money onterm deposit.

y Lending money byoverdraft, installment loan, or other means.

y P roviding doc umentary and standby letter of c redit, guarantees,

performanc e bonds, sec urities underwriting c ommitments and other forms

of off balanc e sheet exposures.

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C ontd««y safekeeping of doc uments and other items insafe deposit boxes

y sale, distributionor brokerage, with or without advic e, of insuranc e, unit trusts and

similar financ ial produc ts as a ´financ ial supermarketµ

y c ash managementand treasury servic es

y merc hant bankingand private equityfinanc ing

y Traditionally, largec ommerc ial banks alsounderwrite bonds, and make marketsin

c urrenc y, interest rates, and c redit-related sec urities, but today large c ommerc ial

banks usually have an investment bank arm that is involved in the mentioned

ac tivities.

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F unctions of Commercial Banksy The func tions of ac ommerc ial banks are divided into two

c ategories:y i) P rimary func tions, andy ii) Sec ondary func tions inc luding agenc y func tions.

i) Primary functions:The primary func tions of ac ommerc ial bank inc lude:

y a) acc epting deposits; andy b) granting loans and advanc es;

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y ii) Secondary functions

B

esides the primary func

tions of acc

epting deposits and lendingmoney, banks perform a number of other func tions whic h are c alled

sec ondary

y

func tions.These are as follows -y a) Issuing letters of c redit, travellers c heques, c irc ular notes etc .

y b) Undertaking safec ustody of valuables, important doc uments, and

sec urities by providing safe deposit vaults or loc kers;

y c ) P rovidingc ustomers with fac ilities of foreign exc hange.

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y d) Transferring money from one plac e to another; and fromone branc h to another branc h of the bank.

y e) Standing guarantee on behalf of itsc ustomers, for making

payments for purc hase of goods, mac hinery, vehic les etc .y f) Collec ting and supplying business information;y g) Issuing demand drafts and pay orders; and,y h) P roviding reports on thec redit worthiness of c ustomers.

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L iabilities & assets of the Banksy A balance sheet (statement of condition , statement of

financial position ) is a financ ial report that shows the value of ac ompany's assets, liabilities, and owner's equity at a spec ific periodof time, usually at the end of an acc ounting period, suc h as aquarter or a year. Anasset is anything thatc an be sold for value. Aliability is an obligation that must eventually be paid, and, henc e,it is a c laim on assets. The owner's equity in a bank is oftenreferred to as bank capital , whic h is what is left when all assetshave been sold and all liabilities have been paid. The relationship of the assets, liabilities, and owner's equity of a bank is shown by thefollowing equation:

y Bank Assets = Bank Liabilities + Bank C apital

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y Assets: Uses of FundsAssets earn revenue for the bank and inc ludes c ash, sec urities, loans,

and property and equipment that allows it to operate.y C ashy Securitiesy Loans Loans inc lude the following major types:y business loans, usuallyc alled c ommerc ial and industrial

(C&I) loansy real estate loansy residential mortgagesy home equity loansy c ommerc ial mortgages

y

c onsumer loansy c redit c ardsy auto loans

y interbank loans

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L iabilities: Sources of F undsLiabilities are either the deposits of c ustomers or

money that banks borrow from other sourc es to use to fundassets that earn revenue. Deposits are like debt in that it ismoney that the banks owe to the c ustomer but they differfrom debt in that the addition or withdrawal of money is at

the disc retion of the depositor rather than dic tated byc ontrac t.

y C heckable Depositsy Nontransaction Deposits:

Nontransaction deposits inc lude savings accounts and timedeposits , whic h are basic ally c ertific ates of deposits (CDs)

y Borrowingsy Bank C apital

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N on-banking financial company/CorporationsNon-bank financial companies (NBF C s) are financial institutions

that provide banking services without meeting the legal definition of abank , i.e. one that does not hold a banking license . Operations are,regardless of this, still exercised under bank regulation .Services provided:

y ac t as suppliers of loansand c redit fac ilitiesy supporting investments in propertyy trade money market instrumentsy fund private educ ationy provide wealth management suc h as managing portfolios of stoc ks and sharesy underwrite stoc k and shares.y provide retirement planningy

advisec ompanies in merger and ac quisitiony prepare feasibility, market or industry studies forc ompaniesy provide disc ounting servic es e.g., disc ounting of instruments

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Classificationy Depending upon their nature of ac tivities, non- banking financ e

c ompaniesc an be c lassified into the followingc ategories:y Development financ e institutionsy Leasingc ompaniesy

Investmentc

ompaniesy Modarabac ompaniesy House financ e c ompaniesy Venture c apital c ompaniesy Disc ount & guarantee houses

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y B. Amendments to NBF C Directions onAcc eptanc e of P ublic Deposits

y C . Amendments to NBF C Directions on PrudentialNorms

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R etail banksy Retail bankingis a banking servic e that is geared primarily toward

individual c onsumers. Retail banking is usually made available byc ommerc ial banks, as well as smallerc ommunity banks. Unlikewholesale banking, retail banking foc uses stric tly on c onsumermarkets. Retail banking entities provide a wide range of personal banking servic es, inc luding offering savings andc hec king acc ounts, bill paying servic es, as well as debit and c redit c ards. Throughretail banking,c onsumers may also obtain mortgages and personalloans. Although retail banking is, for the most part, mass-marketdriven, many retail banking produc ts may also extend to small and

medium sized businesses. Today muc h of retail banking isstreamlined elec tronic ally via Automated Teller Mac hines (ATMs),or through virtual retail banking known asonline banking.

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y Mobile Banking :-Mobile banking (also known as M-B anking, mbanking,

SMSB anking etc .) is a term used for performing balanc e c hec ks,acc ount transac tions, payments, c redit applic ations etc . via amobile devic e suc h a s amobile phoneor P ersonal Digital Assistant(P DA). The earliest mobile banking servic es was offered viaSMS.

With the introduc tion of the first primitive smart phones withWAP support enabling the use of themobile webin 1999, the firstEuropean banks started to offer mobile banking on this platformto their c ustomers.

Mobile banking has until rec ently (2010) most often beenperformed via SMS or the Mobile Web.Apple'sinitial succ ess withiP hone and the rapid growth of phones based onGoogle's Android(operating system) has led to inc reasing use of spec ial c lientprograms, c alled apps, downloaded to the mobile devic e.

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y Mobile Banking Services -Mobile bankingc an offer servic es suc h as the following:

y Account Informationy Mini-statements andc hec king of acc ount historyy Alerts on acc ount ac tivity or passing of set thresholdsy Monitoring of term depositsy Acc ess to loan statementsy Acc ess to c ard statementsy

Mutual funds/ equity statementsy Insuranc e polic y managementy P ension plan managementy Status onc heque, stop payment onc hequey O rdering c heque booksy B

alanc

ec

hec

king in the acc

ounty Rec ent transac tionsy Due date of payment (func tionality for stop,c hange and deleting of

payments)y P IN provision, Change of P IN and reminder over the Internety B loc king of (lost, stolen)c ards

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y Online Banking :-Online banking (or Internet banking ) allows

customers to

condu

ct finan

cial transa

ctions on a se

curewebsite operated by their retail orvirtual bank, c redit union

or building soc iety.

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