UNIT III SERVICE BUSINESS - I
CHAPTER FUNCTIONS OF COMMERCIAL 12 BANKS
A. Demand Deposits Learning Objectives These deposits are repayable on demand on To enable the students to any day. This consists of savings deposits i. understand the primary and secondary and current deposits. functions of commercial banks ii. explain the diversified banking 1. Savings Deposits services iii. describe the uses of debit, credit and General public deposit their savings into smart cards this account. This account can be opened in one individual’s name or more than one name. Section 25 companies also can open Functions of Commercial Banks savings accounts. Business firms are not permitted to open savings account. The They render many valuable services. The rate of interest allowed on this deposit is important functions of the Commercial lower than fixed deposits. Interest is paid banks can be explained with the help of the following chart on the basis of the amount and number of days the amount remains credited in 12.01 Primary Funtions the account. The bank provides facilities The primary functions of a commercial like cheque book, ATM (Automated bank are of three types. They are: Teller Machine) card etc. There is limit on number of ATM card withdrawals I. Accepting Deposits from other bank ATMs only. A minimum II. Granting Loans and Advances. balance should be maintained in this III. Creation of Credit deposit account. Otherwise penal interest is charged. Beyond a number (20 or 60 I. Accepting Deposits leaves) cheque book is available for a fee. The basic deposit accounts offered by Nomination can be registered. Salary commercial banks are listed below. In these account is a type of savings account offered days banks compete with each other to to salaried employees in which zero attract customers by adding facilities to these balance is permitted. Some banks offer deposit accounts. Broadly deposit accounts overdraft facility. An account inactive can be classified into demand deposits and for a long period will become dormant time deposits. account.
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commerce 1-15.indd 106 22-02-2020 16:16:10 2. Current Deposits of interest is higher than savings account. This account is suitable for business On the date of maturity the principal along institutions. Individuals too can open this with interest for the fixed period is paid. account. A higher minimum balance should A customer can obtain loan by depositing be kept in this account. If not penal interest FDR. Pre-mature withdrawal of cash is also is charged. No interest is paid for the balance allowed for payment of penal charges and in this account. Some banks have started it carries no interest. Partial withdrawal offering interest on these account balances. also allowed. Fixed deposit period can be Banks may collect bank charges on this 1 month to 10 years. FD is also called term account. Overdraft (short term unsecured deposit loan) facility is available to current account 2. Recurring Deposits (RD) customers. There is no limitation on deposit of cheques or withdrawals from Certain sum is deposited into the account this account. Credit worthiness of current every month for one year or five years or account business customers are shared the agreed period. Interest rate is more among banks. than savings deposits and almost equal to fixed deposits. At the end of the period the B. Time Deposits deposited amounts along with interest are They include fixed deposits and recurring returned to the customer. Premature closing deposits which are repayable after a period. is allowed with a charge or deduction. It is ideal for persons having regular income to 1. Fixed Deposits (FD) save and receive a lump sum. Any institution Certain amount is deposited for a fixed can open RD account. Minors or students period for a fixed rate of interest. FDR (fixed also can open this account. Loan against deposit receipt) is given to the depositor. Rate this deposit is also provided by some banks.
Know Your Customer (KYC) Norms KYC means “Know Your Customer”. It is the general rule to be followed by banks to get information regarding the identity and address of the customers. This rule helps to ensure that banks’ services are not misused. The KYC process is to be completed while opening accounts. These details should be updated periodically. A person willing to open a bank account, should submit a ‘proof of identity and proof of address’ together with a recent photograph. Six documents have been notified by the Government of India as ‘Officially Valid Documents’ (OVDs) for the proof of identity. They are Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhar Card issued by UIDAI and NREGA Job Card. The person should submit any one of these documents as proof of identity. If such documents also contain his/her address details, then it will be accepted as ‘proof of address’. If not, then another officially valid document which contains address details need to be submitted.
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commerce 1-15.indd 107 22-02-2020 16:16:10 II. Granting Loans and Advances 3. Discounting of Bills The second primary function of commercial Business customers approach banks to banks is lending money in order to earn discount the commercial bills of exchanges interest income. Banks provide specific and provide money. It is a short term credit sums as loans which are repayable along instrument. Banks deduct the discount with interest. Demand loans should be (interest) for the period mentioned in the repaid whenever demanded. Term loans can bill and release the balance amount to the be repaid after the agreed period. Advances traders. If the bill is dishonoured, the bank are credit facilities provided for short period can recover the amount from the customer. (within a year) to business community. But It is a form of unsecured credit. both terms are used interchangeably. B. Loans A. Advances Short term and medium term loans are 1. Overdraft provided by commercial banks against eligible collaterals to business concerns. It is It is a credit facility extended mostly a definite sum of money lent for a definite to current account holding business period. It is repayable in one lump sum or community customers. It is an arrangement in instalments. Interest is payable on the reached between the banker and the credit entire loan amount. Every bank in these worthy customers. Such customers are days design new methods of advancing allowed to overdraw (when there is no loans to find more ways of learning income. balance money in the account) up to a Generally commercial banks provide the certain amount usually for 3 months period. following loans. It may be extended for further periods. Only on the withdrawn amount of credit interest 1. Housing Loan is charged and not on the maximum limit Taking the title deeds of the house as allowed. It is an unsecured credit. Secured collateral security, based on the monthly overdraft against the security of financial income of the borrowing customer, banks instruments is also provided by some banks. advance medium and long term loans. The It is repayable on demand. customer repay the loan in equated monthly instalments (EMI consists of principal and 2. Cash Credit interest). This is a boon to the middle class salaried employees who cannot afford to It is a secured credit facility given mostly pay the full price of a house in a lump sum. to business institutions. Stock in hand, raw materials, other tangible assets, etc. 2. Consumer Loan are provided as collateral. A certain sum is Consumer durables like refrigerator, air allowed as credit for a short period. Interest conditioner, laptop, washing machine, is payable on the actual amount withdrawn television, etc. can be purchased by and not on the entire credit facility. . It is customers with consumer loans from banks. repayable on demand. The product purchased is hypothecated
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commerce 1-15.indd 108 22-02-2020 16:16:10 (secured loan arrangement where the III. Creation of Credit movable asset remains with the borrower) Apart from the currency money issued by as security for the consumer loan amount. the RBI, the credit money in circulation The customer pays in equated monthly created by commercial banks influence instalments for a specified period. economic activities of a country to a large extent. Credit money of commercial banks 3. Vehicle Loan is far greater in volume than the currency Two wheelers, cars, buses and other vehicles money. The volume, the purposes and the can be purchased by individuals as well as sector to which this credit money is to be institutions obtaining vehicle loans from channelised - all these are implemented by the banks. Vehicles are hypothecated to the commercial banks under the guidance of bank until the entire loan amount is repaid. the RBI. Vehicle registration book is deposited with the bank and on full payment of loan amount According to 2011 data, the credit created it will be handed over to the customer. by all Indian commercial banks was 75.1% of GDP. It was 233.3 % in the USA, 145.5% 4. Educational Loan in China, and 340.9% in Japan. Loan is provided by banks to students for studying undergraduate, post graduate or 12.02 Secondary Functions professional courses. Loan may be received Apart from the basic or primary functions in instalments to pay the educational fees commercial banks render various other every year. After completion of the course services which are known as secondary one year is allowed for the student to get functions. These services can be broadly employed. Afterwards, the student should classified into agency services and general repay the loan with interest for the entire utility services. period. Interest is charged from the date of first instalment of loan amount payment. I. Agency Functions Banks act as agents of customers and provide 5. Jewel Loan certain services. They are called Agency Customers pledge their gold jewels and Functions which are as follows: obtain loans from banks. The margin (percentage of value per gram that can be 1. Transfer of Funds given as credit) requirement is fixed by the Banks issue demand drafts, bankers’ cheques, RBI. Interest should be paid every month. travelers’ cheques, etc. and help in transfer of Otherwise interest on interest is charged. funds from one place to another. Customers Within 12 months the customer can redeem need not carry cash. They can just forward or else can re-pledge. Jewels not redeemed the draft issued by the bank to the receiving even after reminders are sold in auction by institution. A small commission is collected banks to recover their dues. by banks for this service.
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commerce 1-15.indd 109 22-02-2020 16:16:10 2. Periodic Payment of Premiums, Rent, etc. account should be linked with savings After instruction from the customers, bank account by the customer. Then the banks undertake the monthly payment of customer can ask the bank to conduct insurance premium, rent, telephone bill, online purchase or sale of securities, on etc. from the accounts of customers. Now behalf him. a days these payments are made through 6. Preparation of Income Tax Return electronic clearing system facility offered by the banks. Banks prepare the annual income tax return on behalf of the customers and provide 3. Collection and Payment of Cheques income tax related advices to them. On behalf of customers bank collect the 7. Dealing in Foreign Exchange cheques deposited into the accounts of customers from other banks and deposit cash Banks buy and sell foreign currencies on in the customers’ accounts. Similarly cheques behalf o customers. issued by a customer is honoured and the 8. Acting as Correspondent amount paid as directed by the customer. Banks act as correspondent of customers Definition of Cheque: According to and receive travel ticket, passport, etc. Negotiable Instruments Act 1881, “cheque II. General utility functions is a bill of exchange drawn on a specified banker payable on demand”. In addition to primary, secondary and agency functions, commercial banks Crossing of Cheque: Drawing two offer some services for the general parallel transverse lines on the left top of welfare of the customers. They are the cheque. It implies that the money will called general utility services. They are not be paid over the counter but through as follows. bank account only. 1. Issue of demand drafts and bankers’ 4. Acting as Executors, Trustees and cheques Attorneys Demand drafts and Bankers Cheques Banks act as executors of will of the are issued to public and customers as customers and implement their will after well. Instead of sending money they can their death. As a trustee a bank takes care attach these instruments for payment of of the funds of the customers. Banker educational fees, etc. signs transfer deed of the properties of the customers in the capacity of attorney to 2. Accepting Bills of Exchange on behalf of customers. Customers Banks accept bills on behalf of customers 5. Conduct Share Market Transactions and make payments to the foreign exporter. A Demat account should be opened with Afterwards, the banks collect from the Depository Participant and that demat customers.
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commerce 1-15.indd 110 22-02-2020 16:16:10 3. Safety lockers services. Providing all such banking and Valuable documents, jewels, etc. can be kept other financial services is also called safely in a vault provided by bank for a rent. universal banking. Such services are as These vaults room is called ‘Strong Room”. follows:
4. Letters of credit 1. Bank Assurance This document is given by bank on behalf It refers to the offering of insurance policies of importing customer to the exporter or products by a bank in association guaranteeing payment for the imported with another insurance company. Banks goods. It is a very important document in should follow Insurance Regulatory international trade. and Development Authority of India (IRDA) regulations in addition to RBI 5. Travellers cheques regulations. Corporation Bank, Oriental Customers need not carry cash during Bank of Commerce and Vijaya Bank has travel in India or abroad. The denomination tied up with Life Insurance Corporation and words are printed in the cheque. It is of India. SBI has joined hands with BNP accepted as money in shops, hotels, travel Paribas Cardif - a French company to sell agencies, etc. insurance products.
6. Gift cheques 2. Merchant Banking These denomination printed cheques are Merchant banks do not provide regular available in attractive design so that it can banking services. A commercial bank be presented during wedding, birthday or its subsidiary merchant bank may functions, etc. offer services like project counselling, 7. Reference service underwriting, etc. required for starting a company. It is called merchant banking. Business firms can give their bank’s name as They are mostly stock market related reference to the new business institution with services. Merchant Banks are controlled which they want to establish commercial by Stock Exchange Board of India (SEBI) relationship. Banks willingly act as referees regulations also. and provide information about the financial standing of their customers. 3. Retail Banking (Personal Banking) 12.03 Diversified Banking It refers to mass market banking which Functions reaches out to large number of individual Competition in the banking industry end customers. Apart from accepting has reduced their profits. Therefore the deposits, their services include personal commercial banks started identifying and loans, vehicle loans, consumer durable offering new and diversified financial loans, loans against equity shares, debit and services. They are purely other than banking credit cards, mortgages, etc.
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commerce 1-15.indd 111 22-02-2020 16:16:10 4. Housing Finance 1. NEFT - National Electronic Funds Transfer Housing finance is provided against the This was launched by the RBI in 2005. security of immovable property of land and Under this electronic funds transfer buildings. Many banks such as SBI, Bank system, bulk transfer of transactions are of India, etc, have set up housing finance settled in batches during specific timings subsidiaries. across India. Individuals and institutions which maintain accounts with a NEFT 5. Mutual Fund enabled bank branch are eligible for It is a financial intermediary that pools the using NEFT. Transactions do not occur savings of investors for collective investment under real time basis. Once in every in diversified portfolio securities in the half hour from 8.00 am to 7.30 pm. 23 capital market and money market. Many settlements are allowed in a day.NEFT banks like SBI, Indian Bank, etc, have set up transfers are not allowed on Sundays and mutual fund subsidiaries. bank holidays. Both NEFT and RTGS use IFSC (Indian Financial System Code) - a 6. Venture Capital Fund 11 digit alphanumeric code, to identify a Venture capital fund provides start-up bank branch. IFSC is provided by IDRBT share capital to new ventures of little (Institute for Development & Research on known, unregistered, risky, young and small Banking Technology), Hyderabad. private business, especially in technology oriented and knowledge intensive business. 2. RTGS - Real Time Gross Settlement Many commercial banks like SBI, Canara Systems Bank, etc. have set up venture capital fund subsidiaries. It was launched by the RBI in 2013. The transactions are settled on real time basis. 7. Factoring Gross settlement means the transaction is Factoring is a continuing arrangement settled between one bank and another bank between a financial intermediary (factor) without adding any other transactions. and a business concern (client) whereby RTGS facility is available between 9.00 am the factor purchase the clients’ accounts to 4.30 pm on weekdays and up to 2.00 pm receivable. Banks like SBI and Canara Bank on Saturdays. In one day the RTGS routes have established subsidiaries to provide about 60,000 transactions worth about factoring services. ₹2,700 billion and covers over 52,000 bank branches located in 10,000 cities and towns. 12.04 Electronic Banking RTGS transfers are not allowed on Sundays Functions and bank holidays. Minimum limit for This reduces cost and time and makes RTGS transaction is 2 lakhs. banking service convenient to the customers. It is operated through internet. This service 3. Electronic Clearing Services (ECS) is a substitute for drafts, cheques and other ECS was launched by the RBI in 1995. It is paper based transfer of funds. an electronic method of fund transfer from a
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commerce 1-15.indd 112 22-02-2020 16:16:10 bank to another bank. ECS credit can be used anywhere. This service is known as mobile to credit salary, dividend, interest, pension banking. etc. and ECS debit is used to debit monthly telephone bills, electricity bills, equated 7. Automated Teller Machine (ATM) and monthly installments (EMI) payments. For CDM Facilities this purpose the account holding individuals and institutions concerned should fill up A customer can withdraw money anytime, certain forms and submit to the banks. ECS anywhere in India from the ATM machine transactions between banks are settled in the using the ATM card given by his/her current account maintained in the clearing bank. The machine also shows the balance house. available in the customers’ account, provides statement print of the few past transactions, 4.CORE Banking Solutions etc. Withdrawal of money in other bank ‘CORE’ stands for ‘Centralized Online ATMs is restricted and will be charged Real time Exchange’. In the centralized beyond the specified number of usage. Cash server of the bank, all the details of all the Deposit Machine Facility is useful to the accounts of all the branches of the bank public as well as customers to deposit cash are available. A customer can withdraw into the account anytime. Similarly there money through cheque at any branch are cheque deposit machines which receive of that bank throughout the world. cheques at any time. Similarly anyone can deposit money into the account. Entry of the transactions is recorded in the centralized server of the 8.IMPS - Immediate Payment Service bank in real time and can be seen in all the IMPS was launched by the National branches of the bank. This facility is called Payments Corporation of India in core banking solutions. November 2010. IMPS allows funds transfer 5. Internet Banking or Virtual Banking through mobile phone or internet banking by banking customers and approved non- Internet banking refers to performing banking partners. Its transactions are on banking operations through internet, using real time basis. The current maximum limit computers and mobile phone. This can be is `. 2 lakhs. It made India a leading country done by a customer from home or office or in the world in real time payments in retail any part of the world and all 24 hours of 7 sector. days.
6. Mobile Banking 9. Funds Transfer Through SMS Most of the commercial banks have *99# is the number for the funds transfer designed computer programs called apps from any mobile phone. It was launched which can be downloaded in smartphones. in 2014. Every common man in India can With this app in the smartphone a customer transact banking transactions from any can operate his account transactions from corner of India.
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commerce 1-15.indd 113 22-02-2020 16:16:10 NACH, BBPS, BHIM National Automated Clearing House founded in 2008 is a web based solution to facilitate interbank high volume electronic transactions which are repetitive and periodic in nature. It will be helpful for banks, financial institutions, Corporates 11. Credit Cards and Governments. It is a centralised system that aim at consolidating multiple Banks issue credit cards to customers and ECS systems running across the country other eligible persons. With this card, the and removing local barriers. holder can purchase goods and services on credit at any shop in India. If the dues are Bharat Bill Payment System is a RBI guided paid within the stipulated time no interest system operated by National Payments is charged. The credit limit is fixed by the Corporation of India from August 2016. issuing bank based on the income of the It is a one stop payment platform for all cardholder. bills providing anytime anywhere bill payment service to all customers across India with certainty, reliability and safety of transactions.
Bharat Interface for Money is an app that lets a bank customer make simple, easy and quick payment transactions using Unified Payments Interface (UPI). A bank 12.05 Functions of All Commercial customer can make instant bank to bank Banks in Totality payments and pay and collect money All commercial banks put together perform using just mobile number or virtual certain functions to the development of the payment address (VPA). It was launched country’s economy. in December 2016. 1. More production and economic growth These banks supply the vitamin money 10. Debit Cards to all sectors of the economy including ATM card is also called debit card. This manufacturing sector. As a result all the card is more useful in purchase of goods sectors produce more. and services anywhere in India, if the shop maintains a swiping machine facility. VISA 2. Capital formation card and Maestro card services are offered Banks encourage savings habit among by Visa Corporation and Mastercard both people and accumulate their small dormant from the USA. RuPay cards services were savings. These funds can be fruitfully launched in March 2012 by the National channelized for productive purposes of the Payments Corporation of India. economy. 114
commerce 1-15.indd 114 22-02-2020 16:16:11 3. Consortium finance through the network of branches. Broad Thousands of crores required to establish a guidelines or rules of the Government for mega factory is not available from a single the monetary sector of a country cannot be source. Banks join together and provide applied without such banks. consortium finance in such cases. 9. Encourages export and international 4. Service coverage to non-monetised trade sector Banks open foreign branches or establish Branches of the banks are opened in rural correspondent relationship with banks and village areas so that the non-banking in foreign countries to help exporters. areas are provided banking services. Instruments like letters of credit and international factoring services are 5. Balanced regional development undertaken to help exporters and importers.
Banks transfer funds from surplus areas 10. New entrepreneurs and employment and make them available in scarce districts opportunities or areas for the formation and operation of business institutions. Even growth of Entrepreneurs obtain project loans and different regions can be achieved through establish new business houses. By providing this function. the required credit banks generate more economic activities and new employment 6. Smoothing of trade and commerce opportunities. For the efficient functioning of all traders and business institutions in a country, safe Key Terms keeping of their funds, transfer of funds, payment and collection of funds when and Deposits, Loans, Electronic, Debit card, where needed is very much necessary. Banks Credit card, Smart card, Core banking perform this function.
7. Development of industry, agriculture, MSMEs and SHGs For Own Thinking Banks design methods and instruments In all ATM Centers, there are one or of financing each sector differently. They two machines, sometime it may be four provide finance for small farmers, medium or five. All ATM machines have some traders as well as industries. For example amount of money inside the box. In this banks allow micro credit to SHGs, overdraft way lot of currency notes are locked day to traders and issue Certificate of Deposits by day. Think about the alternate way for to finance industries. avoiding this locking of currency notes. 8. Implementation of monetary policy Debate about the security problem in Banks have established customer relationship E-Banking system of services. with all public and business institutions
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commerce 1-15.indd 115 22-02-2020 16:16:11 4. In which kind of account, it is compulsory For Future Learning to deposit certain amount at certain time? Field visit - nearest -collect information (a) Saving deposit about rate of interest payable on Savings (b) Fixed deposit deposit, Fixed deposit, Current deposit (c) Current deposit and Recurring deposit. (d) Recurring deposit Collect photo copies of the various cards 5. Which of the following is not a type of used in our day- to-day life. advance provided by commercial bank? Nowadays debit card, credit card, smart (a) Collecting and supplying business cards and other cards are used for day to information day purposes. In future how many cards (b) Overdraft we may use for our purposes. (c) Cash credit (d) Discounting of bills Answers Case Study 1. d 2. c 3. b 4. d 5. a.
A person forgot his password of Debit card, How to get password? Give guidelines to him.
Exercise II. Very Short Answer Questions I. Choose the Correct Answer 1. What is Mobile Banking? 1. Electronic banking can be done through 2. Briefly explain the need for Debit card. (a) Computers (b) Mobile phones 3. Briefly explain the term - Credit card. (c) ATM (d) All of the above 4. What do you mean by ATM? 2. Minimum how much amount can be 5. Write a note on - ECS. transferred through RTGS? III. Short Answer Questions (a) Any amount (b) 50,000 1. What is E-Banking? (c) 2 lakh (d) 5 lakh 2. Write a short note on - RTGS. 3. The largest commercial bank of India 3. Briefly explain the Diversified banking (a) ICICI (b) SBI services of commercial banks. 4. Explain - NEFT. (c) PNB (d) RBI
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commerce 1-15.indd 116 22-02-2020 16:16:11 5. What do you mean by Core Banking Solutions?
IV. Long Answer Questions 1. Discuss the various primary functions performed by the commercial banks. 2. Explain the various secondary functions of commercial banks.
Reference 1. Balaji. C.D. and Prasad. C. 2016, “Principles of Commerce”, Margham Publications, Chennai 2. Natarajan. S and Parameshwaran. 2014, “3. Indian Banking”, S. Chand & Company Ltd. Delhi 3. Dharmaraj. E, 2005, “Banking Theory - Law and Practice”, Scitech Publications 4. Selvaraj. M. 2014, “Modern Banking” - Bavani Pulications.
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