S U B M ITT E D B Y: R U P K A T H A ,

S U B H A S H R E E , S H A YA N , M A N D O B I &
ARAD H AN A
Origin & evolution of
bank
“ Bank” is derived from the Greek word “banque”
or the Italian word “banco” both meaning a
bench.
Revilpout mentions about bank and bank notes in
Babylon in 600 B.C.
The origin of banking lies in the business of money
changing in ancient times & the need for
borrowing by the monarchical governments from
finance companies.
The first bank called the “Bank of Venice” was
established in 1157.
The Bank of England was established in 1694.
The Hindustan Bank was the first banking
institution of its kind to be established in 1779.

What is BANK?
Dictionary meaning: “An establishment for the
custody of money, which it pays out on a
customer’s order”.
Sayers more clearly states: “We can define bank as
an institution whose debts (bank deposits) are
widely accepted in settlement of other people’s
debts to each other.”
A banking company has been defined in the
Banking Companies Act, 1949 as one “which
transacts the business of banking which means
the accepting, for the purpose of lending or
investment, of deposits of money from the public,
repayable on demand or otherwise and
TYPES OF BANKS
Commercial banks: e.g. State bank of India
Co-operative banks: e.g. the West Bengal State Co-
operative Bank
Specialized banks: e.g. IDBI, NABARD
Central banks: RBI
 COMMERCIAL BANKS
 An institution which accepts deposits, makes
business loans and offers related services.
Commercial banks are primarily concerned with
receiving deposits & lending to businesses.
They run to make profit.

Merits of commercial
banking
Economic growth of the country depends on its
commercial banking.
Social banking helps farmers, small
businessmen.
Banks encourage people’s savings habit.
Large number of banks lead to a competitive
market.
Banks transmit money from place to place with
economy and safety.

Demerits of commercial
banking
Commercial banks try to maximize profit and thus
take high risks. Many banks in the first world
countries have become bankrupt due to this.
Though the banking sector has expanded in India,
it is yet to reach each and every nook and corner
of the country.
 COMMERCIAL BANKING IN INDIA
 Mixed banking system.
 In July, 1969 the government nationalized the
14 largest commercial banks; the government
nationalized the six next largest in April,
1980.
Shift in the banking
policy
Urban to rural orientation
Profit motive to mass banking
Class banking to mass banking
Big customers to small customers
Traditional banking to innovative banking
Short-term finance to development finance
Security based lending to purpose oriented
lending
Creditworthiness of the borrower to the
purpose of borrowing
Self-interest to social perspectives.

 List of some commercial
banks in India
At end-March 2009, there were 80 Scheduled
Commercial Banks (SCBs) in India.
SBI & associates
Nationalized banks:
Ø Allahabad Bank, UCO bank, Canara Bank, Bank
of India, Punjab National Bank etc.
 Foreign banks:
Ø ABN Amro, Citibank, HSBC etc.
 Others:
Ø HDFC, Axis etc.
New trends
Nationalized banks are concentrating more on
the rural sector.
From Sept 2006- Sept 2007, 114 branches of
Allahabad Bank were opened throughout the
country taking the total number of branches
to 2134 of which 982 (46%) are Rural.
During the financial year 2009, SBI opened 807
new branches, a majority of which ( 481)
were in rural and semi-urban areas.
 Population group wise
distribution of commercial
banks
Number of offices at the end of

Population June 1969 June 1995 June 2007

Rural
group 22.4
(%) 56.1
(%) 42.7
(%)
Semi-urban 40.1 19.8 22.7
Urban 17.5 13.7 18
Metropolitan 20.01 10.4 16.6
 ROLE OF BANKS IN A
DEVELOPING ECONOMY
 Banks play a very useful and dynamic role in the
economic life of every modern state.
 Ininvesting
bank, by modern community lending and
activities, cause changes in the quantity
of money in circulation which in turn influences the
nature and character of production in any country
because bank have control over a considerable
part of the stock of money.
 Banks are the pivot of modern commerce. It provides
us by innovations and business and finance .
 A study of the economic history of western countries
shows that without the evolution of commercial
banks in the 18th and 19th centuries, the industrial
revolution would not have taken place in Europe.
 The economic importance of
commercial banks to the developing
countries


1.Promoting Capital Formation

2Encouraging Innovation

3.Monetisation


4.Influence Economic Activity
5.Facilitator of Monetary policy

 1.Promoting Capital Formation:-

 A developing economy needs a high rate of capital
formation to accelerate the tempo of economic
development but in underdeveloped countries,
saving is very low.
 Contd....
 Bank mobilize the ideal and dormant capital of the
country and make it available for productive
proposes. Thus realization, mobilization,
canalization and utilization of savings for
productive purposes or capital formation is made
possible by the commercial banks in
underdeveloped countries.
 This shows that the banks have a deep economic
significance.
 2.Encouraging Innovation :-
 Innovation is another factor responsible for economic
development.
 The role of the entrepreneurs in innovation is largely
dependent on the manner in which it is allocated
and utilised in the process of economic growth.
 Bank loans enable the entrepreneurs or producers to
increase their productive capacity, to adopt new
methods and ideas, and to improve working
 Contd…..
3.Monetisation:-


 Banks are the manufacturers of money and they

allow money to play its role freely in the economy.
 Banks monetize debts and also assist the backward
subsistence sector of the rural economy .
 Inbanking
under developed countries, expansion of the
system throughout urban and rural areas
is very essential.
 Rural credit in these countries is generally made
available by the unorganized agencies .
4.Influence Economic Activity :-


 Banks are in a position to influence economic activity

in a country by their influence on the rate of
interest. By variations in the demand deposits,
bank can exert a powerful influence upon the
interest rates.
 Contd….
5.Facilitator of Monetary policy:


 A economic
monetary policy of a country should be conducive to
development .But a well-developed banking
system is an essential pre-condition to the effective
implementation of monetary policy.
 Banks in under developed countries usually lean
favourably towards commerce only and pay little
attention to agriculture and small industrial sectors of
the economy.
 Second planning for development of these sectors is
implemented , banks will automatically be interested in
these sectors .
 Another defeat f banking in backward countries is that
banks generally don’t grant long term credit and lend
only for short term periods In capital formation and new
business, long term capital is essential in developing
countries .
FUNCTIONS OF COMMERCIAL BANKS

PRIMARY SECONDARY
FUNCTIONS FUNCTIONS
 SERVICES OF BANKS
DEPOSITS
LOANS
ENHANSING CHEQUE FACILITIES
FACILITATING MONEY TRANSACTIONS SUCH AS WIRE TRANSFERS AND CASHIER
CHEQUES
ISSUING CREDIT CARDS AND ATM CARDS
SAFETY VAULT OR LOCKER FACILITY
PAYING UTILITY BILLS
 PRIMARY FUNCTIONS
ACCEPTING DEPOSITS (SAVINGS, CURRENT, RECURRING AND FIXED DEPOSITS)
ADVANCING LOANS
1.CASH CREDIT
2.OVERDRAFTS
3.CALL LOANS
4.DISCOUNTING BILLS OF EXCHANGE
5.MONEY-AT-CALL OR VERY SHORT-TERM ADVANCES;
6.TERM LOANS;
7.CONSUMER CREDIT OR SHORT TERM LOANS;
8.MISCELLANEOUS ADVANCES
9.

ENHANCING USAGE OF CHEQUES

CREDIT CREATION IS MAJOR FUNCTION OF COMMERCIAL BANKS
FINANCING FOREIGN TRADE BY ACCEPTING FOREIGN BILLS OF PAYMENT
 TYPES OF LOANS
DOMESTIC TRADE
IMPORT AND EXPORT TRADE
AGRICULTURE
HOTEL AND TOURISM
MANUFACTURING
CONSTRUCTION
TRANSPORT
SERVICES(EDUCATION, HEALTH, ETC)
SECONDARY FUNCTIONS -
AGENCY SERVICES -
Collection of Income & Instruments
Payments
Purchase & Sale of Securities
Investment Counselling
Remittance of Funds
Depository Participation
Safe-Custody Facilities
Tax Compliance
Merchant Banking
Factoring Services
 GENERAL UTILITY SERVICES -
Trustee, Attorney & Administrator
Safe Deposit Lockers
Travellers’ Cheques
Acting As Referees
Letters of Credit
Underwriting
Lease financing
Publication
Performance Guarantee
Dealing in Foreign Exchange
 DEVELOPMENTAL FUNCTIONS
CAPITAL FORMATION
RURAL DEVELOPMENT
PRIORITY SECTOR ADVANCES
CREATING EMPLOYMENT
ASSISTANCE OF MONEY AND
CAPITAL MARKET
 MODERN FUNCTIONS
ATM,
TELEBANKING,
INTERNET BANKING,
SMART CARDS,
ROUND THE CLOCK BANKING,
SALE OF MUTUAL FUND UNITS,
ISSUE OF CREDIT CARDS/SMART CARDS,
ISSUE OF ATM/DEBIT CARDS,
ELECTRONIC TRANSFER OF FUNDS - RTGS, NEFT,
MICR CHEQUES.
BALANCE SHEET
§ Contains particulars of bank’s current
assets and current liabilities.

§ It is a summary of financial balances of
a sole proprietorship, a business
partnership or a company.
Assets, liabilities and ownership equity are
listed as of a specific date, such as the end
of its financial year.
§

PARTS OF
BALANCESHEET

§ ASSETS

§ LIABILITIES
§
§ OWNERSHIP
 EQUITY

TYPES OF BALANCE
SHEET
Personal balance sheet.


US small business balance
sheet.
 PORTFOLIO

ANAGEMENT

Used by bank to manage its three

constituencies namely assets,
liability and ownership equity.

Making new strategies-market,
customer satisfaction, progress of
the bank etc.
TYPES OF PORTFOLIO


 LIABILITIES PORTFOLIO-
Ø
Øshare capital invested by the share
holders.
ØReserve fund is the amount
accumulated over years.
ØBank’s borrow from other banks for
temporary purpose
ØDeposits from public forms the
biggest proposition in bank.

2. ASSETS PORTFOLIO
Ø Cash- bank holds for route in day to day
withdrawal and deposit by the customers
Ø Money at call and short notice- refers to small term
loans at short notice
Ø Bill discounted- bank’s investment on commercial
bills and treasury bills.
Ø Investments- bank invests in government
securities, bonds, shares etc.
Ø Advances-the bank’s loan and its advances to its
customers
Ø Other items-liability of the customers to repay the
loan.
CREDIT CREATION BY
BANK
CREDIT: It is created when one party lends
money to another party, the borrower. Thus
credit is generally understood to mean the
finance provided to others at a certain rate of
interest.
Ø FUNCTION OF CREDIT
Credit is to reveal the constraints imposed by
balanced budget on economic agents i.e. to
meet the financial requirements of investors
who had to spend more on trade and
investments than their own savings.

PURPOSES AND USE OF CREDIT
When credit is demanded and used for
productive purposes it may be used to
finance the needs of working capital or for
fixed investors. The broad category of
economic activity for which credit for
productive purposes is demanded is:
1-Agriculture
2-Industry
3-Construction
4-Trade
CREDIT CREATION BY
BANK
Credit creation is one of the most outstanding
functions of a modern bank. Its creation is
an open secret that the banks do not keep
cent percent reserves against deposits in
order to meet the demand of depositors.
A depositor has to be content simply with
the banks promise to pay him whenever
he makes a demand. Thus the banks are
able to do with a very small reserve. The
bank is enabled to erect a vast super
structure a vast credit on the basis of
small cash reserve.

The bank is able to lend money and charge interest
without parting with cash as the bank loan creates
simply a deposit or it creates a credit for the
borrower. This is what is meant by creation of
credit.
Bank as other business form show that financial

business forms on a balanced sheet. Let us see the

actual process.
vLet us assume that there is only one bank in the
country. Suppose a customer deposits Rs. 1000 in
the bank. The bank has to pay him interest. So
the bank must seek a safe and profitable
investment for this amount.

vThe bank in which a deposit of rs.1000 keeps
20% cash reserve to meet the demand of
depositors. And the rest he will invest as
loan to some other firm and the cash will be
withdrawn by the bank to other bank.
vThen the next bank will keep 20% of CRR and
the rest will be passed on as loan to some
other bank. And this process continues till
the amount of 1000 reaches to amount
5000.
vAt each stage the new deposit by the bank
will decline because at each stage the bank
has to keep 20% of the money as the CRR
and lends only the remaining amount of the
money.


 Bank A Bank B Bank C

Bank D


Cash deposits Rs 1,00,000 Rs 80,000 Rs 64,000

Rs 51,2000
 

Required deposits Rs 20,000 Rs 16,000 Rs 12,800

Rs 10,240
Excess amount Rs 80,000 Rs 64,000 Rs 51,2000
Rs40,960  


 Loan Loan Loan

Loan


Deposits created
 Rs 80,000 Rs 64,000 Rs 51,200
Rs 40,960



 DEPOSIT MULTIPLIER AND CREDIT
MULTIPLIER
DEPOSIT MULTIPLIER
The total expansion of deposits depends upon the
CRR. The total deposit of money expands and it
leads to the multiple expansions in the total
deposit. This is known as deposits or credit
multiplier.
Deposit multiplier dm = 1/r
Where r stands for cash reserve ratio
There is difference between deposit multiplier and
credit multiplier. If we denote multiplier by ΔD
and original increase in cash deposit as ΔR then
deposit multiplier can be written as
Dm = ΔD/ΔR
CREDIT MULTIPLIER
 The credit multiplier measures the extent by which the
banking system creates credit as a result of new
increase in primary deposits which they use as reserve.
If we denote credit created by bank as ΔC and the
increase in primary deposits as cash with bank as ΔR
then credit multiplier can be written as
 Cm = ΔC/ΔR
 Since, ΔC= ΔD –ΔR


 =ΔD/ΔR – ΔR/ΔR=ΔD/ΔR – 1
 ΔD/ΔR = Dm
 SO, Cm=Dm-1
 =1/r -1 =



LIMITATION ON THE CREDIT
CREATION POWER OF THE BANK
Benham has mentioned three limitations on
the power of the bank to create credit
The amount of cash in the country
The amount of cash which the public wishes to
hold
The minimum percentage of cash to deposit
called cash reserve ratio which the bank have
to maintain.