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BOM

UNIT I

Indian financial System

A1) India is the world's fifth largest economy in terms of nominal GDP. India's financial system refers to all institutions, structures, and services that provide financial facilities to the public.

It enables the trading and transfer of funds in a secure way. Democratic India has an independent pillar of the financial system, especially in the areas of banking, capital markets, equity markets, insurance, liability, claims, trading and investment.

It is important for the creation of wealth and the economic development of the country.

Q2) What are the Characteristics, importance, and function of the Indian financial system?

A2) Characteristics, importance, and function of the Indian financial system

Issuing and collecting deposits.

Loan supply from a pool of collected money.

Implementation of financial transactions.

Drive the growth of equity and other financial markets.

Set up a legal commercial substructure.

Providing financial and consulting services.

Allows adaptation of portfolios of existing assets.

Opportunity and risk allocation.

It builds a connection between depositors and investors.

By expanding its scope, we will expand the depth and breadth of our finances.

It is responsible for the creation of capital.

Add time value to assets and money.

Set up the payment structure and the entire system.

Allocate and dissipate economic resources.

To maintain economic stability of the country and markets.

Create a market where you can judge your investment performance.

Components of Indian financial system

Q3) Write note on Financial institution.

A3)

Their role is to act as an intermediary between lenders and borrowers.

Lenders' savings are collected through various commercial markets.

These can turn risky financing into a safe investment.

Short-term debt can be turned into longer-term investments.

These allow you to compare comparable large deposits and loans with small deposits and loans because of their uniform face value.

These provide a balance between the recipient of the loan and the depositor of the amount.

There are two main types of financial institutions.

a. Banking or deposit handling institution

Their role is to make money from the masses.

Interest is paid on these deposits made by people.

The loaned money is offered as a loan to those who need it.

Interest will be charged on these loans given to those who need it.

Examples are banks and other co-operatives.

b. Non-banking or non-depositing institution

Their role is to sell commercial and financial goods and products to those who visit them.

These are based on the provision of insurance, investment trusts, brokerage transactions and more.

These examples primarily include businesses.

These have three additional categories:

Regulation: Management and institutions that regulate and overlook commercial and financial markets. Example – RBI, IRDA, SEBI, etc.

Intermediate: An institution that provides financial counselling and supports by providing loans and the like. Example – PNB, SBI, HDFC, BOB, Axis Bank.

Non-Intermediate: These institutions support the finances of corporate visitors. Example – NABARD, SIDBI, etc.

Q4) What is Financial assets?

A4) These objectives are to provide convenient trading of securities in the commercial and financial markets, based on the requirements of credit seekers.

These are goods or products sold in the financial markets. Financial assets include:

Call Money: Without guarantee, this is a one-day loan that will be repaid the next day.

Notice: Without guarantee, this is the rent for a loan of 1 to 14 days.

Term Money: When a certain amount of money deposited exceeds the maturity of 14 days.

Treasury Short Term Securities: These belong to the government in the form of bonds or debt securities as they have a maturity of less than one year. These are purchased in the form of government T-Bills, which are received as government loans.

Certificate of Deposit: This works in the form of electronic funds that remain in a particular bank for a period of time.

Commercial Paper: A product used by a company that is unsecured despite short-term debt.

Q5) Define Financial services.

A5) These are usually picked up by asset and liability management companies

Their primary purpose is to provide counselling to visitors regarding the purchase or sale of real estate, transactions, transactions, loans, and investment permits.

They also ensure the effectiveness of the investment and the placement of funding sources.

Q6) What does Financial services includes?

A6) Financial services are also included in them:

Banking Services: The functions that banks perform, such as providing loans, accepting debits, distributing credit or debit cards, opening accounts, and granting checks, are some of these services.

Insurance Services: These include services such as providing insurance, selling insurance, and brokerage transactions.

Investment Services: These services include oversight and management of investments, assets and deposits,

Forex Services: These include foreign currency exchange, foreign exchange, and foreign money transfers.

Financial market

These are the markets where bonds, stocks, money, investments and assets are traded and exchanged between buyers.

Q7) What are the four types of financial market?

A7) There are four main types of financial markets:

a. Capital market

These deal with transactions and transactions that take place in the market.

These are done for a year.

These are the three main types:

Corporate securities market

Government securities market

Long-term loan market

b. Financial market

These are for short-term investments.

They are built by governments, banks, and other institutions.

This market is based on low-risk wholesale debt with transparent products and formats.

It has two main types:

a) organized money market

b) Unorganized money market

c. Forex market

A highly developed market that handles several currencies.

It is responsible for the foreign remittance of funds.

This is based on the foreign currency rate.

d. Credit Market

This includes both short-term and long-term loans.

It is often given to both individuals and organizations.

These are granted by some banks, financial institutions, non-banks and more.

Q8) Define Money.

A8) This is an important exchange that can be used to purchase goods and services. It also can act as a store useful. It is evenly accepted everywhere.

It facilitates trading, especially instant daily purchases. It serves as a verifiable record in the socio-economic context.

Q9) What is Indigenous Banks?

A9) The exact date of existence of the indigenous banks is unknown. But it's true that the old banking system has worked for centuries. Some people date the existence of indigenous banks to the Vedic period from 2000 to 1400 BC. It has successfully met the needs of the country in the past.

However, with the arrival of England, its decline began. However, despite the rapid growth of modern commercial banks, indigenous banks continue to maintain their outstanding position in India's money markets. This includes Schlov, Seth, Mahajan, Chetis and more. Indigenous bankers lend money. Act as a money changer and fund India's internal trade through Hundi or internal bills of exchange.

Q10) What are the demerits of indigenous banking?

A10) The main drawbacks of indigenous banking are:

(i) It is unorganized and has no contact with other sections of the banking industry.

(ii) The combination of banking, trading and commissioning creates trade risks in banking.

(iii) There is no distinction between short-term and long-term financing and the purpose of financing.

(iv) They follow common methods for maintaining an account. They do not issue receipts in most cases, and the interest they charge is not proportional to the interest rates charged by other banking institutions in the country.

Suggestions for improvement:

(i) You need to upgrade your banking business.

(ii) Encourage them to use certain facilities of the banking system, including RBI.

(iii) These banks should be linked to commercial banks based on a certain understanding of the interest charged by the borrower, its verification by the commercial bank, and the transfer of concessions to the preferred sector.

(iv) These banks should be encouraged to become legal entities rather than survive as family-owned businesses.

Q11) What are Scheduled and unscheduled banks?

A11) The planned banks are those stipulated in the second schedule of the RBI Act of 1934. These banks have paid-in capital and a total reserve of Rs or greater. Rs 50,000, hey, we have to satisfy the RBI that their business is carried out for the benefit of their depositors.

All commercial banks (India and foreign), regional banks, and state co-operative banks are planned banks. Unscheduled banks are those that are not included in the second schedule of the 1934 RBI Act. Currently, there are only three of these banks in the country.

Local regional banks: The latest form of banking, regional banks (RRBs), developed the local economy in the mid-1970s (sponsored by individual state-owned commercial banks) by providing credit and deposit facilities such as agriculture. Was born for the purpose of. All kinds of production activities in rural areas.

The emphasis is on providing such facilities to small and marginal farmers, agricultural workers, rural artisans, and other small entrepreneurs in rural areas.

Q12) Define Cooperative Banking.

A12) Co-operative banks are so-called because they're organized under the provisions of the State Co-operative Credit Association Act. the most beneficiaries of co-operatives are the agricultural sector and therefore the general rural sector especially.

There are two main sorts of cooperative credit institutions operating in Japan: agricultural (dominant) and non-agricultural. There are two separate co-operative agencies for providing agricultural credit. One is for short-term and medium-term credit, and therefore the other is for long-term credit. the previous features a three-tiered federal structure.

At the highest is that the State Cooperative Bank (SCB) (cooperation is that the subject of the Indian state), at the intermediate (district) level is that the Central Cooperative Bank (CCB), and at the village level is that the Primary Agricultural Credit Association (PAC)

Long-term agricultural credit is provided by the exploitation Bank. RBI funding for the agricultural sector actually goes through SCB and CCB. Originally based in rural areas, the co-operative credit movement has now spread to urban areas, with many urban co-operative banks under the SCB.

Q13) Mention the Reasons for India's financial sector reform.

A13) Reasons for India's financial sector reform-

After independence, India inherited various deprivations and problems due to its colonial heritage. The country was lagging behind in social and economic problems. To achieve the goal of rapid economic development, India has adopted a system of planned economy based on the Mahala Nobis model. This model began to show its limits in the mid-1980s and early 90s.

The government adopted a strategy of fiscal activity for economic growth, and large public spending was covered by large borrowings at concessional rates. This was the cause of India's relatively weak and developing financial markets.

Due to fiscal activity policies, the budget deficit has increased year by year. The automatic monetization policy of the budget deficit has had a negative impact on inflationary trends and other economies.

The nationalization of banks gave the government full control over these banks, resulting in a limited role for market power in the financial sector.

The annual growth rate was about 3.5% before 1980, but reached about 5% in the mid-1980s. This growth rate has proven to be inadequate to solve the country's economic and financial problems.

Lack of transparency and expertise in the banking sector, and bureaucratic issues, were responsible for the increase in bad assets.

The financial sector had the problem of inadequate levels of regulation. The technology used in the financial system and its institutional structure were outdated.

By 1991, India was facing some economic problems. The war in the Middle East and the collapse of the Soviet Union put pressure on India's foreign exchange reserves. India is facing a balance of payments crisis and reforms are now inevitable.

Q14) What are the strategies adopted by India for financial sector reform?

A14) Strategies adopted by India for financial sector reform

To initiate financial reform, India has adopted a gradual reform path instead of shock therapy. This was necessary to ensure the continuity and stability of India's financial sector.

India has adopted international best practices and at the same time adjusted according to local requirements.

First-generation reforms aimed to create an efficient and profitable financial sector by ensuring the flexibility to operate with functional autonomy.

India adopted a consensus-building approach to liberalization because it was necessary for democracy.

Q15) What are Banking sector reform?

A15) Banking sector reform-

CRR and SLR changes: One of the most important reforms is the reduction of the reserve requirement ratio (CRR) and the statutory liquidity ratio (SLR). SLR is reduced. It was raised from 39% to the current 19.5%. The reserve requirement ratio has been reduced from 15% to 4%. This reduction in SLRs and CRRs has given banks more resources to finance agriculture, industry and other economic sectors.

Change of managed interest rate: Previously, a system of managed interest rate structure was widespread, and RBI determined the interest rate charged by the bank. The main purpose was to provide credit to the government and certain priority sectors at concessional interest rates. The system has been deprecated and RBI no longer determines the interest rate on deposits paid by banks. However, the RBI regulates interest rates on small loans up to Rs 2 where interest rates must not exceed the prime rate.

Capital Adequacy Ratio: The capital adequacy ratio is the ratio of paid-in capital to reserves to bank deposits. The capital adequacy ratio of Indian banks did not comply with international standards. An 8% capital adequacy ratio of the risk-weighted asset ratio system was introduced in India. Banks of India had to meet this goal by March 31, 1994, while foreign banks had to meet this goal by March 31, 1993. Currently, the Basel 3 standard has been introduced in India.

Q16) What are the various monetary policy tools that RBI has at its disposal?

A16) The various monetary policy tools that RBI has at its disposal.

1] Open market operations:

Open market operations are the direct involvement of the RBI in buying and selling short-term securities in the open market. This is a direct and effective way to increase or decrease the money supply in the market. It also has a direct impact on the market's ongoing interest rates.

Let's say the market is in equilibrium. The RBI then decides to sell the short-term securities in the market. The money supply in the market will decrease. And after that, the demand for credit lines will increase. Therefore, interest rates will rise accordingly.

On the other hand, if RBI buys securities from the open market, it has the opposite effect. The money supply to the market will increase. As a result, the demand for credits declines and interest rates fall.

2] Bank interest rates:

One of the most effective means of monetary policy is bank interest rates. Bank interest rates are basically the interest rates at which RBI lends funds to commercial banks with or without collateral. This is also the standard rate at which RBI purchases or discounts bills of exchange and other such products.

Therefore, if RBI raises bank interest rates, commercial banks also need to raise lending rates. And this helps manage the money supply in the market. And vice versa will obviously increase the money supply in the market.

3] Variable reserve requirements:

This monetary policy instrument has two components: the cash reserve ratio (CLR) and the statutory liquidity ratio (SLR). Let's understand both.

The Cash Reserve Rate (CRR) is part of a commercial bank deposit that must be deposited with the RBI. Therefore, CRR is the percentage of deposits that a commercial bank must hold in RBI. The RBI adjusts the above percentages to control the money supply available at the bank. Therefore, the loans offered by banks will be cheaper or more expensive. CRR is a great tool for controlling inflation.

The statutory liquidity ratio (SLR) is the percentage of total deposits that a commercial bank must hold in the form of cash reserves or gold. Therefore, increasing SLR means that banks provide less money as loans and control the money supply in the economy and vice versa.

4] Liquidity adjustment facility:

The Liquidity Adjustment Facility (LAF) is an indirect means of managing currencies. Control the flow of funds through repo rates and reverse repo rates. Repo rates are actually the rates at which commercial banks and other institutions obtain short-term loans from central banks.

Reverse repo rate is the rate at which RBI deposits funds in a commercial bank in a short period of time. Therefore, RBI constantly changes these rates to control the flow of funds in the market according to economic conditions.

5] Moral appeal:

This is an informal method of money management. The RBI is the central bank of the country and therefore enjoys a supervisory position in the banking system. If necessary, banks can be encouraged to exercise credit control from time to time in order to maintain a balance of funds in the market. This method is actually very effective, as banks tend to follow the policies set by the RBI.

Q17) What are the normal functions of the financial organisation?

A17) The normal functions of the financial organisation embrace the following:

(a) Issuing bank: Has the exclusive right to issue banknotes (currency) in all countries of the world. In the early years of banking, all banks enjoyed the right to issue promissory notes. However, this led to a number of problems, such as excessive banknote issuance and disorganization of the monetary system. Therefore, the governments of different countries authorized the central banks to issue banknotes. The issuance of notes by a bank has resulted in uniformity in the circulation of notes and the equilibrium of the money supply.

(b)Banker, agent and consultant to the govt: It implies that a financial organization performs totally different functions for the government. As a banker, the financial organization performs banking functions for the govt even as industrial banks do for the general public by acceptive government deposits and creating loans to the govt. As agent, the financial organization manages the general public debt, assumes the payment of the interest on this debt and provides all different debt-related services. As associate consultant, the financial organization advises the govt on matters of policy, securities industry, capital markets, and government loans. except for this, the financial organization formulates and implements business enterprise and financial policies to {control} the money provides within the market and control inflation.

(c) Steward of the money reserves of economic banks: Government banker, agent and consultant: It implies that a financial organization performs totally different functions for the government. As a banker, the finance organization performs banking functions for the government, just as industrial banks do for the general public, by accepting deposits from the government and creating loans for the government. As an agent, the financial institution manages the general public debt, assumes the payment of interest on this debt and provides all the different services related to the debt. As an associate consultant, the finance organization advises the government on policy, securities industry, capital markets, and government loans. Except for this, the finance organization formulates and implements business and financial policies to {control} the money provided within the market and to control inflation.

(d) Manager of the money reserves of economic banks: It implicit that the central bank keeps a minimum deposits of international currency. The main objective of this reserve is to meet emergency foreign exchange requirements and overcome adverse deficit requirements in the balance of payments

(e)Rediscount bank: Meet the money wants of people and firms by rediscounting bills of exchange through business banks. this can be associate indirect manner of loaning cash to business banks by the financial organization. Discounting a bill of exchange implies deed the bill by shopping for it for a add but its face price. Rediscount involves discounting a antecedental discounted bill of exchange. once house owners of bills of exchange want money, they approach the banking concern to discount these bills. If the business banks themselves want money, they approach the financial organization to rediscount the bills.

(f) investor of last resort: see the foremost crucial role of the financial organization. The financial organization conjointly lends cash to business banks. rather than rediscounting bills, the financial organization makes loans against treasury bills, government securities, and bills of exchange.

(g)Central clearing, settlement and transfer bank: It implies that the central bank helps to settle the mutual indebtedness between commercial banks. Bank depositors deliver checks and money orders from other banks. In such a case, it is not possible for banks to approach each other for clearing, settlement or transfer of deposits. The central bank facilitates this process by establishing a clearinghouse under its responsibility. The clearinghouse acts as an institution where mutual indebtedness between banks is settled. Representatives of different banks meet at the clearinghouse to settle interbank payments. This helps the central bank to know the liquidity status of commercial banks.

(h) Credit controller: It implies that the central bank has the power to regulate the creation of credit by commercial banks. Credit creation depends on the amount of deposits, cash reserves, and interest rate given by commercial banks. All of these are controlled directly or indirectly by the central bank. For example, the central bank can influence commercial bank deposits by conducting open market operations and making changes to the CRR to control various economic conditions.

(b) Developmental Functions:

Refer to the functions related to the promotion of the banking system and the economic development of the country. These are not mandatory functions of the central bank. These are treated as follows:

(i) Development of specialized financial institutions: See the main functions of the central bank for the economic development of a country. The central bank establishes institutions that serve the credit needs of the agricultural sector and other rural businesses. Some of these financial institutions include the Industrial Development Bank of India (IDBI) and the National Bank for Agriculture and Rural Development (NABARD). They are called specialized institutions because they serve specific sectors of the economy.

(ii) Influence the money market and the capital market: It implies that the central bank helps to control the financial markets. Money market operations in short-term credit and capital market operations in long-term credit. The central bank maintains the economic growth of the country by controlling the activities of these markets.

(iii) Compilation of statistical data: It compiles and analyzes data related to the banking, monetary and exchange position of a country. The data is very useful for researchers, politicians and economists. For example, the Reserve Bank of India publishes a magazine called the Reserve Bank of India Bulletin, whose data is useful for formulating different policies and making decisions at the macro level.

Q18) Mention the various promotional features implemented by the Federal Reserve Bank of India.

A18) The various promotional features implemented by the Federal Reserve Bank of India are listed below.

1. Promote banking habits

The Federal Reserve Bank of India helps mobilize people's savings for investment. we've expanded our banking industry nationwide by establishing various institutions like UTI, IDBI, IRCI and NABARD. This promoted people's banking habits.

2. Offering refinancing for export

The Federal Reserve Bank of India offers refinancing to market exports. credit and Guarantee Corporation (ECGC) and Export Import Bank were originally established by the Federal Reserve Bank of India to fund India's foreign trade. They lend to foreign trade the shape of insurance covers, long-term loans and foreign currency-denominated credit. However, it's currently working individually.

3. Granting credit to agriculture

The Federal Reserve Bank of India has institutional arrangements for rural or agricultural finance. For instance, banks have found out special agricultural credit cells. It promoted local regional banks with the assistance of economic banks. NABARD is additionally promoted.

4. Providing credit to small industrial units

Commercial banks lend to the tiny industrial sector in accordance with the occasional directive issued by the Federal Reserve Bank of India. The Federal Reserve Bank of India encourages commercial banks to supply guarantee services to the tiny industry sector also. The Federal Reserve Bank of India considers the progress given to the tiny sector as progress within the priority sector. He also instructed commercial banks to open specialized branches to supply adequate financial and technical assistance to the tiny industrial sector.

5. Providing indirect finance to the co-operative sector

The RBI has instructed NABARD to lend to the state co-operative banks, which are lending to the co-operative sector. Therefore, the Federal Reserve Bank of India provides indirect financing to the Indian co-operative sector.

6. Exercise control over the national financial and banking industry

The Federal Reserve Bank of India has enormous and broad authority over the supervision and control of economic banks, co-operative banks, and non-bank institutions that receive deposits. Banking Regulations provide a minimum of a good range of requirements for paid-in capital, reserves, cash reserves and current assets.

Bank operations, management, mergers, reconstructions, liquidations, etc. are thoroughly overseen by Federal Reserve Bank of India staff. All planned banks are required to submit a weekly report back to the Federal Reserve Bank showing key items of India's liabilities and assets.

7. Creating an industrial agreement for industrial finance

The Federal Reserve Bank of India has institutional arrangements for industrial finance. for instance, several development banks are created to supply long-term finance to industry, like the economic Finance Corporation of India and therefore the Industrial Development Bank of India.

Q19) Define Monetary Policy with its purpose.

A19) Monetary policy is a policy developed by the Central Bank, the RBI (Reserve Bank of India), and is related to national financial issues. This policy includes measures taken to regulate the money supply, availability, and credit costs in the economy.

This policy also monitors the distribution of credits between users, as well as interest rate borrowing and lending. In developing countries like India, monetary policy is important in promoting economic growth. Various means of monetary policy include bank interest rates, other interest rates, selective credit management, currency supply, reserve requirement fluctuations, and open market fluctuations.

Purpose of monetary policy

While the main objectives of monetary policy are economic growth and price and exchange rate stability, there are other aspects in which it can be useful.

Facilitating Savings and Investment: Monetary policy controls domestic interest rates and inflation, which can affect people's savings and investment. Higher interest rates lead to greater opportunities for investment and savings, thereby maintaining healthy cash flow within the economy.

Export-Import Control: Monetary policy helps export-oriented units replace imports and increase exports by helping industries secure loans at low interest rates. This, in turn, helps improve the balance of payments.

Business Cycle Management: The two main stages of the business cycle are boom and bust. Monetary policy is the greatest tool for controlling business cycle booms and busts by managing credit and controlling the money supply. Market inflation can be controlled by reducing the money supply. On the other hand, as the money supply increases, so does the demand of the economy.

Aggregate Demand Regulation: Monetary policy can control the demands of the economy, which financial authorities can use to balance the supply and demand of goods and services. As credit grows and interest rates fall, more people will be able to secure loans to buy goods and services. This leads to increased demand. On the other hand, if authorities want to reduce demand, they can reduce credit and raise interest rates.

Job Creation: Monetary policy can lower interest rates, making it easy for small and medium-sized enterprises (SMEs) to secure loans to expand their business. This can lead to greater employment opportunities.

Supporting Infrastructure Development: Monetary policy allows concessional funding for the development of domestic infrastructure.

Allocation of more credits to priority segments: Under monetary policy, additional funds will be allocated at lower interest rates for the development of priority sectors such as small industries, agriculture and underdeveloped sections of society.

Banking Sector Management and Development: The entire banking industry is managed by the Reserve Bank of India (RBI). The RBI aims to make banking facilities widely available nationwide, but uses monetary policy to instruct other banks to establish local branches whenever necessary for agricultural development. In addition, the government has also set up local regional banks and co-operative banks to give farmers immediate access to the financial assistance they need.

Q20) What are the tools applied by policies affecting the money supply of the entire economy?

A20) Tools applied by policies affecting the money supply of the entire economy, including sectors such as manufacturing, agriculture, automobiles and housing

Reserve Ratio

Banks need to secure a certain percentage of cash reserves or RBI-approved assets. There are two types of reserve rates.

Reserve requirement ratio (CRR) – Banks must secure this portion in cash with the RBI. Banks cannot lend it to anyone or earn interest or profits on CRR.

Legal Liquidity Ratio (SLR) – Banks must reserve this portion in current assets such as gold or RBI-approved securities such as government securities. Banks can earn interest on these securities, but that is very low.

Open Market Operations (OMO):

To manage the money supply, RBI buys and sells government bonds on the open market. These operations performed by the central bank in the open market are called open market operations.

Liquidity is sucked from the market when RBI sells government bonds, and the opposite happens when RBI buys securities. The latter is done to control inflation. The purpose of OMO is to check for temporary market liquidity mismatches due to the flow of foreign capital.

Q21) How can money transfer be improved?

A21) Steps to improve money transfers:

Both the government and the RBI have taken and will do some steps to accelerate the transmission of monetary policy.

The government intends to reduce interest rates on small savings accounts. If a small savings rate is linked to bank interest rates, this can serve as a permanent solution.

The RBI wants banks to change the method of calculating base interest rates from average cost of capital to marginal cost to improve remittances.

Despite banks raising lending rates shortly after the RBI rate cut, central banks are unable to curb inflation for the following reasons:

Higher government budget deficit.

Supply-side issues such as crude oil prices and agricultural marketing issues.

Lack of financial inclusion as borrowers still rely on lenders that are not under the control of RBI.

Q22) What is a commercial bank? Write down its functions.

A22) A commercial bank is a type of financial institution that does everything from depositing and withdrawing money to the general public and providing loans for investment. These banks are commercial institutions and operate solely for commercial purposes.

The two main characteristics of commercial banks are lending and borrowing. Banks receive deposits and give money to various projects to earn interest (profit). The interest rate that a bank provides to depositors is called the borrowing interest rate, and the interest rate that a bank lends money to is called the lending interest rate.

The functions of commercial banks fall into two major divisions.

(A) Main functions

Accept Deposits: Banks receive deposits in the form of savings, current and fixed deposits. Surplus balances collected from companies and individuals are lent out as a temporary requirement for commercial transactions.

Providing Loans and Prepaid: Another important function of this bank is to provide entrepreneurs and businessmen with loans and prepayments and collect interest. For all banks, it is a major source of profit. In this process, the bank holds a small number of deposits as reserves and provides (lends) the remaining amount to the borrower at banks such as demand loans, overdrafts, cash credits and short-term loans.

Credit Cash: When a customer is offered a credit or loan, no liquid cash is offered. First, a bank account is opened for the customer and then the money is transferred to that account. This process allows banks to make money

(B) Secondary function

Bill of exchange discount: This is a written agreement approving the amount to be paid for goods purchased at a particular point in the future. You can also settle the amount before the estimated time by using the discount method of the commercial bank.

Overdraft Facility: A prepayment given to a customer by overdrawing the overdraft to a certain limit.

Buying and Selling Securities: Banks provide the ability to sell and buy securities.

Locker Equipment: Banks provide locker equipment to their customers to keep valuables and documents safe. The bank charges a minimum annual fee for this service.

Use various means such as promissory notes, checks, and bills of exchange.

Types of commercial banks:

There are three different types of commercial banks.

Private Bank –: A type of commercial bank in which an individual or company owns a majority of the equity capital. All private banks are recorded as limited liability companies. Banks such as Housing Development Finance Corporation (HDFC) Bank, India Industrial Credit Investment Corporation (ICICI) Bank, Yes Bank, etc.

Public Banks –: A type of nationalized bank in which the government holds important shares. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, Punjab National Bank.

Foreign Banks –: These banks are established abroad and have branches in other countries. For example, banks such as American Express Bank, Hongkong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, and Citibank.

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