Commercial Banking

COMMERCIAL BANKING Chapter 3

Evolution & Origin of Banking  The

word bank is used in the sense of a commercial bank.  The word bank has a German origin though some people believe that it has come from a French word ‘Banqui’ and yet others believe that it has come from the Italian word ‘Banca’. Whatever it is, it referred to a bench for keeping , lending and exchanging of money or coins in the market place by money lenders and money changers.  There was no such word as banking before 1640, although the practice of safe keeping and savings flourished in the temples of Babylon as early as 2000 BC.  In India also reference of banking system could be found in the ancient Jain Temples and literary works like that of Chanakya etc.

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The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157 to finance the monarch in this wars. The bankers of Lombardy were famous in England, but modern banking began with the English Goldsmiths only after 1640. The First Bank in India was Bank of Hindustan started in 1770 by Alexender and Co. But the first bank in modern sense was established in the Bengal Presidency as the Bank of Bengal in 1806. It was merchant bankers who first evolved the system of banking by trading in commodities than in money. Their trading activities required the remittance of money from one place to another. For this they issued ‘hundis’ to remit funds. In India such merchants were known as ‘SETHS’ The next stage in the growth of banking was the ‘goldsmith’ His business was such that he had to take special precaution against theft of gold and jewelry and if he seemed to be an honest person merchants and neighbours started leaving their bullion, money and ornaments in his care. As this practice spread the goldsmiths started charging something. As an evidence for receiving valuables he issued a receipt – these acted like cheques and were used as a medium of exchange. The GSm also lending money (Coins of G& Silver) as not all of them were demanded back at the same time.

Meaning of Bank A

Bank is an institution which accepts deposits from the public and in turn advances loans by creating credit. It is different from other financial institutions in that they cannot create credit though they may be accepting deposits and making advances.

 Commercial

Banks: Are those banks which perform all kinds of banking functions such as accepting deposits, advancing loans, credit creation and agency functions. They are also called joint stock banks because they are organised in the same manner as JSCs.

Role of Commercial Banks in a Developing Country Mobilizing Financing Financing Financing Financing Financing

Saving for Capital Formation Industry Trade Agriculture Consumer Activities Employment Generating

Activities. Help in monetary Policy

Functions of Commercial Banks Accepting

Two Essential Functions Borrowing & Lending

Deposits (Savings, Current and Fixed Dep.) Advancing Loans (1.Cash Credit – bank advances loans

to businessmen against certain specified securities. The amount of loan is credited to the current account of the borrower, and the borrower can withdraw money through cheques., 2.Call loans – These are very short term loans advanced to the bill brokers for not more than 15 days. They are advanced against first class bill or securities. Such loans can be recalled in very short notice. 3.Overdraft – A bank often permits a business man to draw cheques for a sum greater than the balance lying in his current account. 4. Discounting BOE – If a creditor holding a BOE wants money immediately, the bank provides him the money by discounting the BOE…)

Credit

Creation

( Credit creation is one of the most important functions of commercial banks. Like other business organisations they also aim at earning profit, for this they accepts deposits and advance loans by keeping a small cash in reserve for day to day transactions. When a bank advances a loan, it opens an account in the name of the customer and does not pay him in cash but allows him to draw the money by cheque according to his needs. Thus by granting a loan the bank creates credit of deposit.)

Financing

Foreign Trade : by accepting foreign bills of payment Agency Services Miscellaneous Services