Page 189 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes Objectives

After studying this unit, you should be able to:
 Learn the concept of commercial banking;

 Explain the factors effecting the growth of the banking sector;
 Discuss the functions of commercial banking;
 Understanding risk management by commercial banks;
 Understand management of loans in commercial banks.

Introduction

Banks are financial firms and depend on economies of size and gains arising from internalizing
certain activities rather than relying on market transactions. Banks provide packages of financial
services which individuals find too costly to search out, produce and monitor by them.
Commercial banking offers a wide variety of services to small, medium and large scale business
units. The role of banking is more prominent in the open economy.

9.1 Evolution of Commercial Banking

The evolution of banking which lasted for centuries until two types of modern banking developed
in the industrially advanced economies in the late nineteenth century was an integral part of the
expansion of capitalism. The techniques of banking developed in the 17th century facilitated the
industrial and territorial expansion that began about the same time. Banking systems evolved
to meet the demands of the constituents, vested interests are regulations governing their
establishment. The British system evolved around the central banking system with a central
bank and clearing banks with a large network of offices regulated by the central bank while the
German one evolved out of an identification of interests of finance, industry and government to
provide multiple services to the constituents. The US system however was set apart by the
dominance of the unit banks, the role played by an active interbank market in deposits and
reserves and the cooperative lending practices. It also features wholesale banking, which was
the source of several innovative practices such as rollover credit or flexi rate lending.

9.1.1 Factors affecting Banking Systems Growth

While provision of payment services involving the transfer of ownership of bank deposits from
one account to another, provision of deposit facilities and advance credit by means of overdrafts
and loans, by the discounting of bills and by trade finance constitutes the ordinary business of
banking, there has been a sea change in the business of banking in the lasts forty years as
exemplified by the rise of wholesale banking, liability management, international banking,
multiple currency loans, rollover credits, securities lending collaterised mortgages note issuance
facilities, interest rate and currency options and financial futures.

Example:
Credit cards
Debit cards

Automated teller machines
E-cash and on-line banking

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