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Management of Finances

Notes Central Bank

A bank which is entrusted with the functions of guiding and regulating the banking system of a
country is known as its Central bank. Such a bank does not deal with the general public. It acts
essentially as Government’s banker, maintain deposit accounts of all other banks and advances
money to other banks, when needed. The Central Bank provides guidance to other banks
whenever they face any problem. It is therefore known as the banker’s bank. The Reserve Bank
of India is the central bank of our country.
The Central Bank maintains record of Government revenue and expenditure under various
heads.
It also advises the Government on monetary and credit policies and decides on the interest rates
for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the
central bank. Another important function of the Central Bank is the issuance of currency notes,
regulating their circulation in the country by different methods. No other bank than the Central
Bank can issue currency.

Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-term loans and
advances to their customers. In addition to giving short-term loans, commercial banks also give
medium-term and long-term loan to business enterprises. Nowadays some of the commercial
banks are also providing housing loan on a long-term basis to individuals. There are also many
other functions of commercial banks.

Types of Commercial Banks

Commercial banks are of three types i.e., Public sector banks, Private sector banks and foreign
banks.
(i) Public Sector Banks: These are banks where majority stake is held by the Government of
India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,
Corporation Bank, Bank of Baroda and Dena Bank, etc.
(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank
is held by private individuals. These banks are registered as companies with limited
liability. For example, The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd.,
Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global
Trust Bank, Vysya Bank, etc.
(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Some of the foreign banks operating in our
country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American
Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign
banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks

Business often requires medium and long-term capital for purchase of machinery and equipment,
for using latest technology, or for expansion and modernization. Such financial assistance is
provided by Development Banks. They also undertake other development measures like
subscribing to the shares and debentures issued by companies, in case of under subscription of
the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial
Corporations (SFCs) are examples of development banks in India.

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