Structure and investment policies of commercial banks
CO1: To understand the structure of Indian Financial System- will be covered in this
lecture.
Structure of commercial banks
www.slideshare.net
Scheduled Banks
Scheduled Banks refer to those banks which have been included in the Second Schedule of
Reserve Bank of India Act, 1934.
Private Sector Banks:
These are the banks where greater parts of stake or equity are held by the private shareholders
and not by government.
Public Sector Banks
In these banks, the majority stake is held by the Government of India or the Reserve Bank of
India. The public sector in Indian banking emerged to its present position in three stages. First,
the conversion of the existing Imperial Bank of India into the State Bank of India in 1955,
followed by the taking over of the seven state-associated banks as its subsidiary banks. Later
on, the State Bank of Indore and State Bank of Saurashtra was merged with the State Bank of
India.
In the second stage, the nationalization of 14 major commercial banks took place on 19 July
1969. In the third stage, 6 more commercial banks were nationalized on 15 April 1980. In 1993,
the New Bank of India was merged with the Punjab National Bank. The public sector accounts
for 90 percent of the total banking business in India and the State Bank of India is the largest
commercial bank in terms of the volume of all commercial banks. There are currently 27 public
sector banks in India. They include the SBI and its 5 associate banks, 19 nationalized banks (e.g.
Allahabad Bank and Canara Bank), IDBI Bank Ltd., and Bhartiya Mahila Bank.
Foreign Banks:
A foreign bank with the obligation of following the regulations of both its home and its host
countries. CITI bank, HSBC, Standard Chartered etc. are the examples of foreign banks in India.
Unscheduled Banks
These also functions in the Indian banking space, in the form of Local Area Banks (LABs). At the
end of March 2009, four of them were operating in India. Local area banks are banks that are
set up under the scheme announced by the Government of India in August 1996.
One bank was amalgamated with the Bank of Baroda in 2004 due to its weak financial position.
RBI approved established of only 10 Local Area Banks but out of them only 4 are in existence as
of 2015.The intention of the government was to set up new private local banks with jurisdiction
over two or three contiguous districts. The objective of establishing the local area banks was to
enable to mobilization of the rural savings by local institutions and make them available for
investments in local areas.
Investment policy of Banks
1 Liquidity-
Commercial banks have to maintain liquidity of funds deposited by the depositors of the banks.
The banks should see that the money deposited is allowed by the banks to withdraw whenever
the customers require during working hours of the bank. This will ensure more confidence
among the customers of the bank
▫ Honor claims of depositors
▫ Conversion of non-cash assets into cash assets
2 Profitability-
The soundness of any bank is measured by its profitability. The customers will come forward to
deposit their funds with banks on the basis of the profitability of the banks. Hence the banks
have to earn profits.
▫ Interest, commission and discounting charges
3 Safety or security-
Safety and security of the funds which are deposited by the customers of the bank is very
important in banks.
▫ Consider the three ‘C’ s of credit character, capacity and the collateral of the borrower
4 Diversity
▫ Not keep all its eggs in the same basket
5 Sale-ability of securities
▫ Invest in securities that can be easily marketed at a time of emergency
6 Stability of value of investment
▫ Securities the prices of which are more or less stable
7 Principles of tax-exemption on investments
▫ Those government securities which are exempted from income and other taxes
REFERENCES
• Economicdiscussion.net
• Onlinecourses.swayam.ac.in
• Khan M Y, “INDIAN FINANCIAL SYSTEM, Tata Mc Graw-Hill, New Delhi, 2001.
• Santhanam, B., BANKING AND FINANCIAL SYSTEM, Margham Publiations, Chennai.
• Swami, H. R, GUPTA, INDIAN BANKING AND FINANCIAL SYSTEM, Indus Valley Publication,
2009.
Bhole L.M., (1998), Financial Institutions and Markets Structure, Growth and Innovations, 2nd
Ed.
• Thorn, Richard S., (1976), Introduction to Money and Banking, New York, Harper & Row. 2.
3)Luckett, D.G., (1976), Money and Banking, McGraw Hill, New York.
• Ritter, L.S., and Sibler, W.L., (1977), Principles of Money, Banking and Markets, Basic Books,
New York, 3rd Ed.
•https://www.pdfdrive.com/indian-financial-system-and-management-of-financial-institutions-
d42675152.html
•https://www.pdfdrive.com/money-banking-and-financial-system-d39561701.html
