Category: Banking Content

Banking content refers to information and material related to the banking industry, financial services, and various aspects of banking operations. This content is designed to inform, educate, and guide individuals and businesses about banking products, services, regulations, and best practices.

Key topics covered in banking content include:

  1. Bank Accounts: Information about different types of bank accounts, such as savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts. This may include details about account features, fees, interest rates, and how to open and manage accounts.
  2. Online and Mobile Banking: Content about digital banking services, including online banking platforms and mobile banking apps. This content may cover features like balance inquiries, fund transfers, bill payments, and mobile check deposits.
  3. Loans and Credit: Information about various types of loans offered by banks. Such as personal loans, home loans (mortgages), auto loans, and credit cards. Content may include loan eligibility, interest rates, repayment terms, and loan application processes.
  4. Investment and Wealth Management: Content related to investment products and wealth management services offered by banks. Such as mutual funds, retirement accounts, portfolio management, and financial planning.
  5. Banking Regulations and Compliance: Information about banking regulations, laws, and compliance requirements that banks must adhere to. This may include topics related to consumer protection, anti-money laundering (AML), and know-your-customer (KYC) regulations.
  6. Financial Literacy: Content aimed at promoting financial literacy and educating individuals about money management, budgeting, saving, and avoiding financial pitfalls.
  7. Business Banking: Content focused on banking services tailored to businesses, including business accounts, commercial loans, merchant services, and cash management solutions.
  8. Security and Fraud Prevention: Information about online security measures, fraud prevention tips, and how banks protect customers from identity theft and other financial scams.

Banking content is essential for customers and businesses to make informed decisions about their financial needs and to understand how to navigate the banking system effectively. It is provided by banks on their websites, in brochures, in newsletters, and through educational resources offered to customers. Additionally, financial experts and bloggers may also create banking content to share valuable insights and advice with a broader audience.

  • Learn Investment Banks with their Principle and Functions

    Learn Investment Banks with their Principle and Functions

    Investment Banks: This is because of the profit motive as a result of which all companies have to do something to increase their portfolios and get better funds as well. Learn Investment Banks with their Principle and Functions; A lot of this comes in the form of bonds, stock transfer etc. but the biggest contribution is made through investments. Investment banking is a post that helps companies get these investments.

    Here are explained; What is Investment Banks? with their Principle and Functions.

    Investment banking is a field that involves many levels of division of work. The investment banking advice given would differ in different stages, from the smaller levels of the organizations to the higher levels. The magnitude of the advice given would vary with the level, of course. The clients are to be advised on matters of business, especially financial.

    Issues relating to mergers, acquisitions, bonds, strategies regarding investments, the sale of company stocks to public etc. are also to be discussed. These are the most important financial aspects of running a company and these are the strategies that would determine a company’s success or failure in the future. Global investment banks typically have several business units, each looking after one of the functions of investment banks.

    For example, Corporate Finance, concerned with advising on the finances of corporations, including mergers, acquisitions and divestitures; Research, concerned with investigating, valuing, and making recommendations to clients – both individual investors and larger entities such as hedge funds and mutual funds regarding shares and corporate and government bonds; and Sales and Trading, concerned with buying and selling shares both on behalf of the bank’s clients and also for the bank itself.

    Investment banks management of the bank’s own capital, or Proprietary Trading, is often one of the biggest sources of profit. For example, the banks may arbitrage stock on a large scale if they see a suitable profit opportunity or they may structure their books so that they profit from a fall in bond price or yields.

    #Principal Functions of Investment Banks:

    The principal functions of investment banks include:

    • Raising Capital.
    • Brokerage Services.
    • Proprietary Trading.
    • Research Activities, and.
    • Sales and Trading.

    Now, explain;

    Raising Capital:

    Corporate finance is a traditional aspect of Investment banks, which involves helping customers raise funds in the capital market and advising on mergers and acquisitions. Generally, the highest profit margins come from advising on mergers and acquisitions.

    Investment bankers have had a palpable effect on the history of American business, as they often proactively meet with executives to encourage deals or expansion.

    Brokerage Services:

    Brokerage services typically involve trading and order executions on behalf of the investors. This in turn also provides liquidity to the market. These brokerages assist in the purchase and sale of stocks, bonds, and mutual funds.

    Proprietary Trading:

    Underinvestment banking, proprietary trading is what is generally used to describe a situation when a bank trades in stocks, bonds, options, commodities, or other items with its own money as opposed to its customer’s money, with a view to making a profit for itself.

    Though investment banks are usually defined as businesses, which assist other business in raising money in the capital markets (by selling stocks or bonds), they are not shy of making the profit for itself by engaging in trading activities.

    Research Activities:

    Research is usually referred to as a division which reviews companies and writes reports about their prospects, often with “buy” or “sell” ratings.

    Although in theory, this activity would make the most sense at a stock brokerage where the advice could be given to the brokerage’s customers, research has historically been performed by Investment Banks (JM Morgan Stanley, Goldman Sachs etc).

    The primary reason for this is because the Investment Bank must take responsibility for the quality of the company that they are underwriting vis a vis the prices involved to the investor.

    Sales and Trading:

    Often referred to as the most profitable area of an investment bank, it is usually responsible for a much larger amount of revenue than the other divisions. In the process of market making, investment banks will buy and sell stocks and bonds with the goal of making an incremental amount of money on each trade.

    Sales are the term for the investment banks sales force, whose primary job is to call on institutional investors to buy the stocks and bonds, underwritten by the firm. Another activity of the sales force is to call institutional investors to sell stocks, bonds, commodities, or other things the firm might have on its books.

    #Functions of Investment Banks:

    The following functions below are; Basic functions:

    Consultative:

    Investment banking is all about financial planning and consultation. After all, this is the primary function of investment banking. The functions of an investment banker who is working as a consultant would involve guiding the companies and providing them with advice on their activities pertaining to investments. Investment banking would also influence a company’s mergers or acquisitions as well.

    It involves providing companies with some advice on how they manage public assets and affairs as well. In fact, this is a very strategic field of study and work. The functions of an investment banker might also collide and complement with the works of a private broker who also give advice regarding buying and selling assets to companies, so brokerage and investment banking are related fields.

    Transactions:

    Investment banking also involves taking practical steps towards achieving what has been advanced on. In larger firms and companies, the functions of investment banking would be limited to an advisory capacity, because the larger firms prefer to contemplate on the advice given and make the decisions themselves.

    However, for smaller companies that wish to expand, getting an outside consultant to help out with the implementation of the advice given through investment banking professionals would be a really good option. Smaller companies to require more guidance.

    Learn Investment Banks with their Principle and Functions
    Learn Investment Banks with their Principle and Functions, #Pixabay.

    Important Functions:

    Bills of Exchange:

    This instrument safeguards that a bill is accepted so that control is not lost of the item’s involved. A “bill of exchange” contains a stated date of payment that must be concluded on that date irrespective of any disputes concerning the item named. There are legal measures to prevent payment, termed “non-honoring”, which are subject to different rules depending upon the country involved.

    Corporate Finance:

    This aspect of investment banking represents a specific finance area that deals with corporate financial decisions as well as the tools and analysis formulas and processes utilized to arrive at these decisions. It is divided into “short-term” and “long-term” techniques and decisions whereby the objective is to enhance corporate value through ensuring the “return on capital” is more than the “cost of capital”. The equation rests on a conservative application of risks.

    Corporate finance is related to managerial finance, although the latter is larger in scope as it entails financial techniques that are possible in all business forms, whether they are corporate or non-corporate.

    A. IPO’s:

    Termed “Initial Public Offerings”, IPO’s represent the beginning of a publicly listed company and as such those investors who are in position at this stage are poised to reap almost immediate gains if the stock rises on opening day. Similarly, these same investors stand to lose money if the opening price drops substantially.

    During the last few years, the offering prices have tended to average out as being overpriced. This is borne out by the fact that the closing price, on average, the day of opening generated an annual return of just 2%. In terms of profitability, IPO’s generate large fees for the participating firms and represent the most profitable underwriting area. Fees generally average seven percent (7%).

    After the various splits between managing underwriters, brokerage firms, law firms, and staff the profit hovers in the 34% through 40% range. This service is a cornerstone in aiding firms to float securities needed to expand or underwrite operations and as such represents one of the more important functions performed by investment banks.

    B. Rights Issues:

    These are equity issues whereby shareholders of record have the right to purchase new shares that have a fixed exercise price.

    C. Mergers & Acquisitions:

    Investment banks act in the capacity as advisors in merger and acquisition deals. In working with both the target’s of acquisition as well as the acquirer’s, investment banks provide their information expertise to help arrive at the “reservation price”. They also calculate the potential for gains and the risks in the transaction.

    And while investment banks have a vested interest in these deals, their pragmatism is an effective counterweight in maintaining a balance between undervaluing and overvaluing. Operating under banking regulations, investment banks represent a sort of intermediary that engenders public trust in the legitimacy of the transaction and is a part of a system that represents checks and balances over these types of transactions.

    Commercial banks might have potential conflicts of interest in these types of deals, so even while they have recently taken on this role, the majority of these transactions are still funneled through investment banks.

    Investment Management:

    As the term implies, investment management is also known as portfolio management as well as money management. It is a segment of investment analysis that examines the management of money relating to securities purchases as well as their sale.

    A. High Net Worth Individuals:

    Investment banking services for individuals of high net worth has been a long-standing feature for an elite group whose banking investment needs exceed the capabilities of commercial banks and traditional specialists. The complex variable regarding the client’s return targets and relative degrees of risk along with long as well as short-term requirements represent specialized analysis.

    The resources of an investment bank are suited to meet the demanding requirements of these types of individuals as well as confidentiality. The extremely sophisticated variables comprising recommendations and placement in various instruments are crafted to fit an approved plan of action.

    Because high net worth individuals have access to their own channels of information, the demands of these types of clients in terms of sophistication requires the resources of a specialized institution.

    B. Corporations:

    The investment management of corporations entails handling a number of asset management areas. As is the case with high net worth individuals, it entails an extensive analysis of the goals and objectives desired as well as the cash availability requirements for specific periods of time.

    The preceding represents a valuable service as a result of the high-level contacts and access to specialized information, opportunities, and rates of return with the moderate risk that investment banks can avail themselves of.

    C. Pension Funds:

    These funds represent extremely large sums that require placement in investment avenues that contain high degrees of safety as well as meeting return rates in established parameters.

    The important nature of these retirement funds requires an institution to pay close attention to risk avoidance as well as any potential changes and shifts in the market that could potentially affect the money in the Fund.

    D. Mutual Funds:

    In terms of mutual funds, there are literally hundreds of fund types to select from as a result of the classifications within this group. One particular type of fund which investment banks have an advantage over commercial banks is in hedge funds. These types of funds are unregulated and usually governed by unconventional strategies.

    Hedge funds trade in equities, money markets and bonds and offer yields as well as risks that exceed traditional long stock and bond methodologies. The secretive nature of these funds and the fact that they cater to institutions, corporations and high net worth individuals only is within the purview of investment banks.

  • Investment Banking: Introduction, Concept, and Types

    Investment Banking: Introduction, Concept, and Types

    What does Investment Banking mean? Investment banks are essentially financial intermediaries, who primarily help businesses and governments with raising capital, corporate mergers and acquisitions, and securities trade. Investment Banking: Introduction, Concept, and Types; It is a much wider term than merchant banking as it implies significant fund-based exposure to the capital market.

    Does Investment Banking explain their concept of what they are?

    Internationally, investment banking has progressed both in the fund based & fee-based segments of the industry. In India, the dependence is heavily on merchant banking, more particularly with issue management & underwriting. In the USA, such banks are the most important participants in the direct market by bringing financial claims for sale. They help interested parties in raising capital, whether debt or equity in the primary market to finance capital expenditure.

    Once the securities sell, investment bankers make secondary markets for the securities as brokers and dealers. In 1990, there were 2500 investment banking firms in the USA doing underwriting business. About 100 firms are so large that they dominate the industry. In recent years some investment banking firms have diversified or merged with other financial institutions to become full-service financial firms.

    Introduction to Investment Banking:

    Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in the economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation.

    Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for excessive flamboyance as well. Investment banks help companies, governments, and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets, as well as in providing strategic advisory services for mergers acquisitions and other types of financial transactions.

    However downturn in the primary market has forced merchant banks to diversify & become full-fledged investment banks. Over the decades, backed by evolution & also fuelled by recent technological developments, investment banking has transformed repeatedly to suit the needs of the finance community & thus become one of the vibrant & exciting segments of financial services.

    The future for investment banks is bright with scope for merchant banks to convert themselves into investment banks. Much of the investment banking in its present form, thus owes its origins to the financial market in U.S.A due to which, American investment banks have been the leader in the American & Euro market as well.

    Therefore, the term “Investment banking” can say to be of American origin. Their counterparts in the U.K. were termed as “Merchant banks” since they had confined themselves to capital market intermediation until the U.K & European markets & extended the scope of such businesses.

    Investment Banking in India:

    For more than three decades, investment banking activity was mainly confined to merchant banking services. The foreign banks were the forerunners of merchant banking in India. The erstwhile Grindlays Bank began its merchant banking operations in 1967 after obtaining the required license from RBI. Soon after Citibank followed through. Both the banks focused on syndication of loans and raising of equity apart from other advisory services.

    In 1972, the Banking Commission report asserted the need for merchant banking activities in India and recommended a separate structure for merchant banks different from commercial bank’s structure. The merchant banks were meant to manage investments and provide advisory services. The SBI set up its merchant banking division in 1972 and the other banks followed suit. ICICI was the first financial institution to set up its merchant banking division in 1973.

    More Things;

    The advent of SEBI in 1992 was a major boost to the merchant banking activities in India and the activities were further propelled by the subsequent introduction of free pricing of primary market equity issues in 1992. Post-1992, there were a lot of fluctuations in the issue market affecting the merchant banking industry. SEBI started regulating merchant banking activities in 1992 and a majority of the merchant banker registers with it. The number of merchant banker registers with SEBI began to dwindle after the mid-nineties due to the inactivity in the primary market.

    Many of the merchant bankers into issue management or associate activity such as underwriting or advisory. Many merchant bankers succumbed to the downturn in the primary market because of the over-dependence on issue management activity in the initial years. Also, not all the merchant bankers were able to transform themselves into full-fledged investment banks. Currently, bigger industry players who are in investment banking are dominating the industry.

    The Scenario for Investment Banking in India?

    In India commercial banks restricted from buying and selling securities beyond five percent of their net incremental deposits of the previous year. They can subscribe to securities in the primary market and trade in shares and debentures in the secondary market.

    Further, acceptance of deposits limits to commercial banks. Non-bank financial intermediaries accept deposits for a fixed term restricted to financing leasing/hire purchase, investment and loan activities and housing finance.

    They cannot act as issue managers or merchant banks. Only merchant bankers registered with the Securities and Exchange Board of India (SEBI) can undertake issue management and underwriting, arrange mergers and offer portfolio services. Merchant banking in India is non-fund based except underwriting.

    Structure of Investment Banking in India:

    The Indian investment banking industry has a heterogeneous structure for the following reasons:

    • The regulations do not permit all investment banking functions to perform by a single entity for two reasons: 1) To prevent excessive exposure to business risk, and. 2) To prescribe and monitor capital adequacy and risk mitigation mechanisms.
    • Commercial banks prohibited from getting exposed to stock market investments and lending against stocks beyond certain specified limits under the provisions of the RBI and Banking Regulation Act.
    • Merchant banking activities can carry out only after obtaining a merchant-banking license from SEBI.
    • Merchant bankers are other than banks and financial institutions not authorized to carry out any business other than merchant banking.
    • The Equity research activity has to carry out independent of the merchant banking activity to avoid conflict of interest, and.
    • Stockbroking business has to be separated into a different company.

    Regulatory Framework for Investment Banking in India:

    An overview of the regulatory framework furnish below:

    • All investment banks incorporated under the Companies Act, 1956 governed by the provisions of that Act.
    • Those investment banks that incorporate under a separate statute regulate by their respective statute. Ex: SBI, IDBI.
    • Universal banks that function as investment banks regulate by RBI under the RBI Act, 1934.
    • All Non-banking Finance Companies that function as investment banks regulate by RBI under RBI Act, 1934.
    • SEBI governs the functional aspects of Investment banking under the Securities and Exchange Board of India Act, 1992.
    • Those investment banks that carry foreign direct investment either through joint ventures or as fully owned subsidiaries govern by the Foreign Exchange Management Act, 1999 concerning foreign investment.
    Investment Banking Introduction Concept and Types
    Investment Banking: Introduction, Concept, and Types. #Pixabay.

    Types of Players in Investment Banking:

    The following Types of Players below are:

    Full-Service Firms:

    These are the type of investment banks that have a significant presence in all areas like underwriting, distribution, M&A, brokerage, structured instruments, asset management, etc. They are all rounder 0f the game.

    Commercial Banks:

    Commercial Banks operating through “Section 20” subsidiaries referring to the subsidiaries formed under section 20 of the Glass- Steagall Act which were allowed to carry on limited investment banking services.

    Boutique Firms:

    These are the type of players who specialize in particular areas of investment banking.

    Brokerage Firms:

    These firms offer only trading services to retail & institutional clients. They have a huge investor base which also use by underwriters to place issues.

    Asset Management Firms:

    These firms offer investment services. This includes activities like fund management, wealth management, cash management, portfolio management depending on the type of investors, Tenure of the corpus, purpose of investments, type of instrument invested in, etc.

  • What are the Functions of the Central Banks?

    What are the Functions of the Central Banks?

    Definition and Functions of Central Bank; Central Bank is the supreme financial institution that regulates the banking and monetary system of the country. It forms to bring monetary stability, issue notes, and maintain the value of a country’s currency in the international market. Also, It administers the currency and credit system of the nation.

    Learn, Explain What are Functions of the Central Banks? 

    The following points highlight the top twelve functions of the central bank. The functions are:

    Control of bank credit:

    The central bank of a country controls the bank advances or bank credit through its various methods of control such as the bank rate policy, open market operations, variable reserve raveled, credit controls, etc., for maintaining both internal and external stability. Also, This considers being a very important and perhaps the most essential function of the central bank.

    The monopoly of note-issue:

    To regulate the supply of currency, the central bank in every country has been given the monopoly power to issue paper notes by the existing legal provisions.

    The banker to the government:

    The central bank acts as the banker to the government of the country. It keeps the cash balances of the government and maintains its accounts. It gives advances to the government and also takes responsibility for the sale of government securities. Also manages public debt and advises the government on various financial matters.

    The banker to other banks:

    As the banker to other banks, the central bank gives direct advances against the government securities or bill rediscounting facilities to other banks. Also, The latter requires to maintain a portion of their total deposits (from 3% to -15% of total deposits as in India) as the reserve at the central bank. By varying this reserve ratio, the central bank can control the advances of other banks.

    The lender of the last resort:

    The central bank is the ultimate source of funds in the money market of a country. During any crisis or panic, it gives all sorts of funds to other banks to enable them to tide over the crisis.

    Control and supervision of other banks:

    The central bank controls and supervises the operations of other banks through licensing, an inspection of bank accounts, bank mergers, etc. 

    The custodian of the nation’s gold and foreign exchange reserve:

    The central bank keeps the nation’s gold and foreign exchange reserve under its direct supervision.

    Maintenance of the foreign exchange rates:

    The central bank requires to maintain the rate of exchange, i.e., the external value of the currency; It has to conduct foreign exchange operations at some specified exchange rates. It also exercises exchange control, i.e., control of the foreign exchange.

    Stability of the value of money:

    The central bank has the duty of keeping both the internal and external value of the country’s currency through various monetary and exchange control measures.

    Strengthening the banking structure:

    The central bank requires to take various steps such as deposits insurance, the extension of banking facilities in the unbanked areas, etc. for strengthening the country’s banking structure.

    A special role in a developing country:

    The central bank has a special role to play in a developing economy like that of India in promoting growth with stability, providing special credit for agriculture and industry, etc.

    Other functions:

    The central bank also acts as the clearinghouse publishes valuable reports and data; and performs various other functions relating to the management and development of the economy.

    What are the Functions of the Central Banks Image
    What are the Functions of the Central Banks? Image by Mudassar Iqbal from Pixabay.

  • The Relationship between Central and Commercial Banks!

    The central bank and commercial banks have their distinct identities and functions. The central bank, through its function of the lender of the last resort, acts as an active agent of the government in implementing its monetary policies. In developed countries, the efficient carrying out of this function is easy. Also learned, Economic and Market Value Added, The Relationship between Central and Commercial Banks!

    Learn, Explain The Relationship between Central and Commercial Banks! 

    The following concept of relationship below are;

    Central Banks:

    A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state’s legal tender.

    Central banks also act as a “lender of last resort” to the banking sector during times of financial crisis. Most central banks usually also have supervisory and regulatory powers to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by member banks.

    Commercial Banks:

    A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. The commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business – as opposed to individual members of the public/small business.

    In developing economies, however, this is not so simple. Here a case is often made for entry of the central bank in some selected fields to promote the development of the economy; besides ensuring the growth of a sound banking structure to cope with the increasing needs of credit. Commercial bankers take this as an encroachment on their field.

    The Relationship between the commercial banks and the central banks:

    The relationship between the commercial banks and the central bank has to be based on reciprocity. The commercial banks should conform to the spirit of central bank directives rather than letters. On the other side, the central bank should invariably satisfy the genuine needs of the commercial banks in times of stresses and strains. A moral code of conduct between the two will have to be evolved, accepted and followed.

    They argue that the major part of the Central Bank’s funds comprise the reserves of the commercial banks meant for safeguarding their safety (liquidity). It would be immoral on the part of the central bank to compete in business with the commercial banks with their money. In view of the co-operation that the central bank often seeks from commercial banks for carrying out its policies, the central bank should not invite hostility from them by giving them unjust competition through its special privileges as the bankers’ bank and the banker of the government.

    In spite of these arguments, opinion has gone in favor of the undertaking of some commercial business by the central bank, especially in underdeveloped economies. A small amount of business can hardly affect the liquidity position of the ‘creator of liquidity’. It is not at all necessary that the central bank uses the commercial banks’ funds for this. It can set up a separate department for commercial business and create resources also.

    In fact, it may organize a special agent bank as its favored child for doing the arduous business necessary for economic development often avoided by commercial banks. Further, if the central bank feels that the steering wheel of credit control in its banks is loose and not functioning satisfactory, it may gain an edge of maneuverability by keeping in touch with the market through a limited amount of business.

    Besides, in an agriculturally depressed economy like India, the central bank may take up the onus of developing a bill market, granting direct loans, or discounting good bills of exchange. As regards direct loans, it may be a bit difficult to democrat clearly the central bank’s field vis-a-vis that of the commercial banks.

    The difficulty is removed if the central bank while doing ordinary commercial business keeps in mind that in its operations, the public interest and not profit-earning motive, prevails; what it can get done through commercial banks it never undertakes to do itself.

    The various quantitative and qualitative instruments of credit control should be judiciously used by the central bank. No doubt, the bank has the drastic weapons of reserve ratio requirements, open market operations or changes in the bank rate, etc. but none of them is fool-proof.

    After all, it is bank official on the spot who can judge between the credits asked for socially desirable productive purposes or credit being taken in the name of bonafide purposes, but to be used for some anti-social actions. Unless the commercial bank and the central bank provide willing co-operation, the one will be weakened and the other will be frustrated. This is why moral persuasion must be preferred now to direct action.

  • Central Banks: Objectives, Role, Operations, and Autonomy

    Central Banks: Objectives, Role, Operations, and Autonomy

    A central bank, institution, such as the Bank of England, the U.S. Federal Reserve System, or the Bank of Japan, that charges with regulating the size of a nation’s money supply, the availability, and cost of credit, and the foreign-exchange value of its currency. This article explains the Concept of Central Banks: Meaning, Objectives, Role, Operations, and Autonomy. Regulation of the availability and cost of credit may be non-selective or may design to influence the distribution of credit among competing uses.

    Learn, Explain Central Banks: Objectives, Role, Operations, and Autonomy.

    The principal objectives of a modern central bank in carrying out these functions are to maintain monetary and credit conditions conducive to a high level of employment and production, a reasonably stable level of domestic prices, and an adequate level of international reserves. The Concept of Central Banks: Meaning, Objectives of Central Banks, Role of Central Banks, Operations of Central Banks, and the Autonomy of Central Banks…all information below are;

    Objectives of Central Banks:

    The objectives of the central bank include economic growth in line with the economy’s potential to expand; a high level of employment; stable prices (that is, stability in the purchasing power of money); and moderate long-term interest rates.

    The central bank is ultimately concerned with preserving the integrity of a country’s financial institutions, combating inflation, defending the exchange rate of the country’s currency and preventing excessive unemployment.

    Role of Central Banks:

    The central bank, which is responsible for managing a country’s monetary affairs, determines the level of short-term interest rates, thereby profoundly affecting financial markets, wealth, output, employment, and prices.

    Indeed the central bank’s influents spread not only within the domestic territory of a country but even, through financial and trade linkages — to virtually every corner of the globe.

    The central bank’s main goal is low and stable inflation.

    It also seeks to promote steady growth in national output, low unemployment, and orderly financial markets. If the output is growing rapidly and inflation is rising the central bank is likely to raise interest rates, as this puts a brake on the economy and reduces inflationary pressures.

    If the economy is sluggish and business is languishing, an exactly opposite type of monetary action calls for. The central bank will lower interest rates — which is likely to boost aggregate demand, increase output and reduce unemployment.

    Through 5 steps, how the central bank affects economic activity. (1) is the change in reserves, which leads to changes in M, in (2); leading to (3), changes in interest rates and credit availability. In (4) AD change’s in response to investment and other interest-sensitive components of desired expenditure.

    In (5) changes in output, employment and general price level follow. (It should not, however, miss that fiscal policy also affects aggregate demand).

    Operations of Central Banks:

    The central bank has at its disposal several policy instruments. These can affect certain intermediate targets. These instruments are directed towards achieving the ultimate objectives of monetary policy — low inflation, rapid growth in output and low unemployment which are the signs of a healthy economy. For the sake of analysis, it is important to keep the different groups (policy instruments, intermediate targets, and ultimate objectives) separate and distinct.

    The three instruments of monetary policy are open market operations, discount rate policy and reserve-requirements policy. The pros and cons of each will discuss. In determining its monetary policy, the central bank directly manipulates these instruments or policy variables under its control. These help determine bank reserves, the money supply, and interest rates — the intermediate targets of monetary policy.

    More Things…

    In managing money, the central bank must keep its eye on a set of variables known as intermediate targets. These are economic variables that are intermediate in the transmission mechanism between monetary policy instruments and ultimate policy goals. When the central bank seeks to affect its ultimate objectives, it first changes one of its instruments, such as the discount rate.

    This change affects an intermediate variable such as interest rates, credit availability or the money supply. For maintaining sound health of the economy the central bank keeps a close watch on its intermediate targets. Ultimately monetary and fiscal policies are partners in pursuing the measure objectives of rapid growth, low unemployment, and stable prices.

    The autonomy of the Central Banks:

    In recent years there is a strong demand for central bank independence. Monetary policy independence is not necessary primarily in order to protect a ‘conservative’ central banker from the influence that a less ‘conservative’ government might seek to bring to bear, but rather to enable central bankers with a longer-term decision horizon (and/or a lower rate of time preference) to assert their authority when faced with a government with a shorter planning “horizon (and/or a higher rate of time preference).

    Then, when the government ‘by a conscious act relinquishes its power’, it does not mean that the institution to which the power of decision-making transfers has different inflation and employment prefer­ences from the population, but simply that it is operating with a longer time horizon than the government.

    Thus, the central bank may react appropriately to temporary output shocks if it thinks that such a policy can pursue without long-term disadvantages for price stability. From this standpoint, the economic rationale for indepen­dence is that it enables those deciding monetary policy to conduct their policy without being always scrutinized by the government for short-term results.

    More Things…

    The longer-term horizon in their decision-making implies that they make full allowance for the long-time lags involved in the conduct of monetary policy, i.e., its formulation and implementation.

    It is now felt that the most important aim of central bank legislation should be to create an incentive structure that guarantees a long-term time horizon of central bankers. As most politicians are characterized by rather myopic behavior, this implies, above all, that the monetary policy decisions taken in the central bank have to insulate from the general political process as far as possible.

    This explains why central bank independence is now widely regarded as a prerequisite for an effective monetary policy. The trick is to attain the appropriate balance between the need to be responsive to short-term pressures and the need to ensure that those pressures are exerted in a system that safeguards the long-term interest of the population. However, there are different definitions of central bank independence.

    Types:

    Two main types of independence are — “goal independence” and “instrument indepen­dence“. A central bank enjoys goal independence when it is free to choose its goals or, at least, free to decide the actual target values for a given goal. A central bank has instrument independence when it ‘is given control over the levers of monetary policy and allowed to use them’.

    An alternative definition distinguishes between political and economic independence. By political independence, we mean a central bank’s ability to pursue the goal of price stability unfettered by formal or informal instructions emanating from the ruling government. Independence refers to the autonomy to pursue the goal of low inflation.

    Any institutional feature that enhances the central bank’s capacity to pursue this goal will increase central bank independence. Economic independence means that a central bank has unlimited freedom to determine all monetary policy transactions that lead to changes in its operating targets.

    Central Banks Objectives Role Operations and Autonomy Image
    Central Banks: Objectives, Role, Operations, and Autonomy.

    The different notions of independence:

    Since all these definitions have both merits and shortcomings it is necessary to make a synthesis of both approaches, which distinguishes three different notions of independence.

    1. Goal independence: Goal independence requires that the government has no direct influence on the goals of monetary policy.
    2. Instrument independence: Instrument independence requires that the central bank can set its operating targets (interest rate, exchange rate) autonomously. This notion of instrument independence is identical to the concept of ‘economic independence’.
    3. Personal independence: Personal independence requires that the decision-making body of a central bank be in a position to resist formal directives as well as informal pressure from the government.

    Now, Explain;

    Goal Independence:

    The definition of the goals of the monetary policy includes not only the choice between price stability and nominal GDP but also a definition of the time horizon for their realization, the definition of concrete indices, their numerical target values and the definition of escape clauses.

    Thus, ‘goal independence’ can take various forms. It can include a framework wherein the central bank has complete freedom on all these issues, as well as a framework wherein it can decide on only some of these issues. In reality, one can find three variants of the definition of goal independence.

    In the USA monetary policy seeks to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. But ‘stable long-term interest rates’ is not compatible with the standard definition of the goals of monetary policy. Long-term interest rates are, at best, an intermediate target.

    The European Central Bank grants a somewhat more limited degree of goal independence. Similar arrangements are found in Japan and, to some extent, in Sweden.

    More Things…

    A low degree of goal independence characterizes the central bank legislation of the United Kingdom, Canada, and New Zealand. In these countries, the central bank legislation defines price stability as the main goal of monetary policy but gives the government the right to determine the concrete target values.

    The most important prediction of both theoretical and empirical kinds of literature is that a central bank should have instrument independence, but should not have goal independence.

    There are no permanent trade-offs between price stability and other macroeconomic targets. Therefore, there is no real choice that ‘elected officials’ could make for the population in the long run. In the short-term, supply shocks make it necessary to allow for deviations from a medium-term inflation target. But entrusting the government or the parliament with this decision could lead to the risk of an inflation bias.

    This leads to a possible trade-off between:
    • A more flexible response of monetary policy in the case of supply shocks, but only if the central bank overly commits to price stability, and
    • The reduced political independence of monetary policy with all the attendant risks.

    Instrument Independence:

    Instrument independence implies that a central bank can set its operating targets without any interference from the government.

    It includes three important elements:
    • Control of the short-term interest rate as the most important operating target of monetary policy.
    • Control of the exchange rate, which can uses as an additional operating target, especially in a relatively open economy, and.
    • Restrictions of central bank credits to the government, which could undermine the control over the monetary base and, thus, over short-term interest rates.

    Instrument independence constitutes an indispensable element of stability-oriented central bank legislation. Inflation targeting seems to be the most effective and it leads to the most democratically accountable policy-making when the central bank is instrument independent but not fully goal dependent.

    In most countries, monetary policy can autonomously determine interest rates. However, as in the case of goal independence, there are countries where the government can still override the central bank’s decisions.

    As far as the control over the exchange rate is concerned, there is at present no central bank that has unlimited responsibility for this target of monetary policy. Only the ECB makes a distinction between formal exchange arrangements and a policy of managed floating.

    More Things…

    The central banks in all other countries have very limited responsibilities in the field of exchange rate policy. All central bank acts assign this responsibility’ without qualifications to the government.

    The third element of instrument independence concerns the explicit limitations for central bank lending to the government. This relates exclusively to direct lending to the public sector. It is, therefore, perfectly compatible with the EC Treaty.

    By purchasing government bonds from the commercial banks as part of its open-market policy a central bank can easily bypass the prohibition on deficit financing and conduct its money market management essentially on outright open-market operations.

    In other central bank acts, no similar regulations can find. However, it is ‘conceivable that a monetary policy geared to price stability might guarantee simply by giving a politically independent central bank the power to decide of its own accord when and how much to lend to public sector borrowers’.

    But then there is always the danger of a central bank giving in to political pressure and thus promoting inflationary financing of government-expenditure.

    Personal Independence:

    Even if central bankers are granted instrument and/or goal independence, the government could try to exert some informal pressure on monetary policy. For instance, if the central bank governor could dismiss at any time, and without specific reasons at the discretion of the government, he or she would be in a rather weak position vis-a-vis the minister of finance or the head of the government.

    A strong informal influence on the central bank can also be exerted if only one person, i.e., the governor, is in charge of monetary policy decisions. In this case, it is sufficient that the government sends a depicted partisan to the top of the central bank.

    To sum up, there is an inherent inflation bias mainly due to a short-term time horizon of politicians. This calls for central bank legislation that provides central bankers with independence from politicians and with long-terms of office, which is a very efficient means of insulating central bankers from the government.

  • Merchant Banking: Functions, Origin, and Evolution

    Merchant Banking: Functions, Origin, and Evolution

    Meaning of Merchant Banking: Dictionary meaning of Banking points at merchant bank as an organization that underwrites securities for corporations advises such clients on mergers and involves in the ownership of commercial ventures. The term “Merchant Banking” has been used differently in different parts of the world.

    Learn, Explain each topic of Merchant Banking: Functions, Origin, and Evolution!

    While in the UK, merchant banking refers to the “Accepting and issuing houses”, in the USA it knows as “Investment banking“. The word merchant banking has been so widely used that sometimes; it applies to banks who are not merchants, sometimes to merchants who are not banks, and sometimes to those intermediaries who are neither merchants nor banks. Explain the Organizational setup of Merchant Bankers in India!

    Functions of Merchant Banking:

    The basic function of a merchant banker is marketing corporate and other securities. Now they require to take up some allied functions also.

    A merchant bank now takes up the following functions:

    1. Promotional Activities:

    A merchant bank functions as a promoter of industrial enterprises in India He helps the entrepreneur in conceiving an idea, identification of projects, preparing feasibility reports, obtaining governmental approvals and incentives, etc. Some of the merchant banks also assist technical and financial collaborations and joint ventures

    2. Issue Management:

    In the past, the function of a merchant banker had mainly been confined to the management of new public issues of corporate securities by the newly formed companies, existing companies (further issues); and the foreign companies in dilution of equity as required under FERA In this capacity the merchant banks usually act as sponsor of issues.

    They obtain the consent of the Controller of Capital Issues (now, the Securities and Exchange Board of India) and provide several other services to ensure success in the marketing of securities. The service provided by them includes the preparation of the prospectus, underwriting arrangements, appointment of registrars, brokers, and bankers to the issue, advertising and arranging publicity and compliance of listing requirements of the stock exchanges, etc.

    They act as experts of the type, timing, and terms of issues of corporate securities and make them acceptable for the investors on the one hand and also provide flexibility and freedom to the issuing companies.

    3. Credit Syndication:

    Merchant banks provide specialized services in preparation of the project, loan applications for raising short-term as well as long-term credit from the various bank and financial institutions, etc. They also manage Euro-issues and help in raising funds abroad.

    4. Portfolio Management:

    Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions. Merchant bankers even undertake the function of purchase and sale of securities for their clients to provide portfolio management services. Some merchant bankers are operating mutual funds and offshore funds also.

    5. Leasing and Finance:

    Many merchant bankers provide leasing and finance facilities to their customers. Some of them even maintain venture capital funds to assist entrepreneurs. They also help companies in raising finance by way of public deposits.

    6. Servicing of Issues:

    Merchant banks have also started to act as paying agents for the service of debt- securities and to act as registrars and transfer agents. Thus, they maintain even the registers of shareholders and debenture holders and arrange to pay dividends or interest due to them

    7. Other Specialized Services:

    In addition to the basic activities involving the marketing of securities, merchant banks also provide corporate advisory services on issues like mergers and amalgamations, tax matters, recruitment of executives and cost and management audits, etc. Many merchant bankers have also started making bought-out deals of shares and debentures. The activities of the merchant bankers are increasing with the change in the money market.

    Origin of Merchant Banking:

    The origin of merchant banking can trace back to the 13th century when a few families-owned and managed firms engaged in the sale and purchase of commodities were also found to engage in banking activity. These firms not only acted as bankers to the kings of European States, financed coastal trade but also borne exchange risk.

    To earn profits, they invested their funds where they expected higher returns despite the high degree of risk involved. They charged very high rates of interest for financing highly risky projects. In turn, they suffered heavy losses and had to close down. Some of them restarted the same activity after gaining financial strength. Thus merchant Banking survived and continued during the 13th century.

    Later,

    Merchant Bankers were known as “Commission agents” who handled the coastal trade on a commission basis and provided finance to the owners or supplier of goods. They made investments in goods manufactured by sellers and made huge profits. They also financed continental wars. The sole objective of these merchant bankers was profit maximization by making investments in risky projects.

    Then came the industrial revolution in England. The scope of international trade widened to include North America and other continents. Many people were attracted to take up merchant banking activities to transfer the machine-made goods from European nations to other nations and colonies and bring raw material from other nations and colonies to Europe and to finance such trade.

    During the early nineteenth century, merchants indulged in overseas trade and earned a good reputation. They accepted the bills of the lesser reputed traders by guaranteeing the holder to receive full payment on the due date. This practice of accepting bills has grown over the years with expansion in trade and has become part of merchant banking activity.

    Merchant Banking Functions Origin and Evolution
    Merchant Banking: Functions, Origin, and Evolution! Image credit from #Pixabay.

    Evolution of Merchant Banking:

    “Hundi” was the main instrument of credit used by indigenous bankers before the coming of western merchants in India. It was in 1813 when merchants came from European countries to trade with India. Agency houses were set up by merchant bankers based in London.

    These agency houses raised deposits at cheaper rates of interest viz. 4% to 5% from their home and made advances to native merchants at 10% to 12%; and also, they charged high commissions on every kind of service provided to the clients.

    Easy availability of money at the spot from the agency houses had eliminated the role of acceptance house or merchant banking in India. It was only with the entrance of East India Company that restrictions were put on the operation of agency houses.

    During the 19th century,

    Foreign merchant bankers operated in India through “East India House”. East India House members moved into real estate business viz. tea and rubber plantation, cotton mills, etc. They faced tough competition from Persian finance houses who were willing to grant credit to the trade with India.

    It was in 1860 when the merchant’s interest in joint-stock banking started growing and with their investments, they floated joint-stock banks. Some new banks were founded which included Orient Bank in 1845, Chartered Bank of India and Asia in 1853, Chartered Mercantile Bank of India, London & China in 1857, and so on.

    These banks financed trade transactions. The control and management of these banks lied with managing agents. Also, the managing agency system enabled a single firm to look after several firms in complementary industries.

    With the result,

    The banking industry flourished in India with the support of London-based merchant bankers; and, the merchants who had full control of the Board. Telegraphic transfers improved banking links and the business.

    The managing agents acted as merchants banks and performed functions of promoting financing and marketing of securities. They developed strong roots in depth of India’s economic, commercial and industrial structure. Also, they served the industry, trade, and commerce as the merchant bankers were doing in the UK; and, European countries or the investment bankers were doing in the USA.

    Managing agents acquire a large share of investible capital initially; and, later on, dispose of the shares once the company gets established. In other words, Managing Agency Houses acted as an issue house for securities. It founds that 600 industrial establishments did manage under the managing agency system in 1951.

    Few Indian managing agency houses did also established in pre-World War II who started as the family business, later on, converted into partnership and public limited companies.

    Examples of prominent managing agency houses included:
    • Tatas,
    • Birlas,
    • Dalmia’s,
    • Singhanias,
    • Thapar’s,
    • Narang’s etc.

    These managing houses had the necessary skills and expertise which helped in the development of projects.

    Functions performed include:
    • Investing funds like venture capital in promoting the enterprise.
    • Assist the enterprises in procuring finance by guaranteeing bank loans and advances.
    • Raising public deposits.
    • Enter into negotiation with foreign capitalists.

    Thus, they acted as intermediaries of investment by holding the shares of new companies; motivating people to invest, and keeping deposits for investment.

    In Post-World War II, Amendments in the Companies Act, 1956 led to the streamlining of the procedure for capital issues and facilitated the growth of the capital market in India.

    To speed up the pace of economic development, efforts did make to channelize household savings into investment in industry and trade. Significant amendments did make in the Companies Act, Capital Issues (Control) Act, Banking Companies Act to regulate the growth of business enterprises.

    In 1948,

    Industrial Finance Corporation of India (IFCI) did set up to provide long and medium-term finance to industrial enterprises and underwrite new securities. At the state level, State Financial Corporations did also established in 1951 to provide financial assistance to the industry.

    In 1955,

    The Industrial Credit and Investment Corporation of India (ICICI) did set up to provide developmental finance to industrial concerns. Also, ICICI invests in equity by way of direct subscription and also underwrites shares and debentures.

    Many more financial and investment institutions emerged at national and state levels e.g. LIC, RCI (Refinance Corporation for Industry), Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), State Industrial Development Corporation (SIDC), etc. over the years.

    The basic objectives of setting up all these institutions were to boost the industrial sector, improve the capital market; make finance easily available and support the investment climate in the country. These institutions also underwrite the capital issues besides the lending support of broking houses.

    The need for merchant banking services did widely felt. It was during this period that National & Grindlays Bank (now Grindlays Bank) took a lead by taking up merchant banking activities; and announced the inauguration of its “Merchant Banking Division” in January 1969.

  • Explain Primary and Secondary Functions of Commercial Banks!

    The commercial bank is the financial institution performs diverse types of functions. It satisfies the financial needs of sectors such as agriculture, industry, trade, communication, etc. That means they play a very significant role in a process of economic social needs. The functions performed by banks are changing according to change in time and recently they are becoming customer centric and widening their functions. Generally, the functions of commercial banks are divided into two categories viz. primary functions and the secondary functions. Also learned, Explain Primary and Secondary Functions of Commercial Banks!

    Learn, Explain Primary and Secondary Functions of Commercial Banks!

    The two most distinctive features of a commercial bank are borrowing and lending, i.e., acceptance of deposits and lending of money to projects to earn Interest (profit). In short, banks borrow to lend. The rate of interest offered by the banks to depositors is called the borrowing rate while the rate at which banks lend out is called lending rate.

    The difference between the rates is called ‘spread’ which is appropriated by the banks. Mind, all financial institutions are not commercial banks because only those which perform dual functions of (i) accepting deposits and (ii) giving loans are termed as commercial banks. For example, post offices are not the bank because they do not give loans. Functions of commercial banks are classified into two main categories: (A) Primary functions, and (B) Secondary functions.

    Let us know about each of them:

    (A) Primary Functions:

    The Following primary functions below are:

    1. It accepts deposits:

    A commercial bank accepts deposits in the form of current, savings and fixed deposits. It collects the surplus balances of the Individuals, firms, and finances the temporary needs of commercial transactions. The first task is, therefore, the collection of the savings of the public. The bank does this by accepting deposits from its customers. Deposits are the lifeline of banks.

    Deposits are of three types as under:

    (i) Current account deposits:

    Such deposits are payable on demand and are, therefore, called demand deposits. These can be withdrawn by the depositors any number of times depending upon the balance in the account. The bank does not pay any Interest on these deposits but provides cheque facilities.

    These accounts are generally maintained by businessmen and Industrialists who receive and make business payments of large amounts through cheques.

    (ii) Fixed deposits (Time deposits):

    Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are deposits for a fixed term, i.e., the period of time ranging from a few days to a few years. These are neither payable on demand nor they enjoy cheque facilities.

    They can be withdrawn only after the maturity of the specified fixed period. They carry a higher rate of interest. They are not treated as a part of the money supply Recurring deposit in which a regular deposit of an agreed sum is made is also a variant of fixed deposits.

    (iii) Savings account deposits:

    These are deposits whose main objective is to save. The savings account is most suitable for individual households. They combine the features of both current account and fixed deposits. They are payable on demand and also withdrawable by cheque.

    But the bank gives this facility with some restrictions, e.g., a bank may allow four or five cheques in a month. Interest paid on savings account deposits in lesser than that of fixed deposit.

    Difference between demand deposits and time (term) deposits:

    Two traditional forms of deposits are demand deposit and term (or time) deposit:

    • Deposits which can be withdrawn on demand by depositors are called demand deposits, e.g., current account deposits are called demand deposits because they are payable on demand but saving account deposits do not qualify because of certain conditions on withdrawal. No interest is paid on them. Term deposits, also called time deposits, are deposits which are payable only after the expiry of the specified period.
    • Demand deposits do not carry interest whereas time deposits carry a fixed rate of interest.
    • Demand deposits are highly liquid whereas time deposits are less liquid,
    • Demand deposits are chequable deposits whereas time deposits are not.

    2. It gives loans and advances:

    The second major function of a commercial bank is to give loans and advances particularly to businessmen and entrepreneurs and thereby earn interest. This is, in fact, the main source of income of the bank. A bank keeps a certain portion of the deposits with itself as the reserve and gives (lends) the balance to the borrowers as loans and advances in the form of cash credit, demand loans, short-run loans, overdraft as explained under.

    (i) Cash Credit:

    An eligible borrower has first sanctioned a credit limit and within that limit, he is allowed to withdraw a certain amount on a given security. The withdrawing power depends upon the borrower’s current assets, the stock statement of which is submitted by him to the bank as the basis of security. Interest is charged by the bank on the drawn or utilized the portion of credit (loan).

    (ii) Demand Loans:

    A loan which can be recalled on demand is called demand loan. There is no stated maturity. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower. Those like security brokers whose credit needs fluctuate generally, take such loans on personal security and financial assets.

    (iii) Short-term Loans:

    Short-term loans are given against some security as personal loans to finance working capital or as priority sector advances. The entire amount is repaid either in one installment or in a number of installments over the period of the loan.

    Investment:

    Commercial banks invest their surplus fund in 3 types of securities:

    (i) Government securities, (ii) Other approved securities and (iii) Other securities. Banks earn interest on these securities.

    (B) Secondary Functions:

    Apart from the above-mentioned two primaries (major) functions, commercial banks perform the following secondary functions also.

    3. Discounting bills of exchange or bundles:

    A bill of exchange represents a promise to pay a fixed amount of money at a specific point of time in future. It can also be encashed earlier through the discounting process of a commercial bank. Alternatively, a bill of exchange is a document acknowledging the amount of money owed in consideration of goods received. It is a paper asset signed by the debtor and the creditor for a fixed amount payable on a fixed date. It works like this.

    Suppose, A buys goods from B, he may not pay B immediately but instead give B a bill of exchange stating the amount of money owed and the time when A will settle the debt. Suppose, B wants the money immediately, he will present the bill of exchange (Hundi) to the bank for discounting. The bank will deduct the commission and pay to B the present value of the bill. When the bill matures after the specified period, the bank will get payment from A.

    4. Overdraft facility:

    An overdraft is an advance given by allowing a customer keeping the current account to overdraw his current account up to an agreed limit. It is a facility to a depositor for overdrawing the amount than the balance amount in his account.

    In other words, depositors of current account make the arrangement with the banks that in case a cheque has been drawn by them which are not covered by the deposit, then the bank should grant overdraft and honor the cheque. The security for the overdraft is generally financial assets like shares, debentures, life insurance policies of the account holder, etc.

    Difference between Overdraft facility and Loan:

    • Overdraft is made without security in current account but loans are given against security.
    • In the case of the loan, the borrower has to pay interest on full amount sanctioned but in the case of an overdraft, the borrower is given the facility of borrowing only as much as he requires.
    • Whereas the borrower of loan pays Interest on the amount outstanding against him but the customer of overdraft pays interest on the daily balance.

    5. Agency functions of the bank:

    The bank acts as an agent of its customers and gets the commission for performing agency functions as under:

    1. Transfer of funds: It provides a facility for cheap and easy remittance of funds from place-to-place through demand drafts, mail transfers, telegraphic transfers, etc.
    2. Collection of funds: It collects funds through cheques, bills, bundles and demand drafts on behalf of its customers.
    3. Payments of various items: It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its customers.
    4. Purchase and sale of shares and securities: It buys sells and keeps in safe custody securities and shares on behalf of its customers.
    5. Collection of dividends, interest on shares and debentures is made on behalf of its customers.
    6. Acts as Trustee and Executor of the property of its customers on the advice of its customers.
    7. Letters of References: It gives information about the economic position of its customers to traders and provides similar information about other traders to its customers.

    6. Performing general utility services:

    The banks provide many general utility services, some of which are as under:

    1. Traveler’s cheques. The banks issue traveler’s cheques and gift cheques.
    2. Locker facility. The customers can keep their ornaments and important documents in lockers for safe custody.
    3. Underwriting securities issued by the government, public or private bodies.
    4. Purchase and sale of foreign exchange (currency).

    Primary Functions of Commercial Banks:

    Commercial Banks performs various primary functions some of them are given below

    • Accepting Deposits: Commercial bank accepts various types of deposits from the public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period.
    • Making Advances: The commercial banks provide loans and advances of various forms. It includes an overdraft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.
    • Credit creation: It is the most significant function of commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words, while sanctioning a loan a bank automatically creates deposits. This is known as a credit creation from the commercial bank.

    Secondary Functions of Commercial Banks:

    Along with the primary functions each commercial bank has to perform several secondary functions too. It includes many agency functions or general utility functions.

    The secondary functions of commercial banks can be divided into agency functions and utility functions.

    Agency Functions: Various agency functions of commercial banks are.

    • To collect and clear cheque, dividends and interest warrant.
    • To make payment of rent, insurance premium, etc.
    • To deal in foreign exchange transactions.
    • To purchase and sell securities.
    • To act as trustee, attorney, correspondent, and executor.
    • To accept tax proceeds and tax returns.

    General Utility Functions: The general utility functions of the commercial banks include.

    • To provide a safety locker facility to customers.
    • To provide money transfer facility.
    • To issue a traveler’s cheque.
    • To act as referees.
    • To accept various bills for payment e.g phone bills, gas bills, water bills, etc.
    • To provide merchant banking facility.
    • To provide various cards such as credit cards, debit cards, Smart cards, etc.
  • Commercial Banks: Meaning, Functions, and Significances

    Commercial Banks: Meaning, Functions, and Significances

    Commercial Banks: Banks have developed around 200 years ago. The nature of banks has changed as time has changed. This article explains Banks and their topics – Meaning, Functions, and Significances. The term bank relates to financial transactions. It is a financial establishment that uses, money deposited by customers for investment, pays it out when required, makes loans at interest exchanges currency, etc. however to understand the concept in detail we need to see some of its definitions. Many economists have tried to give different meanings to the term bank.

    Learn, Explain Commercial Banks: Meaning, Functions, and Significances.

    Meaning of Commercial Banks:

    A commercial bank is a financial institution that performs the functions of accepting deposits from the general public and giving loans for investment to earn a profit. Banks, as their name suggests, ax profit-seeking institutions, i.e., they do banking business to earn a profit.

    They generally finance trade and commerce with short-term loans. They charge a high rate of interest from the borrowers but pay much less rate of Interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks. Most of the Indian joint stock Banks are Commercial Banks such as Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.

    Definitions of Commercial Banks:

    While defining the term banks it takes into account what type of task performs by the banks. Some of the famous definitions are given below:

    According to Prof. Sayers,

    “A bank is an institution whose debts are widely accepted in settlement of other people’s debts to each other.”

    In this definition, Sayers has emphasized the transactions from debts raised by a financial institution.

    According to the Indian Banking Company Act 1949,

    “A banking company means any company which transacts the business of banking. Banking means accepting for the purpose of lending or investment of deposits of money from the public, payable on demand or otherwise and withdrawable by cheque, draft or otherwise.”

    Nature of Commercial Banks:

    They are an organization that normally performs certain financial transactions. It performs the twin task of accepting deposits from members of the public and making advances to needy and worthy people from society. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increase and it becomes a creditor. Banking transactions are socially and legally approved. It is responsible for maintaining the deposits of its account holders.

    Functions of Commercial Banks:

    The main functions of commercial banks are accepting deposits from the public and advancing them loans. However, besides these functions, there are many other functions that these banks perform.

    Paul Samuelson has defined the functions of the Commercial bank in the following words: 

    “The Primary economic function of a commercial bank is to receive demand deposits and honor cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists.”

    The major functions performed by the commercial banks are:

    Accepting Deposits:

    This is one of the primary functions of commercial banks. The banks accept different types of deposits, the deposits may broadly classify as demand deposits and time deposits. The former refers to the deposits which are repayable by the banks on demand by the depositors, while the time deposits are accepted by the banks for a fixed period before the expiry of which they don’t return the deposit.

    The demand deposits include the current account deposits and savings bank account deposits. These two types of deposits earn a very low rate of interest as they can withdraw at any time. In the case of savings deposits, the depositor did not allow withdrawing more than a fixed number of times or amount over some time.

    More things:

    The time or term deposits include the fixed deposit and recurring deposits. In the former, a sum deposits for a fixed period determined at the time of deposit and never allows to withdrawal before the expiry of the period of deposit. Any such foreclosures will invite a penalty apart from forfeiting the interest.

    Recurring deposits are the type of deposits in which a depositor agrees to deposit a fixed sum of amount every month for several months as determined in advance, and at the end of which the depositor will be repaid his deposit amount along with interest. Every bank will be interested in mobilizing as much deposit as possible as it would improve its liquidity with which the bank can meet its liabilities and expand its business.

    Advancing of Loans:

    They accept deposits and use them for the expansion of their business. The banks never keep the deposits mobilized idle. After keeping some cash reserve, they invest the funds and earn. They also lend loans and advances to the common men after satisfying themselves about the creditworthiness of the borrowers. They grant different types of loans like ordinary loans in which the banks lend money against collateral security.

    Cash credit is another type of loan in which the entire amount sanctioned credits into the borrower’s account and he permits to withdraw only a specified sum at a time. Overdraft is yet another facility under which the customer allows to withdraw an amount subject to the ceiling fixed, from his account and he pays interest on the amount of overdrawn.

    Discounting bills of exchange is another type of advance granted by the banks in which a genuine trade bill discount by the banks and the holder of the bill gives the amount and the banks arrange to collect the due from the drawer of the bill on the date of maturity.

    Investment of Funds:

    One of the main functions of commercial banks is to invest their funds so as learn interest and returns apart from productively utilizing their funds. In India as per the statutes, banks must invest a part of their total investments in government securities and other approved securities to impart liquidity.

    Banks apart from enabling them to earn out of their investments, nowadays have set up mutual funds through which they mobilize funds from the people who invest them in very attractive projects which is a help rendered to the investors who otherwise will not have the benefit of participating in the project. Banks administer these mutual funds through specialists and experts whose services are not available to the common men.

    Agency Functions of Commercial Banks:

    Banks function as the agent of their customers and help them in several ways. For these agency services, the banks charge a nominal amount. The agency services include the transfer of customer’s funds, collection of funds on behalf of the customers, transactions in the shares and securities for their customers, collection of dividends on shares and interest on debentures for their customers, payments of subscriptions, dues, bills, premia on behalf of the customers, acting as the Trustees and Executor of the customers, offering financial and other consultancy services, acting as correspondents of the customers, etc.

    Purchase and Sale of Foreign Exchange:

    The banks account for by far the largest proportion of all trading of both a commercial and speculative nature and operate within what knows as the interbank market. This is essentially a market composed solely of commercial and investments that buy and sell currencies from each other.

    Strict trading relationships exist between the member banks and lines of credit are established between these banks before they are permitted to trade. They are a fundamental part of the foreign exchange market as they not only trade on their behalf and for their customers but also provide the channel through which all other participants must trade.

    They are in essence the principal sellers within the Forex market. One important thing to remember is that commercial and investment banks do not only trade on behalf of their customers but also trade on their behalf through proprietary desks, whose sole purpose is to make a profit for the bank. It should always remember that commercial banks have exceptional knowledge of the marketplace and the ability to monitor the activities of other participants such as the central banks, investment funds, and hedge funds.

    Financing Domestic and International Trade:

    This is a major function of commercial banks. International trade depends to a large extent on the financial and other support given by the banks. Apart from encouraging bills transactions, the banks also issue the letter of credit facilitating the importers to conduct their trade smoothly.

    The banks also process all the documents through consultancy services and reduce the botheration of the traders. They also lend based on commercial bills, warehouse receipts, etc., which help the traders to expand their business.

    Creation of Credit:

    It is worth noting the credit created by the commercial banks. In the process of their lending operations, they create credit. The process involves the following mechanism; whenever the banks lend loans, they do not pay cash to the be borrowers; instead, they credit the accounts of the borrowers and allow them to withdraw from their accounts.

    This means every loan given will create a deposit for the banks. Since every deposit is equal to money, banks are said to be creating money in the form of credit. As a result, the volume of funds required by the trade. The government and the country are met by the banks without any necessity to use actual cash.

    Other Functions:

    Other functions of commercial banks include providing safety vault facilities for the customers, issuing traveler’s cheques acting as referees of their customers in times of need, compiling statistics and other valuable information, underwriting the issue of shares and debentures, honoring the bills drawn on them by their customers, providing consultancy services on financial and investment matters to customers, etc.

    In the process of performing all the above-mentioned services. The banks play a key role in economic development and nation-building. They help the country in achieving its socio-economic objectives. With the nationalization of banks, the priority sector and the needy people provide sufficient funds which helm them in establishing themselves. In this way, the banks provide a firm and durable foundation for the economic development of every country.

    Commercial Banks Meaning Functions and Significances - ilearnlot
    Commercial Banks: Meaning, Functions, and Significances!

    Types of Commercial Banks:

    The following chart depicts the main types of commercial banks in India.

    Scheduled Banks and Non-scheduled Banks:

    Banks classify into two broad categories—scheduled banks and non-scheduled banks.

    Scheduled banks are those banks which include in the Second Schedule of the Reserve Bank of India. A scheduled bank must have a paid-up capital and reserves of at least Rs 5 lakh. RBI provides special facilities including credit to scheduled banks. Some of the important scheduled banks are the State Bank of India and its subsidiary banks, nationalized banks, foreign banks, etc.

    Non-scheduled Banks:

    The banks which did not include in the Second Schedule of RBI are known as non-scheduled banks. A non-scheduled bank has a paid-up capital and reserves of less than Rs 5 lakh. Such banks are small banks and their field of operation also limited.

    A passing reference to some other types of commercial banks will be informative.

    Industrial Banks provide finance to industrial concerns by subscribing (buying) shares and debentures of companies and also giving long-term loans to acquire machinery, plants, etc. Foreign Exchange Banks are commercial banks that are branches of foreign banks and facilitate international financial transactions through buying and selling of foreign bills.

    Agricultural Banks finance agriculture and provide long-term loans for buying tractors and installing tube wells. Saving Banks mobilize small savings of the people in the savings account, e.g., Post office savings bank. Cooperative Banks organizing by the people for their collective benefits. They advance loans to their members at a fair rate of interest.

    The Significances of Commercial Banks:

    Banks play such an important role in the economic development of a country that a modern industrial economy cannot exist without them. They constitute a Nerve center of production, trade, and industry of a country.

    In the words of Wick-sell,

    “Bank is the heart and central point of the modern exchange economy.”

    The following points highlight the significance of commercial banks:

    1. They promote savings and accelerate the rate of capital formation.
    2. They are the source of finance and credit for trade and industry.
    3. It promotes balanced regional development by opening branches in backward areas.
    4. Bank credit enables entrepreneurs to innovate and invest which accelerates the process of economic development.
    5. They help in promoting large-scale production and growth of priority sectors such as agriculture, small-scale industry, retail trade, and export.
    6. They create credit in the sense that they can give more loans and advances than the cash position of the depositor’s permits.
    7. It helps commerce and industry to expand their field of operation.
    8. Thus, they make optimum utilization of resources possible.
  • Development Banks: Features, Functions, and Objectives

    Development Banks: Features, Functions, and Objectives

    Development Banks essentially a multi-purpose Financial Institution with a broad development outlook. This article explains about Development Banks and with their topics – Features, Functions, and Objectives. The important functions of development banks in India.

    Learn, Explain each topic of Development Banks – Features, Functions, and Objectives.

    A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities-economic development in general, and industrial development, in particular. In short, a development bank is a development-oriented bank; The Development Banks and their topics Features, Functions, and Objectives below are.

    Features of Development Banks:

    Following are the main characteristics or features of development banks:

    • It is a specialized financial institution, provides medium and long-term finance to business units.
    • Unlike commercial banks, it does not accept deposits from the public, It is not just a term-lending institution. It’s a multi-purpose financial institution.
    • It is essentially a development-oriented bank. Its primary objective is to promote economic development by promoting investment and entrepreneurial activity in a developing economy. It encourages new and small entrepreneurs and seeks balanced regional growth.
    • They provide financial assistance not only to the private sector but also to the public sector undertakings, It aims at promoting the saving and investment habit in the community.
    • It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial facilities.
    • Its motive is to serve the public interest rather than to make profits. It works in the general interest of the nation.

    Functions of Development Banks:

    Development banks have been started with the motive of increasing the pace of industrialization. The traditional financial institutions could not take up this challenge because of their limitations. To help all round industrialization development banks were made multipurpose institutions. Besides financing, they were assigned promotional work also.

    Some important functions of these institutions discuss as follows:

    Financial Gap Fillers:

    Development banks do not provide medium-term and long-term loans only but they help industrial enterprises in many other ways too.

    These banks subscribe to the bonds and debentures of the companies, underwrite their shares and debentures and, guarantee the loans raised from foreign and domestic sources. They also help undertakings to acquire machinery from within and outside the country.

    Undertake Entrepreneurial Role:

    Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to a lack of expertise and managerial ability. Development banks were assigned the job of entrepreneurial gap filling.

    They undertake the task of discovering investment projects, promotion of industrial enterprises, provide technical and managerial assistance, undertaking economic and technical research, conducting surveys, feasibility studies, etc. The promotional role of the development bank is very significant for increasing the pace of industrialization.

    Commercial Banking Business:

    Development banks normally provide medium and long-term funds to industrial enterprises. The working capital needs of the units are met by commercial banks. In developing countries, commercial banks have not been able to take up this job properly. Their traditional approach in dealing with lending proposals and assistance on securities has not helped the industry.

    Development banks extend financial assistance for meeting working capital needs to their loan if they fail to arrange such funds from other sources. So far as taking up other functions of banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no uniform practice in development banks.

    Joint Finance:

    Another feature of the development bank’s operations is to take up joint financing along with other financial institutions. There may be constraints of financial resources and legal problems (prescribing maximum limits of lending) which may force banks to associate with other institutions for taking up the financing of some projects jointly.

    It may also not be possible to meet all the requirements of concern by one institution, So more than one institution may join hands. Not only in large projects but also in medium-sized projects it may be desirable for a concern to have, for instance, the requirements of a foreign loan in a particular currency, met by one institution and under the writing of securities met by another.

    Refinance Facility:

    Development banks also extend the refinance facility to the lending institutions. In this scheme, there is no direct lending to the enterprise. The lending institutions are provided funds by development banks against loans extended’ to industrial concerns.

    In this way, the institutions which provide funds to units are refinanced by development banks. In India, the Industrial Development Bank of India (IDBI) provides reliance against term loans granted to industrial concerns by state financial corporations. commercial banks and state co-operative banks.

    Credit Guarantee:

    The small scale sector is not getting proper financial facilities due to the clement of risk since these units do not have sufficient securities to offer for loans, lending institutions are hesitant to extend the loans. To overcome this difficulty many countries including India and Japan have devised the credit guarantee scheme and credit insurance scheme.

    • In India, a credit guarantee scheme was introduced in 1960 with the object of enlarging the supply of institutional credit to small industrial units by granting a degree of protection to lending institutions against possible losses in respect of such advances.
    • In Japan, besides credit guarantee, insurance is also provided. These schemes help small-scale concerns to avail loan facilities without hesitation.
    Underwriting of Securities:

    Development banks acquire securities of industrial units through either direct subscribing or underwriting or both. The securities may also be acquired through promotion work or by converting loans into equity shares or preference shares. So, as learn about development banks may build portfolios of industrial stocks and bonds.

    These banks do not hold these securities permanently. They try to disinvest in these securities in a systematic way which should not influence the market prices of these securities and also should not lose managerial control of the units. Development banks have become worldwide phenomena.

    Their functions depend upon the requirements of the economy and the state of development of the country. They have become well-recognized segments of the financial market. They are playing an important role in the promotion of industries in developing and underdeveloped countries.

    Objectives of Development Banks:

    The main objectives of the development banks are:

    • They promote industrial growth.
    • To develop backward areas.
    • To create more employment opportunities.
    • The generate more exports and encourage import substitution.
    • To encourage modernization and improvement in technology.
    • To promote more self-employment projects.
    • The revive sick units.
    • To improve the management of large industries by providing training.
    • To remove regional disparities or regional imbalance.
    • They promote science and technology in new areas by providing risk capital, and.
    • To improve the capital market in the country.

    Development Banks Features Functions and Objectives - ilearnlot
    Development Banks: Features, Functions, and Objectives!

    The Few important functions of development banks in India are as follows:

    • They promote and develop small-scale industries (SSI) in India.
    • To finance the development of the housing sector in India.
    • To facilitate the development of large-scale industries (LSI) in India.
    • They help in the development of the agricultural sector and rural India.
    • To enhance the foreign trade of India.
    • They help to review (cure) sick industrial units.
    • To encourage the development of Indian entrepreneurs.
    • To promote economic activities in backward regions of the country.
    • They contribute to the growth of capital markets.

    Now let’s discuss each important function of development banks one by one.

    Small Scale Industries (SSI):

    Development banks play an important role in the promotion and development of the small-scale sector. The government of India (GOI) started the Small Industries Development Bank of India (SIDBI) to provide medium and long-term loans to Small Scale Industries (SSI) units. SIDBI provides direct project finance and equipment finance to SSI units. It also refinances banks and financial institutions that provide seed capital, equipment finance, etc., to SSI units.

    Development of Housing Sector:

    Development banks provide finance for the development of the housing sector. GOI started the National Housing Bank (NHB) in 1988.

    NHB promotes the housing sector in the following ways:

    • It promotes and develops housing and financial institutions.
    • It refinances banks and financial institutions that provide credit to the housing sector.
    Large Scale Industries (LSI):

    The development bank promotes and develops large-scale industries (LSI). Development financial institutions like IDBI, IFCI, etc., provide medium and long-term finance to the corporate sector. They provide merchant banking services, such as preparing project reports, doing feasibility studies, advising on the location of a project, and so on.

    Agriculture and Rural Development:

    Development banks like the National Bank for Agriculture & Rural Development (NABARD) helps in the development of agriculture. NABARD started in 1982 to provide refinance to banks, which provide credit to the agriculture sector and also for rural development activities. It coordinates the working of all financial institutions that provide credit to agriculture and rural development. It also provides training to agricultural banks and helps to conduct agricultural research.

    Enhance Foreign Trade:

    Development banks help to promote foreign trade. The government of India started the Export-Import Bank of India (EXIM Bank) in 1982 to provide medium and long-term loans to exporters and importers from India. It provides Overseas Buyers Credit to buy Indian capital goods. Also, encourages abroad banks to provide finance to the buyers in their country to buy capital goods from India.

    Review of Sick Units:

    Development banks help to revive (cure) sick-units. The government of India (GOI) started the Industrial Investment Bank of India (IIBI) to help sick units. IIBI is the main credit and reconstruction institution for a revival of sick units. It facilitates modernization, restructuring, and diversification of sick-units by providing credit and other services.

    Entrepreneurship Development:

    Many development banks facilitate entrepreneurship development. NABARD, State Industrial Development Banks, and State Finance Corporations provide training to entrepreneurs in developing leadership and business management skills. They conduct seminars and workshops for the benefit of entrepreneurs.

    Regional Development:

    The development bank facilitates rural and regional development. They provide finance for starting companies in backward areas. Also, they help companies in project management in such less-developed areas.

    Contribution to Capital Markets:

    The development bank contributes to the growth of capital markets. They invest in equity shares and debentures of various companies listed in India. Also, invest in mutual funds and facilitate the growth of capital markets in India.