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Reserve Bank (1921), the Central Bank of India (1935), the Central Bank of Ceylon
China (1928), The Reserve Bank of (1950) and the Bank of Israel (1954) were
New Zealand (1934), The Reserve Bank of established.

History Of Indian BANKS

 The first bank of India was Bank of Hindustan (1770) {Under British Rule}
The Banking system in India was controlled and dominated by the Presidency
 
Banks.
There were three Presidency Banks:

{ }
1. Bank of Bengal (1809)
They were called
2. Bank of Bombay (1840) Presidential Banks
3. Bank of Madras (1843)

All Merged (1921) Change into (1955)

IMPERIAL BANK OF INDIA SBI

6.3 6.3.1 Functions of Commercial Banks:

Commercial banks Commercial banks are institutions

that conduct business with profit motive
Commercial bank refers to a bank, by accepting public deposits and lending
or a division of a large bank, which more loans for various investment purposes.
specifically deals with deposit and loan
services provided to corporations or large/ The functions of commercial banks are
middle-sized business - as opposed to broadly classified into primary functions
individual members of the public/small and secondary functions, which are
business. They do not provide, long-term shown in the picture
credit, as liquidity of assets is to be
maintained. Functions of
Commercial Banks

Primary Secondary Other

functions Functions Functions

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Functions of Commercial Banks 2. Advancing Loans

(a) Primary Functions: It refers to granting loans to

individuals and businesses. Commercial
1. Accepting Deposits banks grant loans in the form of overdraft,
cash credit, and discounting bills of
It implies that commercial banks are exchange.
mainly dependent on public deposits.
(b) Secondary Functions
There are two types of deposits, which
are discussed as follows The secondary functions can be
classified under three heads, namely,
(i) Demand Deposits agency functions, general utility functions,
It refers to deposits that can be and other functions.
withdrawn by individuals without any
prior notice to the bank. In other words, 1. Agency Functions: It implies that
the owners of these deposits are allowed commercial banks act as agents of
to withdraw money anytime by writing a customers by performing various
withdrawal slip or a cheque at the bank functions.
counter or from ATM centres using debit
(i) Collecting Cheques
card.
Banks collect cheques and bills of
(ii) Time Deposits exchange on the behalf of their customers
It refers to deposits that are made through clearing house facilities provided
for certain committed period of time. by the central bank.
Banks pay higher interest on time deposits.
(ii) Collecting Income
These deposits can be withdrawn only
after a specific time period by providing a Commercial banks collect dividends,
written notice to the bank. pension, salaries, rents, and interests on
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investments on behalf of their customers. 3. Transferring Funds

A credit voucher is sent to customers for
It refers to transferring of funds from
information when any income is collected
one bank to another. Funds are transferred
by the bank.
by means of draft, telephonic transfer, and
(iii) Paying Expenses electronic transfer.

Commercial banks make the 4. Letter of Credit

payments of various obligations of Commercial banks issue letters of
customers, such as telephone bills, credit to their customers to certify their
insurance premium, school fees, and rents. creditworthiness.
Similar to credit voucher, a debit voucher
is sent to customers for information when (i) Underwriting Securities
expenses are paid by the bank.
Commercial banks also undertake
(2) G eneral Utility Functions: It implies the task of underwriting securities. As
that commercial banks provide public has full faith in the creditworthiness
some utility services to customers by of banks, public do not hesitate in buying
performing various functions. the securities underwritten by banks.

(ii) Electronic Banking

(i) Providing Locker Facilities
It includes services, such as debit
Commercial banks provide locker
cards, credit cards, and Internet banking.
facilities to its customers for safe custody
of jewellery, shares, debentures, and other (C) Other Functions:
valuable items. This minimizes the risk of
loss due to theft at homes. Banks are not (i) Money Supply
responsible for the items in the lockers. It refers to one of the important
(ii) Issuing Traveler’s Cheques functions of commercial banks that help
in increasing money supply. For instance,
Banks issue traveler’s cheques to a bank lends �5 lakh to an individual and
individuals for traveling outside the opens a demand deposit in the name of
country. Traveler’s cheques are the safe that individual. Bank makes a credit entry
and easy way to protect money while of �5 lakh in that account. This leads
traveling. to creation of demand deposits in that
account. The point to be noted here is that
(iii) Dealing in Foreign Exchange there is no payment in cash. Thus, without
Commercial banks help in providing printing additional money, the supply of
foreign exchange to businessmen dealing money is increased.
in exports and imports. However,
(ii) Credit Creation
commercial banks need to take the
permission of the Central Bank for dealing Credit Creation means the
in foreign exchange. multiplication of loans and advances.
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Commercial banks receive deposits from book debt in his name called a deposit, it
the public and use these deposits to give is known as a “primary deposit’. But when
loans. However, loans offered are many such a deposit is created, without there
times more than the deposits received by being any prior payment of equivalent
banks. This function of banks is known as cash to the bank, it is called a ‘derived
‘Credit Creation’. deposit’.

(iii) Collection of Statistics: Primary Deposits

Banks collect and publish statistics  It is out of these primary deposits that
relating to trade, commerce and industry. the bank makes loans and advances to
Hence, they advice customers and the its customers.
public authorities on financial matters.  The initiative is taken by the customers
themselves. In this case, the role of
6.3.2. Mechanism / Technique of Credit the bank is passive.
Creation by Commercial Banks S o these deposits are also called
 
Bank credit refers to bank loans and “Passive deposits”.
advances. Money is said to be created when
the banks, through their lending activities, Credit Creation literally means the
make a net addition to the total supply of multiplication of loans and advances.
money in the economy. Likewise, money Every loan creates its own deposits.
is said to be destroyed when the loans are Central Bank insists the banks to maintain
repaid by the borrowers to the banks and a ratio between the total deposits they
consequently the credit already created by create and the cash in their possession.
the banks is wiped out in the process. For the purpose of understanding,
it is assumed that all banks are obliged
Banks have the power to expand
to keep the ratio between cash and its
or contract demand deposits and they
deposits at a minimum of 20 percent.
exercise this power through granting more
or less loans and advances and acquiring 1. 
The banks do not keep any excess
other assets. This power of commercial reserves, in other words, it would
bank to create deposits through expanding exhaust possible avenues of income
their loans and advances is known as earning activities like giving loans
credit creation. etc. up to the maximum extent after
attaining the minimum cash reserves.
Primary / Passive Deposit and Derived /
2. There are no drains in the supply of
Active Deposit
money i,e., the public do not suddenly
The modern banks create deposits in want to hold more ideal currency or
two ways. They are primary deposit and withdraw from the time deposits.
derived deposit. When a customer gives Under the above assumptions, when
cash to the bank and the bank creates a a customer deposits a sum of ₹1000 in a
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