Commercial Banks

Notes

Commercial banks accept deposits from the public and lend, aiming at profit. They create credit and are the core of the payments and savings system.

Functions

Primary: accepting deposits (savings, current, fixed or term, recurring) and lending (cash credit, overdraft, term loans, discounting of bills).
Secondary: agency functions (collecting cheques, paying bills, standing instructions, remittances) and general utility functions (lockers, ATMs, foreign exchange, credit and debit cards, bancassurance, mutual fund distribution).

Credit creation: banks lend a part of deposits, and loans return as new deposits; the money multiplier is roughly 1 / reserve ratio (for a CRR of 4%, about 25).

Key ratios and terms

CRR and SLR (Topic 262).
Capital Adequacy Ratio (CAR/CRAR): capital as a percentage of risk-weighted assets; under Basel III the minimum in India is 9%, plus a capital conservation buffer of 2.5% (11.5% overall).
CASA ratio (current and savings deposits to total deposits): a higher ratio means cheaper funds. Net Interest Margin (NIM) and Net NPA ratio.
Lending rate benchmarks: BPLR (2003), Base Rate (2010), MCLR (2016), EBLR (2019). Savings deposit rates were deregulated in October 2011.
Prompt Corrective Action (PCA) framework: RBI restrictions on weak banks (triggers on capital, NPA and return on assets).
Deposit insurance by DICGC up to ₹5 lakh.
Priority sector lending: a 40% target.

Modern services: NEFT, RTGS, IMPS, UPI, internet and mobile banking, core banking solutions.

Governance: the Banks Board Bureau (2016), later replaced by the Financial Services Institutions Bureau (FSIB, 2022), selects heads of public sector banks. Indradhanush (2015) was a plan for reform and recapitalisation of PSBs.

Key Points

Functions: primary (deposits, loans) and secondary (agency, utility).
Credit multiplier = 1 / reserve ratio.
CAR: 9% plus a 2.5% buffer under Basel III.
Lending benchmarks: Base Rate, MCLR, EBLR; savings rates deregulated in 2011.
PCA framework restricts weak banks.

MCQs

Q1. The money multiplier is approximately: (a) CRR (b) 1/CRR (c) SLR (d) Repo rate Ans: (b).

Q2. The minimum Capital Adequacy Ratio required in India (excluding buffers) is: (a) 4% (b) 8% (c) 9% (d) 12% Ans: (c).