MBA_BusinessSociety&Law_Unit8

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2 Business, Society & Law www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

3 Unit 8- Financial Environment-I Commercial Banks www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

4 What is Bank? • Banking is defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to conduct economic activities such as making profit or simply covering operating expenses. • www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

5 • A bank is a financial institution licensed to receive deposits and make loans. Two of the most common types of banks are commercial/retail and investment banks. • Depending on type, a bank may also provide various financial services ranging from providing safe deposit boxes and currency exchange to retirement and wealth management. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

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7 • Central banks are responsible for currency stability. They control inflation, dictate monetary policies, and oversee money demand and supply in the market. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

8 • Commercial or retail banks offer various services including, but not limited to, managing money deposits and withdrawals, providing basic checking and saving accounts, certificates of deposit, issuing debit and credit cards to qualified customers, supplying short-and long-term loans such as car loans, home mortgages or equity line of credits. • www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

9 • Investment banks gear their services toward corporate clients. • They provide services such as merger and acquisition activity and underwriting among other investment services. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

Commercial Bank 10 ▸ A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. www.cuidol.in Unit-1(MAP-607) 10 All right are reserved with CU-IDOL

11 ▸ Finance trade and commerce with short-term loans. ▸ Charge 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. www.cuidol.in Unit-1(MAP-607) 11 All right are reserved with CU-IDOL

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Functions of Commercial 13 Banks ▸ 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. www.cuidol.in Unit-1(MAP-607) 13 All right are reserved with CU-IDOL

Lets Recall 14 ▸ ____________ provide services such as merger and acquisition activity and underwriting among other investment services. ▸ A. Investment Banks ▸ B. Central Banks ▸ C. Commercial Banks www.cuidol.in Unit-1(MAP-607) 14 All right are reserved with CU-IDOL

Primary Accepts Deposits 15 Secondary Functions of Provide Loans Commercial Discounting Bill Banks of Exchange Overdraft Facility www.cuidol.in Agency Function General Utility 15 Unit-1(MAP-607) All right are reserved with CU-IDOL

1. It accepts deposits: 16 ▸ A commercial bank accepts deposits in the form of current, savings and fixed deposits. www.cuidol.in Unit-1(MAP-607) 16 All right are reserved with CU-IDOL

17 (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. ▸ Maintained by businessmen and Industrialists who receive and make business payments of large amounts through cheques. www.cuidol.in Unit-1(MAP-607) 17 All right are reserved with CU-IDOL

18 ▸ (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., period of time ranging from a few days to a few years. ▸ These are neither payable on demand nor they enjoy cheque facilities. www.cuidol.in Unit-1(MAP-607) 18 All right are reserved with CU-IDOL

19 ▸ They can be withdrawn only after the maturity ▸ Higher rate of interest. ▸ They are not treated as a part of money supply Recurring deposit in which a regular deposit of an agreed sum is made is also a variant of fixed deposits. www.cuidol.in Unit-1(MAP-607) 19 All right are reserved with CU-IDOL

(iii) Savings account 20 deposits: ▸ These are deposits whose main objective is to save. ▸ Suitable for individual households. They combine the features of both current account and fixed deposits. ▸ They are payable on demand and also withdraw able by cheque. ▸ A bank may allow four or five cheques in a month. ▸ Interest paid is lesser than that of fixed deposit. www.cuidol.in Unit-1(MAP-607) 20 All right are reserved with CU-IDOL

Lets Recall 21 ▸ (i) Deposits which can be withdrawn on demand by depositors are called ▸ A. Demand deposits ▸ B.Time Deposits www.cuidol.in Unit-1(MAP-607) 21 All right are reserved with CU-IDOL

Contd… 22 ▸ Ii) Deposits which are payable only after the expiry of the specified period ▸ A. Term Deposits ▸ B. Current Account Deposits www.cuidol.in Unit-1(MAP-607) 22 All right are reserved with CU-IDOL

23 ▸ Iii) Demand deposits are highly liquid whereas time deposits are less liquid ▸ A. True ▸ B. False www.cuidol.in Unit-1(MAP-607) 23 All right are reserved with CU-IDOL

2. It gives loans and 24 advances ▸ (i) Cash Credit: ▸ An eligible borrower is 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 utilised portion of credit (loan). www.cuidol.in Unit-1(MAP-607) 24 All right are reserved with CU-IDOL

(ii) Demand Loans: 25 ▸ 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. www.cuidol.in Unit-1(MAP-607) 25 All right are reserved with CU-IDOL

(iii) Short-term Loans: 26 ▸ 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 instalment or in a number of instalments over the period of loan. www.cuidol.in Unit-1(MAP-607) 26 All right are reserved with CU-IDOL

Investment: 27 ▸ 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. www.cuidol.in Unit-1(MAP-607) 27 All right are reserved with CU-IDOL

(B) Secondary Functions: 28 ▸ 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 discounting process of a commercial bank. www.cuidol.in Unit-1(MAP-607) 28 All right are reserved with CU-IDOL

29 ▸ Alternatively, a bill of exchange is a document acknowledging an 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. www.cuidol.in Unit-1(MAP-607) 29 All right are reserved with CU-IDOL

30 ▸ 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 specified period, the bank will get payment from A. www.cuidol.in Unit-1(MAP-607) 30 All right are reserved with CU-IDOL

4. Overdraft facility: 31 ▸ An overdraft is an advance given by allowing a customer keeping 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. www.cuidol.in Unit-1(MAP-607) 31 All right are reserved with CU-IDOL

32 ▸ In other words, depositors of current account make 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 honour the cheque. ▸ The security for overdraft is generally financial assets like shares, debentures, life insurance policies of the account holder, etc. www.cuidol.in Unit-1(MAP-607) 32 All right are reserved with CU-IDOL

Let’s Recall 33 ▸ Overdraft is made without security in current account but loans are given against security. ▸ A. True ▸ B. False www.cuidol.in Unit-1(MAP-607) 33 All right are reserved with CU-IDOL

34 ▸ The borrower of loan pays Interest on amount outstanding against him but customer of overdraft pays interest on the daily balance. ▸ A. True ▸ B. False www.cuidol.in Unit-1(MAP-607) 34 All right are reserved with CU-IDOL

Agency functions of the 35 bank: ▸ The bank acts as an agent of its customers and gets commission for performing agency functions as under: ▸ (i) Transfer of funds: ▸ It provides facility for cheap and easy remittance of funds from place-to-place through demand drafts, mail transfers, telegraphic transfers, etc. www.cuidol.in Unit-1(MAP-607) 35 All right are reserved with CU-IDOL

36 ▸ (ii) Collection of funds: ▸ It collects funds through cheques, bills, bundles and demand drafts on behalf of its customers. www.cuidol.in Unit-1(MAP-607) 36 All right are reserved with CU-IDOL

37 ▸ (iii) Payments of various items: ▸ It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its customers. www.cuidol.in Unit-1(MAP-607) 37 All right are reserved with CU-IDOL

38 ▸ (iv) Purchase and sale of shares and securities: ▸ It buys sells and keeps in safe custody securities and shares on behalf of its customers. www.cuidol.in Unit-1(MAP-607) 38 All right are reserved with CU-IDOL

39 ▸ (v) Collection of dividends, interest on shares and debentures is made on behalf of its customers. ▸ (vi) Acts as Trustee and Executor of property of its customers on advice of its customers. www.cuidol.in Unit-1(MAP-607) 39 All right are reserved with CU-IDOL

40 ▸ (vii) Letters of References: ▸ It gives information about economic position of its customers to traders and provides similar information about other traders to its customers. www.cuidol.in Unit-1(MAP-607) 40 All right are reserved with CU-IDOL

41 ▸ 6. Performing general utility services: ▸ (i) Traveller’s cheques .The banks issue traveler’s cheques and gift cheques. ▸ (ii) Locker facility. The customers can keep their ornaments and important documents in lockers for safe custody. www.cuidol.in Unit-1(MAP-607) 41 All right are reserved with CU-IDOL

42 ▸ (iii) Underwriting securities issued by government, public or private bodies. ▸ (iv) Purchase and sale of foreign exchange (currency). www.cuidol.in Unit-1(MAP-607) 42 All right are reserved with CU-IDOL

43 THANK YOU www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL