Commercial Bank

Commercial Banks

By commercial banks we mean those banks which provide financial facilities to various trading and industrial institutions. Generally industrial organizations receive long term and medium term loans from particular financial institu tions and short term loan from banks. Commercial banks accumulate small savings from the public and build up a huge capital and this benefits the industrial and business ventures in the maximum possible manner. Banks not only give loans to people but also encourage the tendency to save.

The Functions of Commercial Banks

The main functions of commercial banks are as follows –

1. To collect the savings from the customers

2.To give loans

3. To function as an guarantor

4. To assist in transfer of money

5.To exchange letters of credit

6. To en – cash bills

To underwrite shares and letters of credit
In this way commercial banks keep the savings of the people. They give many services as an agent. They contribute people with them and give loans to traders and other peoletters of credit. en – cash commercial bills and underwrite a transferring money from one place to another, transport letters of loan.

Financial assistance being provided by
commercial banks

In the various loans being provided by commercial banks the percentage of loans being given to industries is on the rise. In 1951 only 33.4% of the loans given by banks went to industries which increased to 55.1% in 1978. It is clear from this that commercial banks are playing an important role in financial arrangements of industries.

The loans given by banks fulfil to a large amount the short term financial needs of industrial and trading institutions. Medium – term and long-term financial assistance is also provided by financial institutions but the percentage is very low. The medium – term and long-term financial assistance given by banks are given in the following ways

1. Giving loans against securities – the banks give
medium-term and long-term loans against securities.

2. By purchasing shares and letters of credit – the
bank provides loans to industrial institutions by purchasing shares and letters of credit.

3. By underwriting shares and letters of credit –
commercial banks provide financial assistance by underwriting the shares and letters of credit of various industrial institutions. Using this medium-term and long-term loans are provided to various trading and industrial units.

4. To give financial advice-commercial banks pro-
vide all types of financial advice to various trading and industrial institutions. These advices take care of various financial difficulties.

Difficulties in Providing Medium – Term and
Long-Term Loans

Usually only short term loans are provided to industrial institutions by commercial banks. These have to face many difficulties in providing medium-term and long-term loans. Usually banks do not provide medium – term and long term loans due to the following reasons –

(a) Short term investment – most of the savings
in the banks are short term deposits thus they do not like to give long-term loans

(b) High interest rates – the short term deposits
that the banks have are to be paid high interests thus if the Dank gives a medium-term or long-term loan to the indusTrial institutions it will have to claim a higher rate of interest.Paucity of financial sources – a big part of intrest.

(c)Whatever financial resources are available with the bank is Siven away as short-term loan. This does not leave enough resources to be given away as medium-term and long-term loans.

(d) Shortage of experts – Indian banks are short
of experienced persons and experts. This is the reason they are unable to analyse whether providing medium-term and long-term loans will prove beneficial or not.

(e) The problem of evaluating assets – generally
for medium – term and long-term loans immovable assetsare kept as securities. To get them evaluated is another problem that the banks face.

The effect of nationalization of banks on
industrial finance

On 19th July, 1969 the Indian government nationalized. 14 big commercial banks in order to facilitate industrial and business finance. The deposits of all these banks were Rs.50 Crores or more. After this on 15th May, 1980 6 more big banks were nationalized. While nationalizing these banks the following aims were laid out –

(a) In order to obtain large amount of money for national development.

(b) To get all the benefits gotten from banking business.

(C) To encourage financial resources.

(d) To keep a check on centralization of financial power.

(e) For maximum possible development of industries and business.