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Bank Management
Bank management governs various concerns associated with banks in order to
maximize profits and minimize risks. This is a basic tutorial that explains the
methodologies applied in the rapidly growing area of bank management in
commercial Indian banks.

Audience
This tutorial is designed for students from management streams who aspire to learn
the basics of bank Management. Professionals, especially managers, aspirants of
banking regardless of which sector or industry they belong to, can use this tutorial
to learn how to apply the methods of Bank Management in their respective
enterprises.

Prerequisites
The audience of this tutorial is expected to have a basic understanding of how a
bank manager would deal with multiple banking functions and accomplish it without
overshooting his resources.

Bank Management - Introduction

A bank is a financial institution which accepts deposits, pays interest on pre-defined
rates, clears checks, makes loans, and often acts as an intermediary in financial
transactions. It also provides other financial services to its customers.
Bank management governs various concerns associated with bank in order to
maximize profits. The concerns broadly include liquidity management, asset
management, liability management and capital management. We will discuss these
areas in later chapters.

Origin of Banks
The origin of bank or banking activities can be traced to the Roman empire during
the Babylonian period. It was being practiced on a very small scale as compared to
modern day banking and frame work was not systematic.
Modern banks deal with banking activities on a larger scale and abide by the rules
made by the government. The government plays a crucial role with its control over
the banking system. This calls for bank management, which further ensures quality
service to customers and a win-win situation between the customer, the banks and
the government.
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Scheduled & Non-Scheduled Banks
Scheduled and non-scheduled banks are categorized by the criteria or eligibility
setup by the governing authority of a particular region. The following are the basic
differences between scheduled and nonscheduled banks in the Indian banking
perspective.
Scheduled banks are those that have paid-up capital and deposits of an aggregate
value of not less than rupees five lakhs in the Reserve Bank of India. All their
banking businesses are carried out in India. Most of the banks in India fall in the
scheduled bank category.
Non-scheduled banks are the banks with reserve capital of less than five lakh
rupees. There are very few banks that fall in this category.

Evolution of Banks
Banking system has evolved from barbaric banking where commodities were
loaned to modern day banking system, which caters to a range of financial services.
The evolution of banking system was gradual with growth in each and every aspect
of banking. Some of the major changes which took place are as follows −

• Barter system replaced by money which made transaction uniform

• Uniform laws were setup to increase public trust
• Centralized banks were setup to govern other banks
• Book keeping was evolved from papers to digital format with the introduction
of computers
• ATMs were setup for easier withdrawal of funds
• Internet banking came into existence with development of internet
Banking system has witnessed unprecedented growth and will be undergoing it in
future too with the advancement in technology.

Growth of Banking System in India

The journey of banking system in India can be put into three different phases based
on the services provided by them. The entire evolution of banking can be described
in these distinct phases −

Phase 1

This was the early phase of banking system in India from 1786 to 1969. This period
marked the establishment of Indian banks with more banks being set up. The
growth was very slow in this phase and banking industry also experienced failures
between 1913 to 1948.
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The Government of India came up with the banking Companies Act in 1949. This
helped to streamline the functions and activities of banks. During this phase, public
had lesser confidence in banks and post offices were considered more safe to
deposit funds.

Phase 2

This phase of banking was between 1969 to 1991, there were several major
decisions being made in this phase. In 1969, fourteen major banks were
nationalized. Credit Guarantee Corporation was created in 1971. This helped
people avail loans to set up businesses.
In 1975, regional rural banks were created for the development of rural areas.
These banks provided loans at lower rates. People started having enough faith and
confidence on the banking system, and there was a plunge in the deposits and
advances being made.

Phase 3

This phase came into existence from 1991. The year 1991 marked the beginning of
liberalization, and various strategies were implemented to ensure quality service
and improve customer satisfaction.
The ongoing phase witnessed the launch of ATMs which made cash withdrawals
easier. This phase also brought in Internet banking for easier financial transactions
from any part of world. Banks have been making attempts to provide better services
and make financial transactions faster and efficient

A commercial bank is a type of financial institution that provides services like

accepting deposits, making business loans, and offering basic investment products.
The term commercial bank can also refer to a bank, or a division of a large bank,
which precisely deals with deposits and loan services provided to corporations or
large or middle-sized enterprises as opposed to individual members of the public or
small enterprises. For example, Retail banking, or Merchant banks.

A commercial bank can also be defined as a financial institution that is licensed by

law to accept money from different enterprises as well as individuals and lend
money to them. These banks are open to the mass and assist individuals,
institutions, and enterprises.
Basically, a commercial bank is the type of bank people tend to use regularly. They
are formulated by federal and state laws on the basis of the coordination and the
services they provide.
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These banks are controlled by the Federal Reserve System. A commercial bank is
licensed to assist the following functions −
• Accept deposits − Receiving money from individuals and enterprises known
as depositors.
• Dispense payments − Making payments according to the convenience of
the depositors. For example, honoring a check.
• Collections − Bank plays as an agent to collect funds from another banks
receivable to the depositor. For example, when someone pays through
check drawn on an account from a different bank.
• Invest funds − Contributing or spending money in securities for making more
money. For example, mutual funds.
• Safeguard money − A bank is regarded as a safe place to store wealth
including jewelry and other assets.
• Maintain savings − The money of the depositors is maintained, and the
accounts are checked and on a regular basis.
• Maintain custodial accounts − These accounts are maintained under the
supervision of one person but are actually for the benefit of another person.
• Lend money − Lending money to companies, depositors in case of some
emergency.
Commercial banks are apparently the largest source of financing for private capital
investment in a nation, especially, like India. A capital investment can be defined as
the purchase of a property with the purpose of either producing income from the
property, increasing the value of the property over time, or both. Similar capital
purchases made by enterprises may involve things like plants, tools and equipment.

Present Structure
The current banking framework in India can be broadly classified into two. The first
classification divides banks into three sub-categories — the Reserve Bank of India,
commercial banks and cooperative banks.
The second divides the banks into two sub-categories — scheduled banks and non-
scheduled banks. In both of these systems of categorization, the RBI, is the head
of the banking structure. It monitors and holds all the reserve capital of all the
commercial or scheduled banks across the nation.
Commercial banks are the foundations that receive deposits from individuals and
enterprises and lend loans to them. They generate credit. Commercial banks in
India are regulate under the Banking Regulation Act of 1949. These banks are
further categorized as −

• Scheduled banks
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• Non-scheduled banks
Scheduled banks are banks which are listed in the 2nd schedule of the Reserve
Bank of India Act, 1934. Non-scheduled banks are those banks which are not listed
in the second schedule of the Reserve Bank of India Act,1934.

Scheduled Banks
In India, for a bank to qualify as a scheduled bank, it needs to meet the criteria as
underplayed by the Reserve Bank of India. The following is a list of the criterions

• The banks should carry all their business transactions in India.

• All schedule banks are bound to hold a capital of not less than rupees five
lakhs in the Reserve Bank of India.
• In the year 2011, five lakhs rupees calculated in terms of dollars amounted
to $11,156.
Thus, any commercial, cooperative, nationalized, foreign bank and any other
banking foundation that accepts and satisfies these set conditions are termed as
scheduled banks but not all schedule banks are commercial banks.
The scheduled commercial banks are those banks which are included in the
second schedule of RBI Act, 1934. These banks accept deposits, lend loans and
also offer other banking services. The major difference between scheduled
commercial banks and scheduled cooperative banks is their holding pattern.
Cooperative banks are registered as cooperative credit institutions under the
Cooperative Societies Act of 1912.
Scheduled banks are further categorized as −

• Private-sector banks
• Public sector banks
• Foreign sector banks

Private-Sector Banks
These banks acquire larger parts of stake or congruity is maintained by the private
shareholders and not by government. Thus, banks where maximum amount of
capital is in private hands are considered as private-sector banks. In India, we have
two types of private-sector banks −

• Old Private-Sector Banks

• New Private-Sector Banks

Old Private-sector Banks

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The old private-sector banks were set up before nationalization in 1969. They had
their own independence. These banks were either too small or specialist to be
incorporated in nationalization. The following is a list of old private-sector banks in
India −

• Catholic Syrian Bank

• City Union Bank
• Dhanlaxmi Bank
• Federal Bank ING
• Vysya Bank
• Jammu and Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Lakshmi Vilas Bank
• Nainital Bank
• Ratnakar Bank
• South Indian Bank
• Tamilnadu Mercantile Bank
From the above mentioned banks, the Nainital Bank is an auxiliary or branch of the
Bank of Baroda, which has 98.57% stake in it. A few old generation private-sector
banks merged with other banks. For example, in the year 2007, Lord Krishna Bank
merged with Centurion Bank of Punjab. Sangli Bank merged with ICICI Bank in
2006. Yet again, Centurion Bank of Punjab merged with HDFC in 2008.

New Private-sector Banks

Banks which started their operations after liberalization in the 1990s are the new
private-sector banks. These banks were permitted entry into the Indian banking
sector after the amendment of the Banking Regulation Act in 1993.
At present, the following new private-sector banks are operational in India −

• Axis Bank Development

• Credit Bank (DCB Bank Ltd)
• HDFC Bank
• ICICI Bank
• IndusInd Bank
• Kotak Mahindra Bank
• Yes Bank
In addition to these seven banks, there are two more banks which are yet to
commence operation. They got the ‘in-principle’ licenses from RBI. These two
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banks are IDFC and Bandhan Bank of Bandhan Financial Services.

Commercial Banking Functions

Commercial banking is basically the parent of all types of banking available in the
present banking structure. In order to understand the role of commercial banking,
let us discuss some of its major functions. The following are the major functions of
commercial banks −

Acceptance of Deposits
The most important task of commercial banks is to accept deposits from the public.
Banks maintain and keep records of all the demand deposit accounts of their
customers and transform the deposit money into cash, vice versa is also possible
as per the requirements of the customers. Technically, demand deposits are
accepted in current accounts. The depositor can withdraw deposited money
anytime by means of checks.
In fixed deposit accounts, the depositor can withdraw the money deposited only
after a certain period. We can say, fixed deposits are time liabilities of the banks.
Deposits in the saving bank accounts are subjected to certain limitations regarding
the amount one can receive and withdraw. In this way, banks collect savings from
people and maintain a reserve of these savings.

Giving Loans and Advances

One of the most important functions of commercial banks is to extend loans and
advances out of the money through deposits of businessmen and entrepreneurs
against permitted securities and safety like gold or silver bullion, government
securities, easily saleable stocks and shares and marketable goods.
Banks give advances to customers or depositors through overdrafts, discounting
bills, money-at-call and short notice, loans and advances, different forms of direct
loans to traders and producers.

Using Check System

Banks facilitate services through some medium of exchange like checks. Using
checks for settling debts in business transaction is always preferred over cash.
Check is also referred as the most developed credit instrument.
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There are some other major functions of commercial banking. They perform a
multitude of other non-banking operations. These non-banking operations are
further classified as agency services and general utility services.

Agency Services

The services banks ensure for and on behalf of their customers are agency
services. The banks play the role of an executor, trustee and attorney for the
customer’s will. They accumulate as well as make payments for bills, checks,
promissory notes, interests, dividends, rents, subscriptions, insurance premium,
policy etc.
As mentioned above, they provide services for and on behalf of customers and also
issue drafts, mail, telegraphic transfers on behalf of clients to remit funds. They also
help their customers by arranging income-tax professionals to facilitate the process
of income tax returns. Basically the bankers work as correspondents, agents or
representatives of their clients.

General Utility Services

The services ensured for the entire society are known as general utility services.
The bankers issue bank drafts and traveler’s checks to facilitate transfer of funds
from one part of the country to another. They give the customers letters of credit
which help them when they go abroad.

They handle foreign exchange or finance foreign trade by accepting or assembling

foreign bills of exchange. Banks arrange for safe deposit vaults where the
customers can secure their valuables. Banks also assemble statistics and business
information relevant to trade, commerce and industry.