ACCOUNTMICS
By Sir Irfan Jan
M.Phil (Economics)
All subjects home and online tuitions available
for I.COM, B.COM, BBA & M.A Economics
Cell # 0347-3643211
I.COM(2) BANKING
ONLINE CLASSES LECTURE
Topic :
COMMERCIAL BANKS
Definition of Commercial Bank
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.
KINDS OF COMMERCIAL BANK
SCHEDULE BANKS
1- Registered under charter of central bank
2- Clearing of cheque facility available
3- Must follow the directions given by central bank
4- Transfer of money
5- Take loan from central bank
6- People prefer Schedule bank for open their accounts
7- Number of branches are more than non-schedule banks
NON- SCHEDULE BANKS
1- Not registered under charter of central bank
2- There is no clearing facility
3- Not liable to follow directions given by central bank
4- They cannot transfer money
5- They can not take loan from central bank
6- People do not prefer Non-schedule bank for open their accounts
7- Number of branches are less than schedule banks
FUNTIONS OF COMMERCIAL BANKS
TYPES OF FUCTIONS BY COMMERCIAL BANKS
A. Number 1 are the Primary functions
B. Number 2 are the Secondary functions
A.Primary functions
A) Receiving deposits
Receive deposits in the form of current a/c, fixed a/c and saving a/c.
• Current account:
Payable on demand
Bank does not pay interest on these deposits
• Fixed account:
Not paid on demand
Bank paid interest on such type of deposits
• Saving account:
Objective to encourage people to save
Such types of accounts open by house hold
Payable on demand and also withdraw able by cheque
A. Primary functions
B) Advancing loans
Receive deposits in the form of cash credit, demand loans and short term loans.
• Cash credit:
Loan given to the borrower with is withdrawn within his credit limit
Interest is charge on the amount actually withdrawn
• Demand loans:
Loan can be recall by the bank at any time
Interest is paid on the entire sum
• Short term loans:
Personal loans against some collateral security
(Holding jewelery , property papers etc )
The borrower can withdraw money from his account
Interest is paid on the entire sum
B. Secondary functions
A- PUBLIC/GENERAL UTITLITY SERVICES
Definition of B/E
It is a contract,
binding one party
to an agreedupon payment
amount
1- Acceptance and discounting of bill of exchange
• B/E used in both home & foreign trade
• C.B accept B/E on customer’s behalf discount such bill by
the hard cash
paying
2- Creation of credit money
It is the process of acceptance of deposits and granting loans,
commercial banks are able to create credit
3- Underwriting of shares
It issued share and debentures newly promoted joint stock companies
Shares & Debentures
Both are issued by JSC
for expand our
business.
Shares can be convert
into cash at any time
But debentures is a
type of long term that
can be cash at the
time of maturity
B. Secondary functions
4- Letter of Credit (L/C) / travelers’ cheques
A man going on a tour takes with him a letter of credit from his bank.
It is mentioned there that he can be paid sums up to a certain limit.
5- Providing locker rent service
Safeguard your Jewelry, Currency, documents
6- Transfer of funds
Transfer of funds in quick , reliable way
7- Automatic Teller Machines (ATM) service
Withdrew of cash 24X7
B. Secondary functions
B- AGENCY SERVICES
1. Purchasing and selling stocks and shares on his
behalf.
2. Making sundry payments like rent, insurance,
premium, on his behalf.
3. Receive money on their behalf e.g. dividend,
rent, interest etc.
4. Sale and purchase of securities.
5. Transfer or deposit money from one place or
bank to another.
6. Collecting bills on behalf of K-electric, SSGS
bills, water tax etc.
C . MISCELLANEOUS SERVICES
1.
2.
3.
4.
5.
6.
7.
Receipts of donations
Receipts of fees on behalf of educational institutions
Collection of salaries and dividends
Collection of zakat
Preparation of tax returns
Receipts of Hajj applications
Issuances of Qarz-e-Hasna
PROCESS OF CREDIT CREATION BY COMMERCIAL BANKS
Every deposit creates a loan. Commercial banks give loans and
advances against some security to the public.
AN EXAMPLE:
This can be explained with an example.
Suppose Primary Deposits = Rs 1,000
Bank can lend out = Rs 900
i.e., Primary Deposit — Cash Reserve = Derivative Deposit.
Rs 1,000
—
Rs 100 = Rs 900
(10% of 1000 is Rs 100)
PROCESS OF CREDIT CREATION BY COMMERCIAL BANKS
Primary Deposits
1000
900
810
-
Cash Reserve Ratio Derivative Deposits
(CRR)
100
900
90
810
81
729
10000
This process can be explained with a formula
Total credit creation = Primary deposit X 1/CRR
Total credit creation = 1000 X 1/10 X 100
Total credit creation = 1000 X 10 = 10000
PROCESS OF CREDIT CREATION BY COMMERCIAL BANKS
ASSIGNMENT
Primary deposits = Rs.1000
CRR = 20%
Required:
Compute how much commercial bank create credit?
(within 10 minutes)
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If you want complete notes in pdf form of
CHAPTER # 2 COMMERCIAL BANK
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SIR IRFAN JAN
WHATSAPP # 0347-3643211