The introduction of banking and financial sector reforms has blurred the distinction between commercial and investment banks. One after another, Development Financial Institutions (DFIs) are adopting universal banking paradigm by incorporating a host of services and products in their portfolios. This helps them achieve synergy, greater economic efficiency in the form of lower costs and higher productivity. Many reports of RBI also favor universal banking practices.
Banks are basically business establishments which concern themselves with the business of borrowing surplus cash from some entities and lending it to those entities which are deficient in cash. Banks occupy a pivotal place in the economy since individuals and commercial establishments depend on them for all their financial transactions. In other words, they are the facilitators for every transaction involving the use of money or financial instruments. Before the 1990s, the banking sector in India was dominated by the nationalized banks. The c ommercial bank's area of operation was limited to the small-term loan needs of individuals and corporate customers while Development Financial Institutions (DFIs) were mostly engaged in investment activities.
Commercial banks in India are divided into public sector banks, private sector banks and foreign banks. They are the major participants in the money market, working under the overall guidance of the central bank i.e., the Reserve Bank of India (RBI). The basic function of these banks is to accept all kinds of deposits from the public at large and lend them to individuals and institutions that may require money. The variation in the borrowing and lending rate of interest is the principal source of profit for these banks. They are geared to satisfy the short-term financial requirements (i.e., the working capital) of the commercial institutions. Their lending is in the form of cash credit, discounting bills, promissory notes, overdraft facility and short-term debt instruments. In addition to their basic function, commercial banks also provide such services to their clients as payment of subscription, insurance premium, rent, royalty, interest dividend, etc. In their advisory role, these banks help the clients in the design of their investment portfolio relating to the purchase and sale of securities. |
