Question

Discuss the limits on the types of products and services a commercial bank can offer.

Answer 1

Types of products / Services offered by Commercial banks and limitation over the same:-

1. Accepting of deposits:- Accepting deposits from account holders is the primary function, however the limitation is that the banks cannot utilize in profitable sectors.
2. Advancing of Loans:- Banks are profit oriented business organizations. They can hence advance loans to public. However, the limitations is that before advancing such loans, banks need to keep certain cash reserves and other conditions as required by the RBI.
3. Cheque Payments:- Banks provide cheque pads to customers who can draw cheques upon banks. Here limitations is that bank will pay money only after formal verification and official procedures.
4. Remittance:- Banks provide remittance services to its customers. However, the limitation is that the bank shall not accept or execute any money transfer transaction that:

1. Prohibited under Foreign Exchange law.
2. Is arranged by the customer for or on behalf of the third party.
3. That is conducted for payment of import bill or for any purpose other than remittance purpose prescribed by the banks.

5. Foreign currency exchange:- Banks deal with foreign currency as required by the customers. However the limitation is that the banks shall while providing such services follow the monetary limits as set up under Foreign Exchange Management Act.
6. Bank Guarantee:- Customers are provided the facility of bank guarantee. However the limitation is that the bank before giving any bank guarantee to the customer shall refer the Letter of Credit (LC) for the amount as guaranteed. Also the bank has to follow the norms of RBI.
7. Amount of Cash Credit:- The credit creation power of banks depends upon the amount of cash they possess. The amount of cash that a bank has in its vaults depends upon the primary deposits with the bank. The bank’s power of creating credit is thus limited by the cash it possesses.