A commercial bank is a financial institution with the authorization to offer diverse financial services, such as consumer and business loans, and savings accounts. Initially, commercial banks, Functions Of Commercial Bank were confined to accepting deposits for safekeeping, verifying coinage, and exchanging currencies. As time progressed, particularly by the 17th century, essential aspects of contemporary banking, such as foreign exchange, interest payments, and loan provisions, had become established practices.
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Functions Of Commercial Bank
Commercial Banks play a crucial role in the financial system, offering a range of deposit services:
- Acceptance of Deposits:
- Current Deposits: These deposits, made into a current account, are convenient for businesses, public authorities, and joint-stock companies due to unrestricted withdrawals.
- Savings Deposits: Deposits in a savings bank account, ideal for small businessmen, salaried employees, artisans, and those in the low to middle-income groups. The interest paid is comparatively low, around 4% per annum.
- Term Deposits: Also known as fixed deposits, money is deposited for a fixed period (minimum of 15 days). The deposit can be withdrawn after the maturity period, with interest rates varying from 6% to 12% per annum.
- Recurring or Cumulative Deposits: Variants of fixed deposits, suitable for those unable to save large amounts at once. These deposits carry interest rates between savings bank and term deposits.
Credit and Financing Services: Empowering Financial Growth
Another key function of commercial banks is to extend loans and advances to various segments of the public, including traders, industrialists, farmers, and artisans. The range of credit services includes:
(a) Demand Loans/Call Loans:
- A demand loan, repayable on the bank’s demand, lacks a specified maturity period.
- This type of advance, with or without security, is often referred to as a call loan.
- Typically, call loans are provided to other banks or financial institutions for short durations, ranging from a day to a few days.
(b) Short-term Loans:
- These loans have a specific short-term duration and are sanctioned to businesses, farmers, and individuals for financing working capital.
- Individuals may also obtain short-term loans for personal needs, and these loans are secured.
(c) Cash Credits:
- Involves an arrangement where the bank permits its customer to borrow money up to a specified limit from a dedicated account.
- The customer has the flexibility to withdraw funds as needed, and interest is charged only on the actual amount withdrawn.
(d) Overdraft:
- This facility allows current account holders to withdraw funds beyond their available balance, up to a specified limit.
- Interest is charged on the actual amount withdrawn, offering financial flexibility.
(e) Discounting of Bills of Exchange:
- Bills of exchange represent commitments by buyers to sellers for credit transactions, with specified payment terms.
- Traders holding such bills can approach banks for their discounting when in need of immediate funds.
(f) Credit Cards:
- In contemporary banking, credit cards have emerged as a popular method of providing loans to customers.
- Credit cardholders can make credit-based purchases from specified businesses and shops, and they can also withdraw cash, subject to specific regulations.
3. Creation of Credit:
Commercial banks perform the distinctive function of credit creation, a unique aspect of their operations. This involves the generation of credit using the primary deposits of money received from the public by the customers. A portion of the total deposited amount is then extended as loans and advances to meet the financial requirements of the bank’s customers.
4. Agency Functions:
Commercial banks also engage in specific agency functions, including:
- (a) Collecting cheques, drafts, bills of exchange, etc., on behalf of their customers from other banks.
- (b) Collecting dividends and interest from business and industrial firms.
- (c) Facilitating the purchase and sale of securities, shares, debentures, government securities on behalf of their customers.
- (d) Serving as trustees, safeguarding funds, and acting as executors, executing the will of the customers after their death.
- (e) Making various payments such as insurance premiums, income tax, subscriptions, etc., on behalf of their customers following their guidance.
5. General Utility Functions:
In addition to the aforementioned agency functions, Functions Of Commercial Bank offer various general utility services to their customers, including:
- (a) Providing locker facilities for the safekeeping of silver, gold ornaments, important documents, and valuable items.
- (b) Facilitating money transfers between customers’ accounts in different banks through demand drafts and mail transfers.
- (c) Utilizing computers and internet facilities to enable online money transfers between banks.
- (d) Issuing letters of credit to empower customers to purchase commodities on a credit basis
- (e) Endorsing and providing guarantees for shares issued by joint-stock companies, assisting them in raising capital.
- (f) Issuing traveler’s cheques to mitigate the risk of carrying cash.
- (g) Offering foreign exchange services to customers for their business-related exports and imports.
- (h) Conveying information on behalf of customers to businesses operating in other locations and collecting information about such businesses for the customers.
- (i) Establishing Automated Teller Machines (ATMs) at various locations to allow customers to withdraw cash from their accounts at any ATM, anytime during the day.
Commercial Bank FAQ
A commercial bank is a financial institution that provides a wide range of financial services, including loans, savings accounts, and other banking products to individuals and businesses.
Commercial banks perform various functions, such as accepting deposits, granting loans and advances, creating credit, offering agency services, and providing general utility services.
Commercial banks accept different types of deposits, including current deposits, savings deposits, term deposits, and recurring or cumulative deposits.