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What is Commercial Bank Functions | Download PDF free

December 7, 2017 by Study Mentor Leave a Comment

The banking institutes are the most important part of modern developing countries. They perform various functions to meet the requirements of the people. The business bank is a monetary organization that gives different money related service, for example, such that tolerating stores, issuing credits.

Business bank clients could take advantage of an extent for speculation items that business banks the table such as funds accounts. Those loans a business bank issues could change from business advances. 

Table of Contents

  • There are several banks available in the economy like
  • Function of Commercial Banks
    • Primary Functions
    • Secondary Functions
  • Commercial Banks in India

There are several banks available in the economy like

  • Commercial Banks: These banks mobilize deposits from the public that are repayable on demand. These banks also provide loans to the traders and other small production houses. It also provides capital to the businessmen in form of overdraft facilities and cash credit. It renders agency function to the clients like collection of cheques and bills, discounting the bill of exchange, safely keeping the valuables, issuing letter of credit, remittance of funds, etc. 
  • Investment Banks: These banks are also known as Industrial Banks. It provides medium and long term loans to the old companies for expansion and provides underwriting facilities to the new incorporated companies. 
  • Exchange Banks: These banks deal with the financing of foreign trades; these banks discount the foreign bills of exchange. 
  • Cooperative Banks: This bank accepts all type of deposits and provides loan at low rate of interest. This bank generally provides short term credit to the agriculturists, farmers and small scale industries. 
  • Central Banks: This bank generally acts as the leaders of money market, controls and supervises the activities of the commercial banks and other financial institutions. These banks also assist the agency function to the government in making economic policies. These are known as bank of bankers. It is the regulatory body of the financial institutions like The Reserve Bank of India. 

Commercial Banks are type of joint stock companies that deals with money and credit. Commercial Banks are the financial institute that deals in accepting deposits from public and granting loans to the general public, traders or manufacturers.

Commercial Banks usually provides short term loans and advances. These banks have occupied a very dominant place in money market. These banks are governed by the Indian Banking Regulation Act 1949 and according to this act banks are not allowed to do any other business rather than banking. 

Bank is a profit seeking institute that deals with money and credit creation. It performs various functions and these are divided majorly into two types of function, that is, primary and secondary functions. Primary functions deals with accepting deposits and providing loans whereas secondary functions deals with discounting of bill of exchange, pay clients bill, do cheque payments and many more other functions. 

Function of Commercial Banks

Primary Functions

  • Acceptance of deposits from public: Under this function, a bank mobilizes the household sector savings and the acceptance of deposit is generally done in types of accounts; 
  • Saving Account: This account is maintained in bank to encourage the savings of household sector. There is minimum balance to be maintained in account and later withdrawals are allowed as per the need of the people and in this type of accounts specific interest is given to the people on the deposit of money say four percent. In this type of account, Debit Card is being issued to the people. 
  • Current Account: This account is opened majorly for the businessman and here amount of interest is charged by the bank for this purpose. The account holders get the facilities of overdraft where the withdrawal is done up to the certain limit but may exceed the balance amount. In these type of accounts, payment to third party is done through cheques or Credit Cards. 
  • Fixed Deposit: This deposit comes under time deposit and these types of deposits are done in banks where the funds are deposited for long term and no withdrawal of deposits is done till the maturity date. Here, higher rate of interest is being provided by bank and this depends upon the current repo rate set by RBI. 
  • Reoccurring Deposit: This deposit also comes under time deposit. Here, the specific amount is deposited by the depositor in his account and the amount can only be withdrawn at the time of maturity. This type of time deposit is generally done with the salaried person where each deposit is done of same amount and the depositor gets more amount of interest than the saving account.  
  • Lending of funds: In this function, commercial banks extend loans and advances out the money that comes to them by the way of deposits to the general public and to the businessmen and entrepreneurs against approved security. The lending of funds is generally done for three types of period; 
  • Very short term loan: Here, the loan is provided majorly for the period of 90 days. 
  • Short term loan: Here, the loan is provided for the period of less than one financial year. 
  • Medium term loan: Here, the loan is provided for the period of two to three years. 
  • Long term loan: Here, the loan is provided for the period of more than five years. 

Secondary Functions

  • Overdraft Facility: Bank grants the facility of overdraft to the current account holders where they would be allowed to draw excess amount of balance held in there account. 
  • Cash Credit: A bank give cash credit to the business firms in industry and trade and provides personnel guarantee to the borrowers. It is generally done for the current account holders. 
  • Discounting of Trade Bills: This facility is provided to the businessmen who often draw their obligation towards bank for business transactions. This is done when the parties want money before the maturity of the bill. 
  • Call Money: Bank grants loan to the other banks for very short period of time, seven days maximum. It is given on the overnight basis and is a telephonic transfer. This is majorly done when the banks are having difficulty in matching the CRR and SLR ratios. 
  • Consumer Credit: Consumer is provided credit for the purpose of consumption of consumer durable goods like TV, refrigerator, hospital bills,etc. 
  • Use of cheques: This function is done by banks for the purpose of withdrawal of deposits through cheques. There are majorly two types of cheques, that is, bearer cheques (encash immediately) and crossed cheques (encash is not immediate and third party is involved)  
  • Remittance of funds: Bank remits funds from one place to another and charges nominal commission on the activities like bank draft, agency function and utility functions. 
  • Miscellaneous Advances: Other types of loans and advances are provided to the exporters and importers. Here, export bills are discounted for the purpose of providing finance to the public sector credit, self-employed or weaker section communities. 

Commercial Banks in India

In India, there is mixed banking system. The booked business banks would the individual’s banks which are included in the second calendar of RBI enactment in 1934. Furthermore which do those typical benefits of the business about saving money for example, tolerating deposits, providing for crazy credits?

In 1969, there were 14 major commercial banks that deposits 50 crores of capital for being nationalized. Later in 1980 six more banks were nationalized. In present, 20 commercial banks are nationalized and SBI and its seven subsidiaries constituting public sector banks that controls over ninety percent of the banking business in India. 

Modern Commercial Banks deals with the merchant banking, money lending or traders issued documents like ‘Hundi’. Modern banks issues cheques, on demand drafts, etc. Commercial Banks are considered as the most important source of institutional credit majorly in money market and deals with short term finance. 

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