An institution
which accepts deposits, makes business loans, and offers related services.
Commercial banks also allow for a variety of deposit accounts, such as
checking, savings, and time deposit. These institutions are run to make a
profit and owned by a group of individuals, yet some may be members of the
Federal Reserve System. While commercial banks offer services to individuals, they
are primarily concerned with receiving deposits and lending to businesses.
FUNCTIONS OF COMMERCIAL BANKS
The functions of commercial banks are of two types.
(A) Primary
functions
(B) Secondary
functions.
(A) Primary functions
The primary functions
of a commercial bank include:
a)Accepting
deposits
b)Granting loans
and advances.
a) Accepting
deposits:
- The most important
activity of a commercial bank is to mobilise deposits from the public.
- People who have
surplus income and savings find it convenient to deposit the amounts with
banks.
- Thus deposits with
the bank grow along with the interest earned.
- There is also
safety of funds deposited with the bank.
b) Grant of loans and
advances:
- The second important
function of a commercial bank is to grant loans and advances.
- The rate of interest charged on loans and advances varies
according to the purpose and period of loan and also the mode of repayment.
i) Loans:
-A loan is granted
for a specific time period. Generally commercial banks provide short-term
loans.
-The borrower may be
given the entire amount in lump sum or in instalments.
-Loans are generally
granted against the security of certain assets.
ii) Advances:
-An advance is a credit facility provided by the bank to its
customers. It differs from loan in the sense that loans may be granted for
longer period, but advances are normally granted for a short period of time.
- Further the purpose of granting advances is to meet the
day-to-day requirements of business.
- Interest is charged only on the amount withdrawn and not
on the sanctioned amount.
Types of Advances:
Banks grant
short-term financial assistance by way of cash credit, overdraft and bill
discounting. Let us learn about these
a) Cash Credit:
Cash credit is an
arrangement whereby the bank allows the borrower to draw amount upto a
specified limit. The amount is credited to the account of the customer. The
customer can withdraw this amount as and when he requires. Interest is charged
on the amount actually withdrawn. Cash Credit is granted as per terms and
conditions agreed with the customers.
b) Overdraft:
Overdraft is also a
credit facility granted by bank. A customer who has a current account with the bank
is allowed to withdraw more than the amount of credit balance in his account.
It is a temporary arrangement. Overdraft facility with a specified limit may be
allowed either on the security of assets, or on personal security, or both.
c) Discounting of
Bills:
Banks provide
short-term finance by discounting bills, that is, making payment of the amount
before the due date of the bills after deducting a certain rate of discount.
The party gets the funds without waiting for the date of maturity of the bills.
In case any bill is dishonoured on the due date, the bank can recover the
amount from the customer.
(B) Secondary
functions:
In addition to the
primary functions of accepting deposits and lending money, banks perform a
number of other functions, which are called secondary functions. These are as
follows-
a. Issuing letters of credit, travellers cheque,debit
cards,credit cards etc.
b. Undertaking safe custody of valuables, important document
and securities by providing safe deposit vaults or lockers.
c. Providing
customers with facilities of foreign exchange dealings.
d. Transferring money
from one account to another; and from one branch to another branch of the bank
through cheque, pay order, demand draft.
e. Providing consumer finance for individuals by way of
loans on easy terms for purchase of consumer durables like televisions,
refrigerators, etc.
f. Educational loan to students at reasonable rate of
interest for higher studies, especially for professional courses.
