Commercial Banks: Functions (2024)

A commercial bank is a type of financial organisation that handles all operations relating to money deposits and withdrawals for the general public, as well as investment loans and other similar activities. These banks are profit-making enterprises that do business only for the purpose of profit.

A commercial bank’s two fundamental qualities are lending and borrowing. The bank accepts deposits and distributes funds to various initiatives in order to generate income (profit). The borrowing rate is the rate of interest that a bank gives to depositors, while the lending rate is the rate at which a bank lends money.

Primary functions

Accepting Deposits: Customers can put money into commercial banks through savings, fixed, and current deposits.

Savings Deposits: A customer can add money to their account up to a certain limit with a savings deposit. People with a fixed income like these deposits because they help them save money over time.

Fixed Deposits: With a fixed deposit, the money is locked in for a certain amount of time. Fixed deposits are also called “time deposits” because the money is put away for a certain amount of time.

Current Deposits: With current deposits, account holders can put money in and take it out of their accounts whenever they need to. People and businesses can sometimes get overdrafts up to a certain limit with their current accounts.

Loans: One of the main things commercial banks do is lend money to businesses and people, and they make money off the interest they earn. Usually, banks keep a small reserve to cover their costs and give the rest of the money to customers in the form of short-term and long-term loans.

Credit Creation – Credit creation is something that only commercial banks can do. Instead of giving out cash, banks create a line of credit and give the loan to a business or commercial body all at once.

Commercial banks offer both loans with and without collateral.

Cash Credit: One of the things that commercial banks do is lend money to people and businesses against bonds, inventory, and other types of securities. This type of credit, which is often called “cash credit,” gives you a bigger amount than other types of credit.

Short-Term Credits: Short-term loans are usually given without collateral, and the loan amount and length of time to pay it back are smaller. Personal loans is another name for these kinds of loans.

Secondary functions

Providing Lockers – Customers who want a safe place to store valuables can rent a locker from a commercial bank. The risk of theft or loss is eliminated when things are kept in lockers instead of at home.

Dealing with foreign exchange: Commercial banks help people and businesses that export or import goods from other countries get the foreign exchange they need. But only certain banks that are licensed to deal in foreign exchange can do these kinds of deals.

Exchange of Securities: Commercial banks also buy and sell bonds and other securities. Customers can buy or sell the units directly from the financial institution, which is easier than other ways to do it.

Bills of Exchange: The main job of a commercial bank in the modern world is to discount business bills. Bill discounting is seen as a good way for banks to make money. Bills create a steady flow of money, but when they are paid, they are not a risky investment because they can be changed. The financial institution is also not involved in any court cases.

Bank as an Agent – Commercial Bank and its Function also require them to give customers financial services, which is what an agent does. Most of the time, these services include acting as an administrator, trustee, or executor of an estate that belongs to a customer.

Helping customers with their tax returns, tax refunds, and other tasks that are similar.

Providing a place to pay insurance premiums, loan installments, etc.

Providing a place to send and receive money electronically, as well as to process checks, draughts, bills, etc.

Accepting deposits

The most important thing a commercial bank does is take deposits. The public gives the bank money in the form of deposits, which the bank uses to make loans. They have to be paid back when asked. Banks usually accept the following kinds of deposits:

• Current Deposits.

• Savings Deposits.

• Fixed Deposits.

• Recurring Deposits

1. Current Deposits

Current deposits are also called current accounts. Most businessmen have current accounts to make it easier for them to do their banking transactions. A customer can open a checking account at a bank by putting in an amount that the bank decides on from time to time.

2.Savings Deposits

Commercial banks offer savings deposit accounts to help people with low, middle, and high incomes put their money to work. They teach people who have a fixed income every month to save money. This kind of account can only be opened by people or organisations that don’t make money from it. Anyone who wants to open a savings account at a commercial bank has to put down a certain amount, like Rs.500, as a deposit.

3. Fixed Deposits

Fixed deposits are also called time deposits. Here, the customer puts down a certain amount of money for a set amount of time and can’t get it back before the end of that time. During that time, he gets interest on the deposit. Most of the time, the interest rate on these deposits is higher than the interest rate on current and savings accounts.

4. Recurring Deposits

In recurring deposits, customers send in the same amount of money every month for a period of time that can be anywhere from 12 to 120 months. After the last payment, you’ll have to pay the whole amount plus interest. People with low and middle incomes can benefit a lot from these kinds of deposits. “Little drops of water make a big ocean” is the idea behind it.

This account can be opened by anyone. It can also be opened under two names. Most of the time, the rate of interest paid on this deposit is added up.

Conclusion

Commercial banks are very important to the economy of the country as a whole. They are so important to modern life that they are almost a necessity. They are at the centre of the money market. Almost every part of the economy is affected by the way banks work today. They are connected to all parts of the economy, like agriculture, industry, trade, commerce, import, export, etc., in a way that can’t be broken apart.