Commercial banks are authorized to provide a variety of financial services which includes loans, savings accounts, etc. In this article, we will talk about various functions that a commercial bank performs.
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Commercial banks accept deposits from people, businesses, and other entities in the form of:
Another important activity is lending funds to customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
Loans are advances that a bank extends to his customers with or without security for a specified time and at an agreed rate of interest. Further, the bank credits the loan amount in the customers’ account which he withdraws as per his needs.
Under the cash credit facility, the bank offers its customers a facility to borrow cash up to a certain limit against the security of goods. Further, an overdraft is an arrangement that a bank offers to customers wherein a temporary facility is offered to overdraw from the current account without any security.
The limit is pre-specified. Additionally, banks also discount and purchase bills. In both of these cases, a bank credits the amount of the bill in the customer’s accountafter deducting discounts and commissions. Subsequently, this amount is recovered from the debtors on thematurity of the instrument.
Q1. What are the primary functions of a commercial bank?
Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customersin the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
Q2. What are the secondary functions of a commercial bank?
Answer: The secondary functions of a commercial bank are acting as an agent to its customers and also providing general utility services.
FAQs
Bank as an Agent
What are the general utility functions of a commercial bank? ›
The General Utility Functions are also called as Social development functions. In some areas, the banks will help you with all the transactions that you will have to do during a course of time. For example, you will be able to pay your phone, electricity and other utility bills from a center that is run by the banks.
What are the 5 functions of a commercial bank? ›
Commercial banks perform various functions that are as follows:
- Accepting deposits. The basic function of commercial banks is to accept deposits of the customers. ...
- Granting loans and advances. ...
- Agency functions. ...
- Discounting bills of exchange. ...
- Credit creation. ...
- Other functions.
Agency functions of commercial banks are like collecting interest, dividends, payment of rent or insurance, the conduct of stock exchange, transactions, and acting as executor trustees, and attorneys; these banks also advise their customers about investment.
What are the seven functions of banks? ›
Functions of Banks
- Acceptance of deposits from the public.
- Provide demand withdrawal facility.
- Lending facility.
- Transfer of funds.
- Issue of drafts.
- Provide customers with locker facilities.
- Dealing with foreign exchange.
There are four common types of utility functions: linear, perfect substitutes, perfect complements, and Cobb-Douglas. (Nonetheless, it is better to keep in mind that utility functions can take many shapes, these are just the most common ones.)
Which of these is one of the main functions of commercial banks? ›
Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy.
What are the primary and secondary functions of a commercial bank? ›
Functions of Commercial Banks: - Primary functions include accepting deposits, granting loans, advances, cash, credit, overdraft and discounting of bills. - Secondary functions include issuing letter of credit, undertaking safe custody of valuables, providing consumer finance, educational loans, etc.
What is the management of commercial banks? ›
Mostly it deals with the management of deposits, lending activities, investments, bank capital, bank liquidity and off-balance sheet activities. It also covers the use of derivatives and asset backed securities such as credit derivatives etc. to manage the market risk.
Which of the following is not a function of commercial banks? ›
Solution: Issuing currency is not the function of commercial banks. The main function of the Reserve Bank of India is to issue currency. A commercial bank is a financial institution that carries out all the operations regarding deposits, withdrawal of money, loans, and other activities.
Their primary responsibilities include handling bank transfers, assisting with online accounts, completing transactions, accepting deposits, and answering banking or financial related questions. A banking representative may assist clients going through identity theft or fraud by reviewing account charges.
What is the difference between a bank and an agent bank? ›
Agent Banking means providing limited scale banking and financial services to the underserved population through engaged agents under a valid agency agreement, rather than a teller/cashier. It is the owner of an outlet who conducts banking transactions on behalf of a bank.
What are the objectives of agent banking? ›
By reducing the overhead required to set up a bank branch and through its use of technology, agent banking allows financial institutions to reach underserved segments of the population, particularly in rural and remote areas, in a more cost effective way.
What is commercial banking and its functions? ›
A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.
What is the general utility function? ›
Answer. The general utility services offered by commercial banks include the issuance of cheques and drafts, project reports, locker facility, underwriting services, and locker facility.
What are the three 3 main functions of a bank? ›
Although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money).
What is the utility function in a bank? ›
Some of the most important utility functions of the banks may include the issue of drafts, letter of credits, etc., locker facility, underwriting of shares, dealing in foreign exchange, project reports, social welfare programs, other utility functions.
What are three core key pieces of utility that are provided by banks? ›
Question options:
- A value store.
- Money movement.
- Access to credit.
- Money storage.
In economics, the isoelastic function for utility, also known as the isoelastic utility function, or power utility function, is used to express utility in terms of consumption or some other economic variable that a decision-maker is concerned with.
What is the direct utility function? ›
The direct utility is derived from the consumption of goods. Said it simply, money, on its own, is almost worthless in terms of utility (setting aside cases where people simply like having money). Goods, on the other hand, generate utility because they can be used or consumed directly.
