Functions of Commercial Banks: meaning, functions, types, example (2024)

What is Commercial Bank?

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.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.

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Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.

Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.

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Examples of Commercial Banks

Few examples of commercial banks in India are as follows:

1.State Bank of India (SBI)

2.Housing Development Finance Corporation (HDFC) Bank

3.Industrial Credit and Investment Corporation of India (ICICI) Bank

4.Dena Bank

5.Corporation Bank

This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for commerce students. To know about more such concepts, stay tuned to BYJU’S.

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Frequently Asked Questions on Function of Commercial Banks

Q1

What is the most important function of a Bank?

The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.

Q2

What is the first commercial bank of India?

Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.

Q3

What is the main purpose of commercial banks?

The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.

Functions of Commercial Banks: meaning, functions, types, example (2024)

FAQs

Functions of Commercial Banks: meaning, functions, types, example? ›

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 customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc. Q2.

What are the functions of a commercial bank with an example? ›

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 are the operations functions of a commercial bank? ›

Banking operations (Ops) serve as a back office function responsible for reconciliation and the execution and settlement of transactions originating in the front office. Trade booking and adherence to risk and regulatory guidelines are important roles of Ops. Customer onboarding is another key function.

What is the primary functions of commercial banks definition? ›

Primary function means a major activity for which a building or facility is intended. ...

What are the 5 functions of a central bank? ›

The five functions of a central bank are:
  • maintaining macroeconomic stability;
  • lender of the last resort for financial stability;
  • being a bank to the government;
  • implementing monetary policy;
  • regulating the financial sector.

What are the functions of banks? ›

Banks in India offer a wide range of banking services, such as savings and checking accounts, loans (personal, business, and mortgages), credit cards, investment services, and electronic banking options like online and mobile banking.

Do commercial banks have different categories? ›

Commercial banking involves a range of financial services and products for businesses, governments, and institutions. Large commercial banks often have several subsidiaries or subdivisions, each with specialized products and services.

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 four main functions of banks today? ›

The four main functions of banks are accepting deposits, making loans, providing checking accounts, and acting as financial intermediaries, crucially linking savers to borrowers and facilitating economic activity.

What are the functions of commercial operations? ›

Duties of a commercial operations manager
  • Overseeing day-to-day operations.
  • Performing sales analyses with a focus on long-term company growth.
  • Assessing the company's position on the commercial market.
  • Designing commercial strategies for the company's sales practices.
  • Making purchasing decisions.
Jan 26, 2023

What are the main functions of money? ›

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.

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.

Can a commercial bank create money? ›

Commercial banks perform the function of credit creation in an economy. Therefore, the money that is created by commercial banks is known as credit money.

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.

What is the main aim of a commercial bank? ›

The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, credit creation is the most significant function of commercial banks.

What is meant by commercial bank? ›

What is Commercial bank? A commercial bank is a financial institution that provides services like loans, certificates of deposits, savings bank accounts bank overdrafts, etc. to its customers. These institutions make money by lending loans to individuals and earning interest on loans.

What is the function of central bank and commercial bank? ›

The central bank and Commercial bank are the important financial institutions of a country. The central bank is an institution that is responsible for the monetary policies of the country while the commercial bank provides banking and other financial services to the general public.

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