Major Functions of Commercial Banks
Describe the major functions of commercial banks.
Functions of Commercial Banks The functions of commercial banks are as follows:
A. Primary Functions:
The primary or main functions of commercial banks are as follows:
- Accepting deposits: The first important function of a commercial bank is to accept deposits in different accounts. The main forms of deposits accepted by the commercial banks are as follows
- Demand deposit: Demand deposit is also known as the current account deposit. This account is generally maintained by the traders and businessmen who have to make a number of payments every day. Money from this account can be withdrawn as many times and as much amount as desired by the depositors. Normally, no interest is paid on this account. In this account, the passbook containing account and the cheque book to withdraw money is issued to the depositors.
- Saving deposit: This account is generally maintained by the low-income people and those who do not need to withdraw money frequently. Certain restrictions are imposed on depositors regarding the number of withdrawals and amount to be withdrawn in a given period. Cheque facility is provided to the depositors. Interest is paid on this account but lower than on the fixed deposit.
- Fixed deposit: Fixed deposit is also known as the time deposit. Money in this account is deposited for a fixed period of time and can not be withdrawn before the expiry of that period or maturity period The rate of interest on this account is higher than the saving deposit The longer the period, the higher will be the rate of interest. On this deposit, the cheque book is not given to the depositor
- Providing loans: The second important function of the commercial bank is to provide loan to the public. The bank ears profit by giving the amounts deposited in it in the form of loans. Since the bank creates credit with its deposits, it is called the manufacturer of credit. The bank charges interest on loans which is usually higher than the one offered on the deposits. The main forms of loans provided by commercial banks are as follows:
- Cash credit: It is a type of loan which is given to the borrower against his shares, stocks, bonds, etc. Such loans are not based on personal security. The bank opens an account in the name of the borrower and allows him/her to withdraw the borrowed money from time to current assets, such as time up to a certain limit as determined by the value of his current assets. Interest is charged only on the amount actually withdrawn from the account
- Overdraft: Sometimes, the commercial bank provides overdraft facilities to its customers through which they are allowed to withdraw more than their deposits. Interest is charged to the customer on the overdrawn amount.
- Loans and advances: These are generally long-term loans which are provided by the bank to individuals and institutions. Such loans are provided only against adequate securities like gold silver, government and non-government securities, which are easily marketable, stable in value and liquid. The bank charges on the full amount of the loan.
- Call loans: Such loans are very short-period loans. Such loans are given for some days or weeks High rate of interest is charged on such loans Secondary Functions: Secondary functions are also called the agency.
B. Secondary Functions:
Secondary functions are also called agency functions. The bank charges minimum for undertaking these functions. The secondary functions are as follows:
- Remittance of money: Commercial banks help their customers in transferring money from one place to another through cheques, drafts, etc.
- Collection and payment of credit instruments: Commercial banks collect and pay various credit instruments like cheques, bill of exchange, promissory notes, etc.
- Purchase and sale of securities: Commercial banks undertake functions like purchase and sale of various securities like shares, stocks, debentures, etc. on behalf of their customers
- Income receiving and payments: Commercial banks receive dividends, interest on share and debentures of their customers. Similarly, they receive and make payment of insurance premium. rent, income tax periodically.
- Acting as trustee and executor: Commercial banks preserve the wills of their customers and execute them after their death.
C. Contingent Functions
Contingent functions are also called general utility functions. The contingent functions are as follows:
- Locker facility: Commercial banks provide the locker facility to their customers. The customers keep their valuables like gold, diamond, etc. and important documents in lockers for safe custody.
- Traveller’s cheque: Commercial banks issue traveller’s cheques to help their customers to travel without fear of theft or loss of money.
- Letter of credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.
- Dealing in foreign exchange: Commercial banks exchange foreign currency of customers. The commercial banks perform this function with prior approval of the central bank
- Collection of statistics: Commercial banks collect statistics giving important information relating to industry, trade and commerce, and money and banking. They also publish journals and bulletins containing research articles on economic and financial matters.
