Question

briefly explain the functions of commercial bank

Answer 1

Commercial Bank Function #
1. Accepting of Deposits:

Generally, the banks accept four types of deposits from the public which are as follows:

(a) Current Account or Demand Deposit:

Under this account the depositor can withdraw the money whenever he requires it. Normally no interest is paid by the bank because the bank cannot utilise this money in earning and he must keep himself ready to meet the demand of the customer. He must keep cent per cent reserve against the deposit. In this account the depositor has to maintain minimum balance. Occasionally a small interest is paid to the people who keep large balances.

(b) Savings Bank Account:

Under this account the depositor is not free to withdraw any amount like current account. He can withdraw only a specified sum of money in a week. Here the depositor gets less interest in comparison to Fixed Account.

(c) Fixed or Time Deposit Account:

Under this account deposits are accepted for a fixed period say one, two, four or five years or above. The money deposited in this account cannot be normally withdrawn before the expiry of the agreed period. The rate of interest on this account is higher than on other accounts.

(d) Home Safe Account:

Under this account a safe is provided by the bank to the customers. Safe is locked and the bank keeps the key with him. Customers put their small savings in the safe and after two to three months the customers take the safe to the bank where the banker unlocks it before the customer and makes credit in the customer’s account. A nominal rate of interest is allowed to the customer.

Commercial Bank Function # 2. Advancing Loans:

A bank lends a certain percentage of cash lying in deposits on higher interest rate than it pays to the depositors. This is how it earns profits and carries on its business.

The bank advances loan in the following manner:

(a) Cash Credit:

This type of loan is granted to businessmen against certain specified securities. To a new customer, a loan account has to be opened from where the money is withdrawn by cheque but he pays interest on the full amount.

(b) Call Loans/Money at Call and Short Notice:

They are very short-term loans and are mostly given to bill brokers for 15 days. They are advanced against first class securities. This can be recalled at a very short-notice.

(c) Overdraft:

Overdraft is the facility extended by the banker to draw a sum greater than the balance lying in his current account. The businessman is charged interest only on that amount by which his current account is actually withdrawn and not by the full amount of the overdraft sanctioned.

Commercial Bank Function # 3. Credit Creation:

Credit creation is one of the most important functions of the commercial banks. In order to earn profit the bank accept deposits and advance loans by keeping a small cash in reserve to meet the day to day needs of the customers.

When a bank gives loan, it opens an account in the name of the loan taker and does not pay him in cash but allows him to draw the money according to his requirements. By granting a loan, the bank creates credit or deposit.

Commercial Bank Function # 4. Financing Foreign Trade:

A commercial bank helps in foreign trade by financing his customers and by accepting foreign bills of exchange. The bank encourages the documents like D/A (Documents against acceptance) and D/P (Documents against payments) in foreign payments. Further, it transact foreign exchange business and buys and sells foreign currency.

Commercial Bank Function # 5. Agency Service:

A bank discharges agency services on behalf of its customers which are as follows:

(i) The bank collects payments of bills of exchange, cheques dividends etc. on behalf of his customers.

(ii) It buys and sells shares, securities, debentures etc. for its customers.

(iii) The bank remits money to different places by bank drafts on telegraphic transfer (T/T) on behalf of its customers.

(iv) It discharges the functions of marketing, work as a trustee, administrator or executor for its customers.

(v) It gives proper advice to the customers in the matter of correspondence and other matters of business.

Commercial Bank Function # 6. Miscellaneous Services:

Besides the above mentioned services the commercial bank performs a number of other services the important of them are as follows:

(i) It provides lockers facility to the customers where the customers can keep the valuable documents and ornaments etc.

(ii) It underwrites the company debentures and shares.

(iii) It provides information’s about the customers.

(iv) It issues travellers cheques, letter of credit etc. to the customers and it accepts bills on behalf of the customers.