Define Bank and also explain the functions of commercial bank.
Answers
Answer:
(A) Primary Functions:
1. It accepts deposits:
A commercial bank accepts deposits in the form of current, savings and fixed deposits. It collects the surplus balances of the Individuals, firms and finances the temporary needs of commercial transactions. The first task is, therefore, the collection of the savings of the public. The bank does this by accepting deposits from its customers. Deposits are the lifeline of banks.
Deposits are of three types as under:
(i) Current account deposits:
Such deposits are payable on demand and are, therefore, called demand deposits. These can be withdrawn by the depositors any number of times depending upon the balance in the account. The bank does not pay any Interest on these deposits but provides cheque facilities. These accounts are generally maintained by businessmen and Industrialists who receive and make business payments of large amounts through cheques.
(ii) Fixed deposits (Time deposits):
Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are deposits for a fixed term, i.e., period of time ranging from a few days to a few years. These are neither payable on demand nor they enjoy cheque facilities.
They can be withdrawn only after the maturity of the specified fixed period. They carry higher rate of interest. They are not treated as a part of money supply Recurring deposit in which a regular deposit of an agreed sum is made is also a variant of fixed deposits.
(iii) Savings account deposits:
These are deposits whose main objective is to save. Savings account is most suitable for individual households. They combine the features of both current account and fixed deposits. They are payable on demand and also withdraw able by cheque. But bank gives this facility with some restrictions, e.g., a bank may allow four or five cheques in a month. Interest paid on savings account deposits in lesser than that of fixed deposit.
Difference between demand deposits and time (term) deposits:
Two traditional forms of deposits are demand deposit and term (or time) deposit:
(i) Deposits which can be withdrawn on demand by depositors are called demand deposits, e.g., current account deposits are called demand deposits because they are payable on demand but saving account deposits do not qualify because of certain conditions on withdrawal. No interest is paid on them. Term deposits, also called time deposits, are deposits which are payable only after the expiry of the specified period.
(ii) Demand deposits do not carry interest whereas time deposits carry a fixed rate of interest.
(iii) Demand deposits are highly liquid whereas time deposits are less liquid,
(iv) Demand deposits are chequable deposits whereas time deposits are not.
Explanation:
A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit.
In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do banking business to earn profit.
They generally finance trade and commerce with short-term loans. They charge high rate of interest from the borrowers but pay much less rate of Interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks. Most of the Indian joint stock Banks are Commercial Banks such as Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.
A bank is a financial institution that accepts deposits from the public and creates a demand deposit .
Functions of commercial banks :-
1) Collection of Deposits - They accept deposits from their clients . The common types of deposits accepted by bank are
• Saving account deposits
• Current account deposits
• Recurring deposits
• Fixed term deposits
2) Lending of Funds - It provide loans and advances out of the money received through deposits . These advances can be made in the form of overdraft cash credit .
3) Cheque Facility - The banks collect the cheques for their customers drawn on other banks . To collect cheques banks have clearing houses .
4) Agency Functions - Bank pay insurance premium on behalf of their clients , Bank also collect divided premium , interest , pension , etc .
5) Allied Services - In addition to above functions bank also provide allied services such as bill payments , locker facilities , etc .