Explain the functions of commercial banks.!!!
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Answer:
Primary Functions of Commercial Banks
Accepting Deposits. Commercial banks accept deposits from people, businesses, and other entities in the form of: ...
Lending of Funds. Another important activity is lending funds to customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
Introduction to Economics
Nature of Economics
Utility of Economics to Society
Broadly speaking, the functions are of two categories – primary and secondary.
Primary Functions of Commercial Banks
The primary functions of a commercial bank are as follows:
1. Accepting Deposits
Commercial banks accept deposits from people, businesses, and other entities in the form of:
Savings deposits – The commercial bank accepts small deposits, from households or persons, in order to encourage savings in the economy.
Time deposits – The bank accepts deposits for a fixed time and carries a higher rate of interest as compared to savings deposits.
Current deposits – These accounts do not offer any interest. Further, most current accounts offer overdrafts up to a pre-specified limit. The bank, therefore, undertakes the obligation of paying all cheques against deposits subject to the availability of sufficient funds in the account.
2. Lending of Funds
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 account after deducting discounts and commissions. Subsequently, this amount is recovered from the debtors on the maturity of the instrument.