Question

mention two function of commercial bank

Answer 1

The most important functions of commercial banks are discussed below:

1. Accepting deposits:

The most significant and traditional function of commercial bank is accepting deposits from the public. The deposits may be of three types: Saving deposits, Current deposits and fixed deposits. In case of current account, people can withdraw deposits in part or in full at any time he likes without notice.

Usually no interest is paid on them, because the bank cannot utilise these short-term deposits. Savings deposits are payable on demand and money can be withdrawn by cheques. But there are certain restrictions imposed on the depositors of this account. Deposits in this account earn interest at nominal rates. Fixed deposits are made for a fixed period of time. A higher rate of interests is paid on the fixed deposits.

2. Providing loans:

The second important function of the commercial bank is to provide loans against suitable mortgages to the public to fulfill their needs of money. Loans can be granted in the form of cash credit, demand loans, short- term loan, overdraft, discounting of bills etc. Under cash credit system, borrower is sanctioned a credit limit up to which he can borrow from the bank. The interest payable by the borrower is calculated on the amount of credit limit actually drawn. Demand loans granted by a bank are those loans which can be recalled on demand by the bank any time.

Here, the interest is payable on the entire sum of demand loans granted. Short-term loans (like car loans, housing loans etc.) are given as personal loans against some security. The interest is payable on the entire sum of loan granted. In case of overdraft facility, an account holder is allowed to withdraw a sum of money in excess of the amount deposited with the bank.

Here, the borrower who has received this facility, has to pay interest on the amount overdrawn. Another important form of bank lending is through discounting or purchasing the bills of exchange. A bill of exchange is drawn by a creditor on the debtor specifying the amount of debt and also the date when it becomes payable. Such bills of exchange are normally issued for a period of 90 months.