Important functions of a commercial bank.

The important functions of a commercial bank.

Banks are regarded as the nerve centre of trade, industry and commerce of a country. Bank denotes an institution which deals in money and credit. A banker is regarded as a dealer of debt either may be own or of others. Commercial banks in India are divided as scheduled and non-scheduled banks. The former denotes a type of commercial banks which has a paid-up capital of Rs. 5 Lakhs and more and the latter denotes a type of bank which has a paid-up capital of less  than Rs. 5 Lakhs. Commercial banks were like joint stock companies as they raise capital from the general public. After nationalization commercial banks were classified as nationalized banks private sector banks.

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As a tree gets its recognition by its fruits, a bank is known by its functions. The functions of a commercial bank may be classified into:

  • Banking Functions
  • Subsidiary Functions.


Banking Functions

Banking functions of a commercial bank consists of acceptance of deposits and granting of loans. These functions are also regarded as primary functions. These are called as primary functions becuase banks are meant to discharge these functions.

I. Acceptance of deposits: One of the most major function of a commercial bank is to receive and accept deposits from those who can save. Banks usually accept deposits from those who have surplus funds and who cannot employ these surplus funds in profitable direction. Banks accept deposits in three manners. Fixed deposit is a type of deposit which fetch much more rate of interest and are drawn after the expiry of a specified period. Current deposits refer to a type of deposit which carry a very low rate of interest and allow withdrawal at any time. These types of deposits are usually preferred by the business people. Savings bank deposit is a type of deposit which aims at encouraging saving among the people and bears a higher rate of interest than the current deposits and less than fixed deposits.

II. Granting of Loans: Granting of loan is also on important function of a commercial bank. The amount of loan depends on the bank’s strength in receiving deposits. Banks acts an agency which helps in mobilizing people’s savings and using them to be spent for the promotion of trade, industry and commerce of a country. Banks usually advance loans in the form of loans, cash credits, overdrafts and discounting bills of exchange. When lump sum advances are made against some security, it is called as loans. Cash credit is an arrangement where customers are allowed to borrow money from the bank upto a certain limit against some tangible securities. Customer is allowed to draw the amount according to his needs. Bank charges interest on cash credit on daily balance method and not on entire amount. Overdraft is an arrangement where current account holders are allowed to draw in excess of their deposit and pay interest on the amount overdrawn. There is another way of advancing loan called discounting of bill of exchange. Under this system banks lend without any collateral security.


Subsidiary Functions

Besides acceptance of deposits and granting of loans, banks perform a number of other functions. These functions are called secondary or subsidiary functions. Subsidiary functions are again divided into two types called:

  • Agency service.
  • General utility services.

The following agency services are rendered by a commercial bank:

i. A customer may leave standing instructions with the banker for payment of different sums to different institutions. Bank arranges payment insurance premium, subscriptions to clubs and socities as per the instruction of the customer. Banks charge a nominal amount of charges for these services rendered.


ii. Bank collect dividend and interest on securities as per standing instructions of the customers.
Banks undertake purchase and sale of securities on behalf of customers.

iii. It facilitates in transfer of fund from one bank to another.

iv. It helps in collection and payment of cheques, bills and promissory notes.

v. It acts as an executor or trustee because it facilitates in the administration of a will.

Besides the above functions a number of general utility functions are performed by a commercial bank. These are:

i. It undertakes safe custody of valuable and important documents against theft and fire because banks provide locker facilities.

ii. Banks act as a referee in respect of financial standing of the customer.

iii. It provides various trade information and statistics.

iv. It underwrites for the loan raised by the government.

v. It issues personal and commercial letters of credit.

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