Definition of commercial bank

Commercial Bank is a term that refers to the financial institution that makes money by earning and providing interest from loans such as auto loans, mortgages, personal loans, and business loans. Commercial Bank accepts deposits, makes various loans, savings accounts to individuals and small businesses, offers checking account services, and offers basic financial products like a certificate of deposit (ICDs). A commercial bank is where most people do their banking.

Functions of Commercial Banks

There are seven main functions of commercial banking along with some other functions too:-

  • Accepting deposits

Accepting deposits may be any of the following types –

  • Current Deposits
  • Fixed Deposits
  • Saving Deposits
  • Giving Loans
  • Discounting Bills of Exchange
  • Overdraft
  • Investment of Funds
  • Agency Functions
  • Other Functions

Accepting Deposits:

   The rudimentary function of commercial banks is to accept customers’ deposits. Accepting deposits may be any of the following types –

  • Current Deposits:

From a current deposit account, the depositor can withdraw money at any time through cheques. A current deposit account is also known as ‘a demand deposit’. Depending upon the balance in the account money can be withdrawn from the current deposit account any number of times. Generally, businessmen use this account to make many transactions in a day. On a regular basis, the bank provides account statements to the current account holders.

  • Fixed deposits:

One can choose a fixed deposit for a period that ranges from 7-14 days to at most 10 years. Fixed deposit is also known as ‘FD’. In a fixed deposit account, as the name suggests, deposits are kept from a fixed period of time, and after a fixed period of time when the money is received, then it is a high amount along with the interest. As higher the time period, the more will be the interest rate, so a fixed deposit is a good money-saving plan.

  • Saving Deposits:

A savings account is a safe place to store money and earn interest. It is a type of account where one can save a part of his/her income and earn interest on it. There are even some savings accounts that provide more interest rates than others, so the rate of interest is not the same in all the banks. 

Giving Loans:

Giving loans is the second most important function of commercial banks; this is also called credit creation by commercial banks. Loans granted can be for a long or short time. The loans granted by the bank are always against security and are natural for the long term. 

Discounting Bills of Exchange:

This is the most important method of financial assistance from commercial banks to provide to the businessmen or traders for a short-term purpose. Under this system, banks provide loans to the traders by discounting their bills.

Overdraft:

Through overdraft, the bank provides loans to the customers, if there is zero amount deposited in the current account.

Investment of Funds:

In three types of securities banks, the bank invests their surplus funds –  Government securities, other approved securities, and other securities.

Agency Functions:

Commercial Banks perform various agency functions. The functions include:

  1. a) Collection of funds, b) Banks assist in the process of tax payment by account holders, c) Banks collect interest on debentures, insurance premiums, etc., d) Transfer of Funds.

Other Functions:

Other functions include-

  1. a) Providing locker facility.
  2. b) Underwriting of shares.
  3. c) Providing statistical data to the customers.
  4. d) Purchase and sale of foreign exchange.
  5. e) Issue of gift cheques.

Some Commercial Bank in India 

  • State Bank of India
  • Bank of India
  • Axis Bank
  • ICICI Bank
  • Bank of Baroda
  • Central Bank of India
  • Indian Bank
  • Indian Overseas Bank, etc

Classification of Commercial Bank:

Commercial Bank is classified into three categories –

  • Public Sector Banks
  • Private Sectors Bank
  • Foreign Banks
  • Regional Rural Banks

Public Sector Banks:

Public sector banks are financial institutions whose 50% or more shareholders are with the central or state government. Names of some public sector are –

  1. a) State Bank of India.
  2. b) Indian Bank.
  3. c) Punjab National Bank.
  4. d) Union Bank of India.
  5. e) Bank of Maharashtra, etc.

Private Sector Banks:

Private sector banks are the financial institution whose maximum stake is held by the stakeholders of the bank itself and not by the government. Names of some public sector banks are –

  1. a) HDFC Bank.
  2. b) YES Bank.
  3. c) Federal Bank.
  4. d) ICICI Bank.
  5. e) Axis Bank.
  6. d) Karnataka Bank.
  7. e) Bandhan Bank, etc.

Foreign Banks:-

A foreign bank is a type of bank whose head office is located outside the country. Some of the foreign banks in India are –

  1. a) AB Bank Ltd..
  2. b) Bank of America.
  3. c) Bank of Ceylon.
  4. d) Bank of China.
  5. e) BNP Paribas, etc.

Regional Rural Bank:-

Regional Rural Bank is the commercial bank that conducts banking activities in the rural areas at the state level. Some of the RRBs in India are –

  1. a) Aryavart Bank.
  2. b) Assam Gramin Vikash Bank.
  3. c) Arunachal Pradesh Rural Bank.
  4. d) Baroda UP Bank.
  5. e) J&K Gramin Bank, etc.

Conclusions

This is to conclude that a Commercial Bank is a term that refers to the financial institution that makes money by earning and providing interest from loans such as auto loans, mortgages, personal loans, and business loans.