Functions of Commercial Banks

What Is A Commercial Bank?

A commercial bank is a place where activities like giving loans to people in lieu of expecting returns and accepting deposits from general people are carried out. It is a bank formed only with the purpose to earn profit. Their main business is to provide short term loan services. In return to which they get the high interest paid from the borrowers which are their high source of profit. 

Explain the Functions of Commercial Banks

• The main two functions of commercial banks are lending and borrowing which caters to accepting deposits and lending money to earn high earn interests in return. 
• The interest rate offered by the bank to the depositor is termed as borrowing rate whereas the rate which the bank lends is termed as lending rate.
• Not all financial institutions can be categorised into a commercial bank. For instance – Post offices cannot be a bank as it does not provide a loan facility.

The functions of commercial banks can be grouped into two types:

Acceptance of Deposits

The acceptance of deposits can be in the form of savings, current and fixed deposits. Deposits are the heartbeat of the bank. It gathers the balances from the individuals, companies for which they carried out the commercial transactions for. 

Deposits are again bifurcated into three various types: 

Fixed Deposits

Fixed deposits are often termed as time deposits due to their nature of getting mature after a fixed period of time. This fixed period of time ranges from some days to years. These deposits do not hold a cheque facility and are not even payable on demand. They can be withdrawn only after a specific period of time when it gets mature. They possess high-interest rates. Although they are not categorised under money supply.

Current Account Deposits

Current accounts are deposits that can be withdrawn by depositor’s numerous times depending upon a balance reflected in the account. These deposit services do not hold any kind interest but do have a cheque facility. Industrialists and businessmen who have high cheque transactions maintain this Current account.

Savings Account Deposits

The ultimate objective of these deposits is to save. For an individual bank account this is most suitable. They hold a combined nature of both fixed and current deposits. They are simpler in nature as they hold both cheque and demand pay services. Although this deposit has few restrictions, a bank only allows 4-5 cheque facilities per month. Also, the interest return on this deposit is less as compared to the fixed ones.

Lending of Loans

Another major function of a commercial bank is to give advances in the form of loans to people and in return earn interest. This is majorly a main income source of banks. A certain part of deposits is with the bank itself and the rest is used for lending to the borrowers in the form of loans. 

Loan Demand

A loan facility that caters for demand can be termed as demand loans. There isn’t any kind of maturity stated. An individual whose credit wants to keep on fluctuating easily conducts such loans as personal security or financial assets. The entire loan account is disbursed which is credited to the loan account of the borrower.

Short Term Loans

These types of loan facilities are provided against some security for financing working capital. The complete amount can be repaid in one instalment or in various instalments over a brief period of time. 

Cash Credits

This facility is sanctioned only to a borrower who is eligible with a credit limit and a borrower has to take the facility within that certain period of time. Interest is charged as per utilised or drawn part of credit. The withdrawal completely depends on the borrower’s current assets. 

Discounting Bill of Exchange

A bill of exchange represents an agreement or moreover a promise to pay a fixed amount at a certain point of time in the future. However, a bill of exchange is nothing but a document stating a certain amount of money owed in consideration of goods received. It is a paper agreement verified and signed between a debtor and a creditor for a certain amount for a brief period of time.

Overdraft Facility

An overdraft facility is simply an advance given by a bank to the customer where he has to keep his current account to overdraw his current account up to a decided limit.  It is a service offered to a depositor to overdraw the amount rather than the amount which is reflected as a balance.

Difference between Overdraft & Loans

Conclusion 

Commercial banks play a key role in the economic development of the nation. They boost the central point of the modern economy. They are the sole source of finance for industry and trade. They encourage savings and help in the rate of capital formation. They aid the commerce industry to extend their field in operation.