Loans Provided By Commercial Banks

Introduction

A commercial bank is a financial establishment that lends money by overdraft that offers credits, acknowledges deposits, and provides actual financial products. for example savings accounts and certificates of deposits to businesses, unlike a retail bank that gives comparable overdraft facilities and financial products to individuals. This kind of bank brings in cash basically by giving various sorts of loans to clients and charging interests. In simpler words, a commercial bank gives loans for consumption and investment by taking deposits from the public to make a profit. A commercial bank can be called a financial institution or a division of a large bank, dealing with small businesses and corporations. The finances of commercial banks come from deposits by the clients, and these clients get interest on their deposits. 

Loans provided by Commercial Banks

Overdraft is not the only loan type provided by commercial banks. The other types of loans are: 

Bank Loan

Commercial banks provide bank loans. These loans are the amount of money a bank presents to a borrower at a characterized loan fee for a decent period. Before allowing a bank loan to a client, a bank should acquire a few meaningful reports to confirm that the borrower will repay the credit. These reports might incorporate duplicates of character, evidence of payment, and evaluated budget summaries on account of corporate clients. These loans are allowed against collateral like equipment, land property, documents of ownership. If the client or borrower fails to repay the loan on time, the bank will use the collateral to acquire the money. 

Bank Overdraft

Commercial banks also provide overdraft facility. But, what is an overdraft? A bank overdraft is a financing form that permits the current account holders to overdraw money from their accounts to a specific limit. For taking a bank overdraft, one does not require to fulfill any written formalities. Hence, an overdraft is a perfect option to meet urgent needs. 

Cash Credit

Cash credit is the arrangement between the bank and a client that allows the latter to withdraw money more than their account limit. This kind of loan is granted for one year. However, it can be extended in particular circumstances to three years. 

Discounted Bills of Exchange

By facilitating money instantly to the bill holder, a commercial bank discounts a bill of exchange. After deducting the interest rate for the loan period, the money is deposited in the current account of the account holder by the bank. The bank gets its payment back after the bill of exchange matures. 

What are the Functions of a Commercial Bank?

The essential job of a commercial bank is to offer financial assistance to organizations and corporations. Banks likewise guarantee financial security and the practical development of a nation’s economy. Below are some of the fundamental functions of commercial banks. 

Accepts deposits

One of the oldest functions of a commercial bank is to accept deposits from clients. When these banks were started, they charged a commission for keeping the deposits of people on behalf of the public. Over the years, the banking industry has come a long way, and numerous changes have been observed. With these changes and the business’s profitability, the commercial banks now pay a short interest to the clients on their deposits. However, these depositors are also charged a fee by the banks to maintain and manage their accounts. 

Advancing Loans

Another common function of commercial banks is advancing loans. Annually, these banks acquire a high percentage of interest. Therefore, they advance loans. Usually, a short or medium-term loan is granted by the bank at a high-interest rate. 

Credit Creation

While conceding loans to clients, banks don’t give the loan in real money to the borrower. The bank makes a deposit account from which the borrower can draw reserves. This permits the borrower to pull out cash with a money order per his necessities by driving an interest deposit in the borrower’s account without printing extra cash.

Agency Functions

Commercial banks fill in as specialists for their clients by aiding them in gathering and paying checks, profits, premium warrants, and bills of exchange. Likewise, they pay insurance instalments, service bills, leases, and different charges for their clients.

Conclusion

Commercial banks are the banks or the financial institutions that lend overdraft or loans to clients. These banks ensure economic stability for businesses and corporations and help them sustain economic growth. Although the financial products of a commercial bank are the same as a retail bank, they differ because retail banks offer these products to individuals. In contrast, commercial banks provide to businesses and corporations. A commercial bank provides numerous kinds of loans, including- bank overdraft, cash credit, bank loans and discounted bills of exchange.