MONEY AND BANKING PART 21
The functions of a commercial bank are divided into 2 parts: 1. PRIMARY FUNCTIONS 2. SECONDARY FUNCTIONS Primary functions include 2 functions: 1. Accepting deposits 2. Giving loans
GIVING LOANS O A commercial bank extends loans to industrialists and businessmen and earns interest. Main source of income. A portion of cash deposit is reserved and the remaining is extended as loan in the following forms: O 1.Cash credit 2.Demand loan 3.Short run loan 4.Overdraft
CASH CREDIT An eligible borrower is first sanctioned a credit limit and within that limit he is allowed to withdraw a certain amount on a given security The withdrawing power depends upon the borrower's current assets, the stock statement of which is submitted by him to the bank as the basis of security Interest is charged by the bank on the drawn or utilised portion of credit (loan).
DEMAND LOANS 1. Can be recalled on demand. 2. No maturity. 3. The entire loan amount is paid in lump sum by 4. 5. crediting it to the loan account of the borrower. Taken by security brokers, whose credit need fluctuate They take it on personal security and financial assets.
SHORT RUN LOANS Given against some security. Given as personal loans to finance working capital or as priority sector advances The entire amount is repaid either in one instalment or in a number of instalments over the period of loarn. 1. 2. 3.
INVESTMENT Commercial banks invest their surplus fund in 3 types of securities: 1. Government securities 2. Other approved securities 3. Other securities. Banks earn interest on these securities.
SECONDARY FUNCTION 1. Discount bills of exchange. 2. Over draft facility 3. Agency function 4. General utility services
DISCOUNT BILLS OF EXCHANGE 1.A bill of exchange is a document acknowledging an amount of money owed in consideration of goods received. 2. It a promise to pay a fixed amount of money at a specific point of time in future. 3. It can also be encashed earlier through discounting process of a commercial bank 4. It is signed by the debtor and the creditor for a fixed amount payable on a fixed date