Commercial Banks

What is a Commercial Bank?

A commercial bank is a profit seeking business unit, dealing in credit & money. It is a financial institution that deals in money in the sense that it accepts deposits of money from public to keep them in its safekeeping for security. So also, it deals in credit, that is, it forms credit by making advances out of the funds acknowledged as deposits to needy people. It therefore, functions as a mobiliser of saving in the economy.

Functions of Commercial Banks

Commercial banks have to carry out an assortment of functions which are common to both developing & developed nations. These are known as ‘General Banking’ functions of commercial banks. The contemporary banks perform diversity of functions. These can be largely divided into 2 categories:

(a) Primary functions
(b) Secondary functions

A. Primary functions

Primary functions include the following:

1. Acceptance of Deposits

(a) Current Deposits
(b) Savings Deposits
(c) Fixed Deposits

2. Advancing Loans

(a) Overdraft Facilities
(b) Cash Credit
(c) Discounting Bills of Exchange
(d) Money at Call
(e) Term Loans
(f) Consumer Credit
(g) Miscellaneous Advances

3. Creation of Credit
4. Promote the Use of Cheques
5. Financing Internal & Foreign Trade
6. Remittance of Funds

B. Secondary Functions

Secondary banking functions of commercial banks comprise:

1. Agency Services
2. General Utility Services

The various agency services of banks are:

(a) Collection & Payment of Credit Instruments
(b) Purchase & Sale of Securities
(c) Collection of Dividends on Shares
(d) Acts as Correspondent
(e) Income tax Consultancy
(f) Execution of Standing Orders
(g) Acts as Trustee & Executor

2. General Utility Services

(a) Locker Facility
(b) Traveller’s Cheques and Credit Cards
(c) Letter of Credit
(d) Collection of Statistics
(e) Acting Referee
(f) Underwriting Securities
(g) Gift Cheques
(h) Accepting Bills of Exchange on Customer’s behalf
(i) Merchant Banking

C. Fulfillment of Socio - Economic Objectives