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Functions Of Commercial Banks Research Team | Posted On Monday, November 05,2018, 05:42 PM

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Functions Of Commercial Banks



A commercial bank is very important for the banking system in India. A commercial bank is all about profits. It accepts deposits like fixed deposits, term deposits, savings deposits and grants loans like car loan, home loan, personal loan, commercial vehicle loan among others. It also offers the remittance facility, overdraft and electronic transfer of funds along with other financial services. Commercial banks are basically financial institutions which accept deposits, lend money and help you transfer money from your account to another account, thereby earning profits.

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Functions Of Commercial Banks

Nature of commercial banks:

  • The money you deposit in the bank is safe. You can store precious items, documents and papers in a bank locker after paying the requisite fees.
  • Banks offer credit/loans to you and other customers. Banks also offer business loans to businessmen to finance growth/expansion of the business and meet working capital needs.
  • Banks encourage saving and investing. Banks offer savings bank accounts and you can invest in FD, PPF and even insurance products through banks.
  • Banks allow the transfer of money between accounts and allow you to send money to friends and relatives.
  • Commercial banks help meet short-term and medium-term needs. They look at the size of the business, financial status and profitability of the business, scope and nature of the business and the ability of the business to repay loans.

Primary functions of commercial banks:

  • Current Deposits: Current deposits are also called current accounts. Businessmen use current accounts for banking transactions. Businessmen make an initial deposit and open a current account. Businessmen can remit any amount of money to the bank and withdraw using cheques. Most banks don’t pay interest on current accounts. Businessmen cannot withdraw more than they have deposited, unless there is an overdraft facility. Banks charge fees for maintaining current accounts. Current accounts are repayable on demand as per customer’s wishes.
  • Savings Deposits: Savings bank accounts encourage saving and being thrifty. Banks mobilize the money from the poor, salaried, middle-class and some rich citizens through savings bank accounts. Most banks ask for a minimum deposit of Rs 500 to open a savings bank account. Banks have restrictions on number and amount of withdrawals. Banks give cheques or an ATM Card to make withdrawals. Most banks pay 3.5-4% interest a year on SB Accounts. Banks offer 5-6.5% on SB deposits above Rs 1 Crore.
  • Fixed Deposits: Fixed deposits also called time deposits allow customers to deposit money for a fixed time period say a year. You cannot withdraw the amount before a particular date called maturity date. You earn interest on this deposit. Banks offer interest of 7-8% on FDs, which is higher than SB accounts. Banks offer interest based on amount and tenure of the deposit. You can pledge FD as collateral and avail loan against FD. You deposit money for a fixed period of time and withdraw on maturity. Banks use the FD deposits for loans and advances.
  • Recurring deposits: You deposit small amounts regularly in monthly installments for a period ranging from 1 year to 10 years. The whole amount deposited and interest payable is given to you on the payment of the final installment. This account can be opened individually or as a joint account. This account operates on the principle; little drops of water make the ocean. RD is very useful for poor and middle-income citizens to accumulate money and grow rich. Interest is same as FDs. Interest is compounded quarterly.

SEE ALSO: Child Aadhaar Enrolment

Secondary functions of commercial banks:

Agency functions:

  • Collecting cheques: Banks collect cheques and bills of exchange on behalf of customers through clearing houses offered by RBI.
  • Collecting income: Dividends, pension, salaries, rent and interest on investments are collected by commercial banks on behalf of customers and then giving them a credit voucher.
  • Paying expenses: Commercial banks pay telephone bill/electricity bill/college fees/insurance premium and then send a debit voucher to customers.

General utility functions:

Bank offers locker facilities: Commercial banks offer lockers to store gold jewelry, documents, investment papers, WILL and share certificates.

Banks issue travelers checks: Banks issue travelers checks for citizens travelling out of India. These are a safe way to carry and protect money while travelling abroad.

Banks deal in foreign exchange: Commercial banks help businesses indulging in export/import get the necessary foreign exchange. 

Transferring funds: Funds are transferred mainly through the electronic route.

Modern functions of commercial banks:

  • Phone banking
  • Issue of debit/credit cards
  • Net banking
  • Bancassurance which is selling of insurance using banking channels.
  • Offering the ATM facility
  • SMS alerts
  • Rail and air ticket reservation
  • NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement).

Other functions of commercial banks:

  • Creating money:  This is one of the most important functions of a commercial bank. A bank could lend Rs 10 Lakhs and open a demand deposit in the name of the individual. There are no payments made in cash.
  • Accepting deposits.
  • Giving loans
  • Overdraft
  • Discounting of bills of exchange
  • Investment of funds.

See also: Types Of Cheques

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