Functions of Commercial Banks

Functions of Commercial Banks :
 Primary functions
 Secondary functions
Primary functions:
1. Accepting of Deposits:
Generally, the commercial banks accept three types of deposits from the public which are as
follows:
 Current Account or Demand Deposit:
Under this account the depositor can withdraw the money whenever he requires it. Normally no
interest is paid by the bank because the bank cannot utilise this money in earning and he must
keep himself ready to meet the demand of the customer.
 Savings Bank Account:
Under this account the depositor is not free to withdraw any amount like current account. He can
withdraw only a specified sum of money in a week. Here the depositor gets less interest in
comparison to Fixed Account.
 Fixed or Time Deposit Account:
Under this account deposits are accepted for a fixed period. The money deposited in this account
cannot be normally withdrawn before the expiry of the agreed period. The rate of interest on this
account is higher than on other accounts.
2. Advancing Loans:
A bank lends a certain percentage of cash lying in deposits on higher interest rate than it pays to
the depositors. This is how it earns profits and carries on its business. The bank advances loan in
the following manner:
 Cash Credit:
This type of loan is granted to businessmen against certain specified securities. To a new
customer, a loan account has to be opened from where the money is withdrawn by cheque but he
pays interest on the full amount.
 Call Loans/Money at Call and Short Notice:
They are very short-term loans and are mostly given to bill brokers for 15 days. They are
advanced against first class securities. This can be recalled at a very short-notice.
 Overdraft:
Overdraft is the facility extended by the banker to draw a sum greater than the balance lying in
his current account. The businessman is charged interest only on that amount by which his
current account is actually withdrawn and not by the full amount of the overdraft sanctioned.
 Discounting Bills of Exchange:
If a creditor wants money immediately and has a bill of exchange, the bank gives his money by
discounting the bill of exchange. The banker deposits the amount of the bill in the current
account of bill-holder after deducting the rate of interest for the period of the loan which is
normally not more than 90 days. When the bill matures the bank gets payment from the banker.
3. Credit Creation:
Credit creation is one of the most important functions of the commercial banks. In order to earn
profit the bank accept deposits and advance loans by keeping a small cash in reserve to meet the
day to day needs of the customers.When a bank gives loan, it opens an account in the name of
the loan taker and does not pay him in cash but allows him to draw the money according to his
requirements. By granting a loan, the bank creates credit or deposit.
4. Dealing in Foreign Exchange:
A commercial bank helps in foreign trade by financing his customers and by accepting foreign
bills of exchange. The bank encourages the documents like D/A (Documents against acceptance)
and D/P (Documents against payments) in foreign payments. Further, it transacts foreign
exchange business and buys and sells foreign currency. However, commercial banks need to take
the permission of the central bank for dealing in foreign exchange.
 Secondary functions :
1. Agency function
A bank discharges agency services on behalf of its customers which are as follows:
(i) The bank collects payments of bills of exchange, cheques dividends etc. on behalf of his
customers.
(ii) It buys and sells shares, securities, debentures etc. for its customers.
(iii) The bank remits money to different places by bank drafts on telegraphic transfer (T/T) on
behalf of its customers.
(iv) It discharges the functions of marketing, work as a trustee, administrator or executor for its
customers.
(v) It gives proper advice to the customers in the matter of correspondence and other matters of
business, etc.
2. General utility function
Besides the above mentioned services the commercial bank performs a number of utility
services; some of them are as follows:
(i) It provides lockers facility to the customers where the customers can keep the valuable
documents and ornaments etc.
(ii) It underwrites the company debentures and shares.
(iii) It provides information’s about the customers.
(iv) It issues travelers cheques, letter of credit etc. to the customers and it accepts bills on behalf
of the customers, etc.

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Functions of Commercial Banks

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Functions of Commercial Banks :

 Current Account or Demand Deposit:

 Savings Bank Account:

 Fixed or Time Deposit Account:

 Call Loans/Money at Call and Short Notice:

 Discounting Bills of Exchange:

4. Dealing in Foreign Exchange:

2. General utility function

(ii) It underwrites the company debentures and shares.

(iii) It provides information’s about the customers.

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