Question

Explain the functions of commercial banks with an example of each.

Answer 1

The following functions are performed by commercial banks:

(i) Collection of deposits: Banks accept various types of deposits from the public such as savings account deposit, current account deposit and fixed account deposit, and pay interest on them. They are indebted to repay the depositor the amount deposited by him or her.

(ii) Lending of funds: Banks grant loans and advances on the basis of the total deposits available with them. These advances can be in the form of overdrafts, discounted trade bills, cash or consumer credits, etc. The interest charged on these loans is a major source of profits for banks.

(iii) Extension of cheque facility: Cheques drawn on other banks are also collected by banks, and thus they act as a clearing house. Cheques are mainly of two types—bearer cheques (encashable immediately at bank counters) and crossed cheques (only deposited in the payees’ accounts).

(iv) Remittance of funds: Banks help in transferring the funds of customers from one place to another. These transfers can be done in the form of bank drafts and pay orders at nominal commission charges.

(v) Provision ofallied services: In addition to other functions, banks also provide services such as locker facility, underwriting services and bill payments. They also perform functions such as buying and selling of shares and debentures on behalf of their customers.