Question

Answer the following question:

Describe the secondary functions of commercial banks.

Define the secondary functions of the bank.

Answer 1

The secondary functions of commercial banks are classified into two groups:

1. Agency Functions
2. Utility Functions

Agency Functions: A commercial bank acts as an agent or representative of its client and performs certain functions as follows:

• Periodic Collections and Payments: Commercial bank collects salary, dividends, interests, and any other income periodically as well as makes periodical payments such as taxes, bills, premiums, rent, etc. on the standing instructions provided by the customer. Commercial bank charges a certain fixed amount quarterly or annually in the form of service charges from the customer for providing such services.
• Portfolio Management: Large commercial banks undertake to purchase and sell securities such as shares, bonds, debentures, etc. on behalf of the clients. This handling of securities is known as portfolio management. Due to this facility, more clients are opting for such services of commercial banks.
• Fund Transfer: Commercial banks provide the facility of fund transfer from one branch to another branch or branch of another bank. Commercial banks come with various initiatives to make these transfers hassle-free.
• Dematerialization: Banks provide dematerialization facilities to their clients to hold their securities in an electronic format. On behalf of clients, it undertakes the electronic transfer of shares in case of purchase or sale.
• Forex Transactions: Forex is an abbreviation for foreign exchange. A bank may purchase or sell foreign exchange on behalf of its clients. A bank purchases forex from its clients which the clients receive from foreign transactions and sell the forex when the clients need it for overseas transactions.

Utility Functions: A commercial bank performs utility functions for the benefit of its clients. It provides certain facilities or products to its clients as follows:

• Issue of Drafts and Cheques: A draft/cheque is an order to pay money from one branch of a bank to another branch of the same bank or another bank. A bank issue drafts to its account holders as well as nonaccount holders whereas cheques are issued only to the account holders. Bank charges a commission for issuing a bank draft.
• Locker Facility: This is a common utility function of any commercial bank. The bank provides a locker facility for the safe custody of valuables, documents, gold ornaments, etc.
• Project Reports: A bank may prepare project reports and feasibility studies on behalf of the clients. Project reports enable the business firm to obtain funds from the market and obtain clearance from government authorities.
• Gift Cheques: Banks issue gift cheques and gold coins to account holders as well as to non-account holders. The gift cheques/ coins can be used by the clients for the purpose of gifting on occasions like weddings, birthdays, etc.
• Underwriting Services: A commercial bank may underwrite the issue of securities issued by companies. If the shares are not fully subscribed, the underwriting bank agrees to take up the unsubscribed portion of the securities.
• Gold-related Services: Nowadays many banks are providing gold services to their customers. Some banks also provide advisory services to their customers in terms of gold funds, gold ETFs, etc.