Question

Explain any two Lending Money functions of Commercial Banks.

Answer 1

The two lending functions of Commercial Bank are:

1. Providing Loans and Advances: Commercial banks have a vital role in the provision of loans and advances to individuals, businesses, and other entities. They provide a wide range of loan options to cater to the different financial requirements of borrowers. These options include personal loans, business loans, mortgages, and term loans. When evaluating loan applications, commercial banks carefully consider various factors, including the borrower's income, credit history, collateral, and repayment capacity. This thorough assessment helps determine the creditworthiness of potential borrowers. Commercial banks play a crucial role in supporting economic growth and development by providing loans and advances to finance investments, working capital requirements, asset purchases, and other expenses.
2. Overdraft Facilities: Commercial banks provide overdraft facilities to their customers, enabling them to withdraw funds that exceed their account balance, up to a predetermined limit. Overdraft facilities offer account holders the flexibility and convenience of accessing extra funds temporarily. This allows them to meet short-term cash flow needs or unexpected expenses. Customers can enjoy the benefit of paying interest only on the amount they use through the overdraft facility. This makes it a cost-effective financing option when compared to traditional loans. Overdraft facilities can be quite handy when it comes to managing fluctuations in cash flows and quickly addressing liquidity challenges.