Question

Explain main functions of commercial bank.

Answer 1

The main functions of the commercial banks are as follows:

1. Acceptance of Deposits: Commercial banks primarily accept deposits to deploy family savings. Banks typically accept four types of deposits:
   1. Current Deposits: Current deposits are often referred to as demand deposits. You can withdraw these deposits at any time. Current deposits often do not earn interest, and customers must maintain a minimum amount to withdraw funds. Cheques are used to withdraw the funds. Deposits are held by business owners and industrialists who make substantial payments through banks. The bank may charge additional fees to customers for its services.
   2. Savings Deposits: Designed for professional men and middle-class individuals to deposit little savings. It can be opened without introduction. Deposits are accepted at any time, however, there is a maximum limit. Withdrawal limits apply at specific times or during the week. If a consumer wishes to remove more than the specified amount, they must provide prior notice.
      Interest can be earned on this account's credit balance. The rate of interest is higher than that of current deposits but lower than fixed deposits. This approach strongly emphasises the practice of thrift or saving.
   3. Fixed Deposits: Fixed deposits are also referred to as time deposits. These deposits cannot be withdrawn before the deposit period expires or without prior notification. If a depositor needs money, they must borrow against the account and pay a slightly higher interest rate to the bank. They are tempted by bigger interest payments over a longer period. Depositors prefer fixed deposits due to its safety and interest. In India, they are accepted for three months to ten years. 
   4. Recurring Deposits: Recurring deposits occur when an account holder deposits a set amount on a monthly basis. The goal is to encourage individuals to save tiny amounts of money. At maturity, the account holder receives a considerable amount. This sort of deposit offers interest rates comparable to fixed deposits. Banks create many deposit options to entice individuals and promote economic savings.
2. Advancing Loans: A commercial bank's second primary duty is to provide loans and advances to individuals, especially business owners and entrepreneurs. Loans are secured by personal valuables such as gold, silver, and stocks of products. The most popular method of lending is through:
   1. Overdraft Facilities: Depositors in a current account can draw up to a pre-determined limit. Assume a businessman has only ₹ 30,000/- in his bank account, but needs ₹ 60,000/- to cover expenses. He can approach his bank to borrow an additional ₹ 30,000/-. The bank permits customers to overdraw their accounts through cheques. The bank only charges interest on overdrafts. This form of financing is common among Indian businessmen. 
   2. Cash Credit: The Cash Credit account allows the bank to provide loans to borrowers in exchange for security. The loan is not granted all at once, but rather credited to the borrower's bank account. In case of urgency, cash will be provided. Borrowers are only required to pay interest on the amount of credit they receive. He can withdraw small sums of money using cheques, but cannot exceed his credit limit. Additionally, banks can provide loans to individuals or businesses in exchange for collateral. The bank has the option to recall such loans.
   3. Discounting Bills of Exchange: Discounting bills of exchange is a prominent method of lending among modern banks. If a bill holder needs money, they might request a reduction from their bank. The bank pays the bearer the bill's current price after deducting the commission. These bills are a fantastic investment for a bank. They offer a highly liquid asset that can readily be converted into cash. Commercial banks can rediscount discounted bills with central banks when in need of funds. These are safe and secure bills. When the bill matures, the bank can collect payment from the party who accepted it.
3. Agency Functions: A commercial bank serves as an agent for its customers in the following ways:
   1. Collects cheques, bills, dividends, interest, rent, etc., on behalf of customers.
   2. Pays cheques, bills, rent, taxes, interest, insurance premium, fees, subscriptions, etc., on behalf of customers.
   3. Purchases and sells securities on behalf of customers as per their instructions.
   4. Acts as trustee, executor, guarantor, etc., in financial matters for their customers.
   5. Carries out correspond nice for and on behalf of customers.
   6. Acts as agent or correspondent for other banks at home and abroad.
4. General Utility Services: 
   1. Transfer of funds from one branch to another.
   2. Issuing letter of credit and standing as surety for customers.
   3. Accepting valuables, jewellery and securities for safe custody.
   4. Underwriting capital issues.
   5. Providing foreign exchange to persons going abroad and to importers.
   6. Issuing travellers' cheques, drafts, circular notes, etc.
   7. Providing trade information to customers.
   8. Providing reports on the creditworthiness of customers.
   9. Accepting and discounting bills of exchange of exporters.
   10. Advising customers with regard to investments and other financial matters.