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Question
What are the primary functions of commercial banks?
Solution
Accepting deposits from the general public and granting loans to the borrowers are the two primary functions of commercial banks.
- Accepting deposits: Accepting deposits from the general public is the basic function of a commercial bank. The banks also provide some interest on these deposits. The interest rate depends upon the type of deposit.
- Advancing loans: Granting loans and advances to the investors is the second most important function performed by the commercial banks. The deposits received by the banks from the public are not kept idle. Rather, the commercial banks keep only a fraction of the deposits with themselves as reserves and extend the rest as loans and advances to the borrowers for various productive purposes. The bank charges interest on these loans. The interest charged on the loans is higher than the interest provided on the deposits.
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