Question

Write short notes on the primary functions of commercial banks.

Answer 1

1. Accepting Deposits: Commercial banks receive deposits from the public for the purpose of making investments and granting loans. People deposit their savings for the sake of safety and to earn interest. Depositors can withdraw their money either in the form of cash or through cheques. Commercial banks accept deposits of various types to meet the requirements of different people. Fixed deposits, savings deposits, recurring deposits and current deposits are the main forms of deposits. These are explained later in this chapter.
2. Lending Money: Commercial banks lend money to businessmen, farmers, artisans and others in the following ways: 
   1. Overdraft: An arrangement under which a current account holder is allowed to withdraw more than the balance to his credit up to the specified limit. Overdrafts are allowed for a short period, and interest is charged on them. Commercial banks provide overdraft facilities on the security of some assets or on the personal security of the account holder.
   2. Cash Credit: In this arrangement, the bank advances cash loans to the borrower against some tangible security or personal guarantee. The borrower can withdraw up to his cash credit limit according to his needs and can deposit back any surplus. Interest is charged on the amount actually withdrawn and not on the whole amount granted. Cash credit is for a longer period than an overdraft. It is a popular method of borrowing for businessmen.
   3. Discounting of Bills: Businessmen receive bills of exchange from their customers who buy goods on credit. Commercial banks pay the amount of a bill before the date of its maturity after deducting discount (interest) charges. On the date of maturity, the bank gets payment of the bill from its acceptor. If the bill discounted is dishonoured, the bank receives the payment from the customer who discounted the bill. 
   4. Loans and Advances: The bank advances a fixed amount in a lump sum to the borrower for an agreed-upon period. The borrower may withdraw the whole amount at once or as per his needs. But interest is charged on the whole amount sanctioned. Commercial banks grant both short-term and medium-term loans. Loans are granted against the security of assets or against the personal security of the borrower.