Importance Functions of commercial banks

Functions Of Commercial Bank:

A Commercial bank normally perform the following functions :

  1. Primary Function
  2. Secondary Functions

Primary Function:

Primary function is the key function of a commercial bank. A commercial bank earn money by using this functions.

Types Of Primary Functions :

  1. Acceptance of Deposits
  2. Granting loans and advances

A ) Acceptance Of Deposits :

The most important activity of a commercial bank is to mobilize deposit from the public. People who have more income and savings , find it easy to deposit the amount with commercial banks in different types of deposits account which are as follows :

1. Savings Account Deposit :

This type of account is generally maintained by the households or business individual. The depositor can deposit or withdraw money under this account only for a limited number of times. This account also attracts a nominal rate of interest to the account holders.This account as the name recommends is intended for promotion of savings funds.A person having regular and fixed income can deposit their savings in this account.

2. Current Account Deposit :

This type of account is generally maintained by the business entities and money under this deposit are payable on demand of the depositor . The depositor are free to deposit or withdraw money from their account any number of times without any restrictions.

3. Fixed Deposits Account :

A fixed account is deposited for the fixed period of time. It is also known as term deposit . The fixed period of time might be from 30 days to 5 years or more . The rate of interest on these accounts is higher than savings and current account deposit because the amount accepted is invested elsewhere for a long term by the bank. The depositor can get a loan against this account.

4. Recurring Deposit Account :

In this type of deposits, a depositor deposits a fixed amount of money every month for a fixed period of time . The amount are deposited on monthly basis. This money can not be withdrawn before the expiry of a fixed term except in certain conditions. This account attracts higher interest in comparison to other accounts except fixed deposits.

5. Multiple option deposit account :

It is a kind of savings deposit account in which deposits of more than a specific point of limit gets naturally transferred into fixed deposits. On the other hand, in case adequate fund is not available in our savings bank account so as to honour a cheque that we have issued, the requirements account gets automatically transferred from fixed deposit to savings deposit account.

B) Granting Loans And Advances

This is another important functions of a commercial bank. This is the main source of income of any commercial bank. Banks grant loans and advances out of surplus money after keeping certain percentage of their total deposit are called reserves. Some important forms of loans and advances are ordinary loans, overdraft facility, discounting of bill of exchange.

Types of loans and advances granted by a bank :

  1. Loans
  2. Cash Credit
  3. Overdraft
  4. Purchasing and discounting of bill of exchange

1. Loans:

Sanctioning of a specified lump sum amount by the banker to the customer is called a loan. In case of a loan, a specified amount of money is sanctioned by the banker to the customer for a specific purpose. The customer can obtain loan from the bank with or without any tangible securities. The entire loan amount is paid to the borrower either in cash or by sending cash to his account. Loan is given for a certain fixed period of time at an agreed rate of interest. The borrower is required to pay interest on the entire amount of the loan from the date of sanction.

2. Cash Credit :

Cash credit is an important and frequently used mode of borrowing from the banks. Cash credit is an arrangement by which a customer can borrow money from the bank through his current account upto a certain limit. The banker sanction cash credit against some tangible securities which are charged with the bank. The borrower is authorized to withdraw money from his credit limit according to his needs and he can also deposit any surplus amount with him in the account. The cash credit account is thus an active and running account to which withdrawals and deposits may be effected frequently. The interest in case of cash credit is charged on the actual amount utilised by the borrower and for the period of actual utilisation.

3. Overdraft :

Overdraft means am arrangement with a bank by which a current account holder is allowed to withdrawn more than the balance standing to his credit upto certain limit.Overdraft account can either be clean overdraft, partly secured or fully secured. The borrower is allowed to withdraw the amount as and when he needs and repay it by means of deposits in his account as and when it is feasible for him. Interest on overdraft credit is higher than on loans but is lower as compared to cash credit. Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilisation.

4. Purchasing and Discounting of bills

Purchasing and discounting of bills is the most important form in which a bank lends without any collateral securities. A customer having bills can obtain immediate cash from the bank and do not have to wait till the bank collects the payments of the bills. The bills which are used by the customer to borrow from banks may be demand bills or time bills. Demand bills are payable on demand while time bills after the expiry of a definite period of time.

Secondary Functions :

The bank perform a number of secondary functions which are follows :

A) Agency Functions :

Commercial Banks receives and collects different kinds of payments on behalf of their Clients through the instructions of cheques, drafts, bills and promissory note and also buy and sell gold, silver and other securities on behalf of their customers.

Types Of Agency Function :

  1. Transfer of money
  2. Sale and purchase of foreign exchange
  3. Collection of cheques
  4. Periodic collection
  1. Transfer of money : The commercial bank provides facilities of funds transfer to it’s customers through the instructions of cheques, demand draft or electronic fund transfer from one place to another place or one person to another person.
  2. Sale And purchase of foreign exchange : This is another important functions of commercial bank which has increased tremendously with increasing the volume of the international trade particularly in the era of globalization .
  3. Collection of Cheques : The commercial bank collects the money of the cheques as per the customer want.
  4. Periodic Collection : The commercial bank also collects the periodic payment like pension, salary and other periodic payment on behalf of the customer.

B) General Utility Services :

In modern days the commercial bank also perform some very useful functions for the benefits of their customers.

Types of Utility Services:

  • Collection and publication of data
  • Advisory functions
  • Issue of locker facility
  • Under writing of shares and debentures
  • Issuing of letter of credit
  • Collection and publication of data : A commercial bank collects and published data on behalf of their customers satisfaction.
  • Advisory functions : A commercial bank also perform advisory functions for their customer.
  • Issuing of locker facility : A commercial bank provides locker facilities to their customers for keeping valuable things like gold and silver etc.
  • Underwriting of shares and debentures : A commercial bank underwrite the shares and debentures through their merchant banking.
  • Issuing of letter of credit : A commercial bank also issuing letter of credit for their customer.

What is Liquidity?

The term liquidity implies the capacity of the bank to give money on demand . In simple words , it is the ability of the banker to satisfy the interest of clients for cash in exchange for deposits. Liquidity depends on the availability of liquid assets. Liquid assets are those assets which can be readily converted into cash without loss. More the liquid assets, more noteworthy will be the liquidity and vice versa.

What is statutory liquidity ratio?

A variant of the cash reserve ratio is the method of statutory liquidity ratio which is used by the central bank as an instrument of credit control. The commercial bank’s beside maintaining the cash reserve with the central bank are also statutorily required to maintain certain liquid assets to meet it’s liabilities.

Related :

  1. What Is Commercial Bank ?

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