What are Functions of Commercial Banks?

Introduction to Bank and Financial System.

Primary Functions of Commercial Banks?
In the modern world, Commercial Banks has such an vital and huge role to perform, it makes so much difficult to put the list of functions and services.  Here are the few basic functions performed by the banks.

1) Accepting Deposits:
The first and the main Important function of the Commercial Banks is to accept deposits from those who can save but cannot profitably utilise those saving by themselves.  People consider it more rational to deposit their savings in a bank because by doing so they, earn interest and on other hand the money will be at the safe hands.  So, for attracting the savings from all sectors of individuals, the banks maintains different types of account which are suitable for the individuals they looking for.

a) Fixed Deposit Accounts:
Money in these accounts is deposited for fixed period of time and cannot be withdrawn before the maturity period, usually the minimum term varies from 2-5 years.  The rate of the interest on this account is higher than that on other types of deposits.  The longer the period, the higher will be the rate of interest.  Fixed deposits are also called Time deposits or Time Liabilities.

b) Current Account / Current Deposit Account:
These account are generally maintained by the traders and businessman who have to make a number of payments every day.  Money from these accounts can be withdrawn in as many times in as much amount as desired by the depositors .  Normally, no interest is paid on these accounts.  Rather, the depositors have to pay certain incidental charges to the Commercial Banks for the services rendered by it.  Current deposits are also called as Demand Deposits or Demand Liabilities.

c) Savings Account:
The aim of these accounts is to encourage thrift and mobilise small savings of the public.  Certain restrictions are imposed on the depositors regarding the number of withdrawals and the amount to be withdrawn in a given period.  Cheque facility is provided on request to the depositors.  Rate of interest paid on these deposits is low as compared to that on fixed deposits.


d) Recurring Account:
The purpose of these accounts is to encourage regular savings by the public, particularly by the fixed income group.  Generally money in these accounts is deposited in monthly installments for a fixed period and is repaid to the depositors along with interest on maturity.  The rate of interest on these deposits is close to the same as fixed deposits.

e) Home safe Account:
Home safe account is another scheme aiming at promoting saving habits among the people.  Under the scheme a safe is supplied to the depositor to keep it at home and to put his small savings in it. Periodically, the safe is taken to the bank and amount will be deposited in the account. 
But now a days, this process is not much in use.

2) Loan Advancing:

The another important function of a Commercial Banks is advancing of loans to public.  After keeping some cash reserves, the banks lend their deposits to the borrowers who are in need.  Before loans advancing, banks themselves satisfy about the credit worthiness of the borrowers. Other types of loans which is granted by banks are.

Call Money

a) Money at call / Call Money:

These loans are typically very short in period and the loan can be called back at a very short notice of time by the lending bank say even in one day to fourteen days.  These type of loans are generally to other financial institutions.

b) Cash Credit:

It is type of loan which is given to the borrower against his current assets, for example , stocks, shares, bonds etc.  Such loans are not based on personal security.  The banks opens an account in the borrowers name and allows to withdraw the money borrowed from time to time, up to a certain limit as determined by the value of his current assets.  Interest are charged for the amount withdrawn from the account.

c) Overdraft:

Commercial Banks provides overdraft facilities to its customer through which they are allowed to withdraw more than their deposits.  Interest is charged from the customers only on the overdrawn amount.

d) Discounting of Bills of exchange:

One of the very popular type of lending by modern banks, here the holder of the bill of exchange which can be get discounted at the bank.  In bill of exchange, the debtor agrees the drawn bill upon him by the creditor(ie.,the holder of the bill) and agrees to pay the amount mentioned at the time of maturity.  Thus the bank makes the payment and earn in the way of commission.  Thus it is an self-liquidating loan.

e) Term Loan:

This is an very common type of loan and very much in use these days.  These are medium and long-term loans with an maturity period of minimum one year.  The interest is charged on the whole loan amount and repaid either on installement or at a time of maturity.

f) Personal Loans:

Usually employed people can avail this type of loan for buying Motorcycles, Television, Refrigerators etc. The repayment will be in installment basis.

Credit card Swiping

g) Credit Cards:

Purchasing of goods and services without carrying any cash, is the main motive of introduction of Credit cards. The voucher/bill generated for goods purchased by swiping the card is sent to the banker by the vendor.  There is an credit limit imposed by the bank as per the credentials of the holder.

3) Promoting Cheque System:

Commercial Banks also create a very useful medium of exchange in the form of cheques.  Through a cheque, the depositor direct the bankers to make payment to the payee.  Cheque is the most developed credit instrument in the money market.  In the modern business transaction cheques have become much more convenient method of setting debts than the use of cash.