Explainthe functions of a commercial bank. (2024)

Commercialbanks perform various functions that are as follows:

1.Accepting deposits

The basicfunction of commercial banks is to accept deposits of the customers.These deposits are of the following types:

(i)Saving Accounts

Savingaccounts cater to the needs of those individuals who wish to save apart of their income and earn interest on the amount saved. Accountholders of saving accounts can deposit cheques, drafts, etc. However,there is a limit on withdrawal.

(ii)Fixed deposit accounts

As thename suggests, fixed deposit accounts imply deposits are kept forfixed periods of time; for example, Rs.500 per month for 5 years. Theperiod has to be decided in advance, while opening the account.Holders of these accounts do not enjoy the cheque facility. Higherthe time period, higher will be the interest rate, which is decidedby RBI.

(iii)Current deposits accounts

Currentdeposit accounts are also called ‘demand deposits’ as thedepositor can withdraw money at any time through cheques. Businessmenuse this account to make many transactions in a single day; however,they do not earn interest on the deposits. Banks provide accountstatements to the current account holders at regular intervals.

2.Granting loans and advances

The secondmost important function of the commercial banks is to give loans andadvances. The rate of interest charged by the banks on loans ishigher than the rate of interest paid by the banks on demand depositsand saving deposits. Loans granted by commercial banks are generallyfor long term and are given against securities. Advancesare given by a bank only for a short span of time.

3.Agency functions

Thecommercial banks perform various agency functions with the primepurpose of acceptance of deposits and granting of loans. Theirfunctions include:

(i) Transfer of funds − The banks provide easy flow of fundsfrom place to place via mail transfers, demand drafts, etc.

(ii) Collection of funds − The banks also collect funds onbehalf of its customers through bills, cheques, etc.

(iii)Banks collect insurance premiums, dividends, interest on debentures,etc.

(v) Banksassist in the process of tax payment by the accountholders.

(vi) Banksalso play the role of trustees or executors.

4.Discounting bills of exchange

CommercialBanks provide financial assistance to the business community bydiscounting bills of exchange. The banks purchase these bills,produced by customers, by deducting interest fromthe face value of the bill, thus providing easy finances to thebusiness community when required.

5.Credit creation

Commercialbanks create credit in the economythrough demand deposits. Credit creation paves the path for thegrowth of the economy.

6.Other functions

(i)Providing locker facility

(ii)Purchase and sale of foreign exchange

(iii)Issue of gift cheques

(iv)Underwriting of shares and debentures

(v)Providing information and statistical data useful to customers

Explainthe functions of a commercial bank. (2024)


Explainthe functions of a commercial bank.? ›

A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.

What are the functions of a commercial bank? ›

A commercial bank is a financial institution that performs operations related to deposit and withdrawal of money for the public, provides loans for investment, and carries out other similar activities. The two main functions of a commercial bank are lending and borrowing.

What is the primary functions of commercial banks definition? ›

A "primary function" is a major activity for which the facility is intended.

What are the primary functions of banks? ›

Functions of Commercial Banks: - Primary functions include accepting deposits, granting loans, advances, cash, credit, overdraft and discounting of bills. - Secondary functions include issuing letter of credit, undertaking safe custody of valuables, providing consumer finance, educational loans, etc.

Which of the following is a function of commercial bank loans? ›

{"text":"The correct answer is: Provide short-term financial capital to businesses.

Which of the following is not a function of a commercial bank? ›

Solution: Issuing currency is not the function of commercial banks. The main function of the Reserve Bank of India is to issue currency. A commercial bank is a financial institution that carries out all the operations regarding deposits, withdrawal of money, loans, and other activities.

What is an example of commercial bank money? ›

Commercial bank money consists mainly of deposit balances that can be transferred either by means of paper orders (e.g., checks) or electronically (e.g., debit cards, wire transfers, and Internet payments).

What is the meaning of commercial bank? ›

What is Commercial bank? A commercial bank is a financial institution that provides services like loans, certificates of deposits, savings bank accounts bank overdrafts, etc. to its customers. These institutions make money by lending loans to individuals and earning interest on loans.

What are the functions of banks and their structure? ›

Banks are financial institutions authorized to receive deposits and provide credit. Other functions of banks may include financial services like wealth management, safe deposit boxes, and currency exchanges. There are several types of banks that are designated to perform all of the above-mentioned functions.

What are the two essential functions of a bank? ›

All banks have to perform two major primary functions namely:
  • Accepting of deposits.
  • Granting of loans and advances.

What are 4 functions that define a bank? ›

What are the four main functions of banks today? storing money, transferring money, lending money, and financial services.

What are the primary and secondary function of commercial bank? ›

The primary functions of the bank are to receive deposits and make loans. Commercial banks must lend the deposits they acquire to another individual to generate a profit for people who take the loan.

What is the main function of banks quizlet? ›

Create money through lending. *Banks perform two essential functions for the macro economy: transfer money from savers to spenders by lending funds (reserves) held on deposit and create additional money by making loans in excess of total reserves.

What is the classification of a commercial bank? ›

Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural.

What is the management of commercial banks? ›

Mostly it deals with the management of deposits, lending activities, investments, bank capital, bank liquidity and off-balance sheet activities. It also covers the use of derivatives and asset backed securities such as credit derivatives etc. to manage the market risk.

Which is not considered money? ›

By defini- tion, currency and demand deposits are money, while checks, credit and debit cards are not.

What is the difference between central bank and commercial bank? ›

The central bank and Commercial bank are the important financial institutions of a country. The central bank is an institution that is responsible for the monetary policies of the country while the commercial bank provides banking and other financial services to the general public.

Is Wells Fargo a commercial bank? ›

Who we are. Wells Fargo Commercial Banking provides market-leading solutions, industry expertise, and insights to help enable our clients' growth and success, enhancing the communities we serve.

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