Functions of Commercial Banks: meaning, functions, types, example (2024)

What is 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.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.

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Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.

Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.

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Examples of Commercial Banks

Few examples of commercial banks in India are as follows:

1.State Bank of India (SBI)

2.Housing Development Finance Corporation (HDFC) Bank

3.Industrial Credit and Investment Corporation of India (ICICI) Bank

4.Dena Bank

5.Corporation Bank

This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for commerce students. To know about more such concepts, stay tuned to BYJU’S.

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Frequently Asked Questions on Function of Commercial Banks


What is the most important function of a Bank?

The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.


What is the first commercial bank of India?

Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.


What is the main purpose of commercial banks?

The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.

Functions of Commercial Banks: meaning, functions, types, example (2024)


Functions of Commercial Banks: meaning, functions, types, example? ›

Commercial banks have the primary functions of accepting customer deposits in the current account, savings, and fixed deposits, lending money as credit to borrowers who then pay with interest, and disbursing payments in the form of transactions and customer payments.

What are the functions of commercial banks? ›

Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.

What is the function of a bank and examples? ›

Providing Loans: Banks lend money to individuals and businesses for various purposes, such as home mortgages, business expansion, or personal loans. Payments and Settlements: Banks enable transactions through various payment methods, like checks, debit/credit cards, and electronic transfers.

What is the primary functions of commercial banks definition? ›

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

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 commercial bank answer? ›

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 functions of bank answers? ›

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

What is the meaning of commercial bank? ›

A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit.

What is a bank and its types? ›

A bank is a financial institution licensed to receive deposits and make loans. There are several types of banks including retail, commercial, and investment banks. In most countries, banks are regulated by the national government or central bank.

What are the two essential functions of a bank? ›

The two essential functions of banks in the economy are accepting deposits and granting advances or lending loans. Banks collect deposits from the public in the form of savings deposits, fixed deposits, current deposits, and recurring deposits.

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.

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

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

What is the type of 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. Apart from these, a fairly new addition to the structure is a payments bank.

What is the function of the bank? ›

Although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money).

Which is an example of an advantage of commercial banks? ›

They provide a secure place where people save money, earn interest, and make payments through checks, debit cards, and credit cards.

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