Functions of Commercial Banks - Primary and Secondary Functions (2024)

In our routine life, we must have visited banks. These banks help us in many banking activities like maintaining our savings account, depositing cash, and withdrawing the same, thus we see these banks are always at our service. These are the commercial banks, which operate commercially for serving the common people.

Commercial banks have a lot of other functions to do than what is mentioned above. What are those functions? What will happen if the commercial banks cease to perform all the banking activities? Are there any other types of banks that might help the masses? All these questions will be addressed in our discussion that is based on the functions of Commercial Banks.

What are Commercial Banks?

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Before diving straight into the topic of functions of commercial banks, first, it is obligatory to know what are Commercial Banks.

A commercial bank is a typical financial institution that accepts as well as deposits from the general public and also, they give loans for the purposes of consumption activities and investment activities, to make their own profit.

Commercial banks are profit-based institutions that offer financial services like loans, as well as services like deposits, electronic transfers of funds, etc. to their customers. Commercial banks have a significant role in a country’s economy as these organizations fulfill the short and mid-term financial requirements of industries.

The functions of commercial banks are primarily based on a business model of accepting public deposits and utilizing that fund for various investment purposes. Such functions can be classified into two categories, primary and secondary functions.

These functions will be discussed in our upcoming section.

What are the Functions of Commercial Bank?

Commercial Banks have both primary and secondary functions that as explained in detail below.

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Primary Functions

  • Accepting Deposits – Commercial banks accept deposits from their customers in the form of saving, fixed, and current deposits.

  • Savings Deposits – Savings deposits allow a customer to credit funds towards their accounts for up to a certain limit. These deposits are preferred by individuals with a fixed income, utilized to create savings over time.

  • Fixed Deposits – Fixed deposits come with a predetermined lock-in period. Fixed deposits are also referred to as time deposits as the funds are deposited for a specific time frame.

  • Current Deposits – Current deposits allow account holders to deposit and withdraw money whenever necessary. In some cases, current accounts also offer overdrafts until a pre-specified limit to individuals and businesses.

  • Providing Loans – One of the main functions of commercial banks is providing credit to organizations and individuals, and profit from the earned interest. Usually, banks retain a small reserve for their expenses while offering the remaining amount to customers as various types of short and long-term credits.

  • Credit Creation – A unique function of commercial banks is credit creation. Instead of offering liquid cash, banks create a line of credit and transfer the loan to a business or commercial body all at once.

Categories of Secured and Unsecured Loans provided by Commercial Banks

  • Cash Credit – Commercial Banks and their Functions include extending advances to individuals and organizations against bonds, inventories, and other types of securities. This facility, commonly known as cash credit, provides a more substantial sum when compared to other forms of credit.

  • Short-Term Credits – Short-term loans are usually pledged without any security, offering a smaller loan amount and repayment tenor. These are also referred to as personal loans.

Secondary Functions

The following can be considered as the secondary functions of commercial banks –

  • Providing locker Facilities – Commercial banks provide locker facilities to customers who want to store valuables safely. Locker facilities eliminate the impending risk of theft or loss, which prevail when kept at home.

  • Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to individuals and organizations that export or import goods from overseas. However, only certain banks which have the license to deal in foreign exchange are eligible for such transactions.

  • Exchange of Securities – Another function of commercial banks is to trade in bonds and securities. Customers can purchase or sell the units from the financial institution itself, which offers more convenience than alternate approaches.

  • Discounting Bills of Exchange – The main function of a commercial bank in today’s date is to discount bills of businesses. Bill discounting is considered a profitable investment for banks. Bills create a steady flow of funds, while not becoming a risky venture during payment as it is considered as a negotiable instrument. These also do not involve the financial institution in any litigation.

  • Bank as an Agent – Commercial Bank and its Function also require them to provide finance-related services to customers, fulfilling the role of an agent. These services usually include –

  • Acting as an administrator, trustee, or executor of a customer-owned estate.

  • Assisting customers with tax returns, tax refunds, and other similar tasks.

  • Serving as a platform to pay premiums, repay loan installments, etc.

  • Offering a platform for electronic transaction of funds, processing of cheques, drafts, bills, etc.

Importance of Commercial Banks

Thus, we now know how important are commercial banks in performing the balanced function in an economy. In a parallel universe, if commercial banks cease to perform these banking functions, then the economy will collapse out of thirst for money liquidity. Along with the growth, economic and social stability will be shattered completely.

Types of Commercial Banks

It is necessary to understand the different types of financial institutions to explain the functions of commercial banks effectively. Commercial banks are commonly categorized into three types. They are as follows:

  • Public sector banks

  • Private sector banks

  • Foreign banks

Public Sector Banks

Public sector banks refer to a type of financial institution that is state-owned by the corresponding Government. A significant part of the share of such organizations is held by the Government.In India, the Reserve Bank of India, which acts as the central bank, creates operating guidelines for the public sector banks.

Private Sector Banks

Private sector banks are financial institutions registered as companies with limited liabilities. The major part of the share capital of such companies is owned by individuals or private businesses.

Foreign Banks

Foreign banks are financial institutions that are operating overseas within a foreign nation. Post the financial reform of India (in 1991), there was a marked increase in the number of foreign banks on Indian soil. They are essential for the economic development of a nation.

Apart from these commercial banks that lend and deposit money, there is Central Bank which is known as the ‘head honcho’ in terms of banks. The Central Bank supervises the commercial banks, sets their interest rates, and controls the money flow in the economy. This bank, unlike the commercial banks, does not engage with the general public in terms of providing banking services. Thus, Central Bank will never be as helpful as commercial banks to the general mass.

Did You Know?

In this section, we will know about some interesting commercial banking facts.

  • Allahabad bank is the oldest joint stock bank existing in India.

  • Bank of India was the first bank to open branches in foreign nations.

  • Canara Bank is the first bank to be receiving the ISO 9002 Certificate.

  • Bharatiya Mahila Bank is the first all-women bank formed in India.

  • Reserve Bank of India served as the central bank of two countries at a time. It was the central bank for Pakistan after the partition of India until June 1948.

From the above-mentioned details, you will get a clear idea about commercial bank definition as well as its functions. For more information on the discussed topic students can refer to Vedantu’s website today. They can also avail study solutions on the introduction of commercial banks from us and avail a detailed idea.

Functions of Commercial Banks - Primary and Secondary Functions (2024)


What are the primary and secondary functions of a 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 are the 5 functions of a commercial bank? ›

Commercial banks perform various functions that are as follows:
  • Accepting deposits. The basic function of commercial banks is to accept deposits of the customers. ...
  • Granting loans and advances. ...
  • Agency functions. ...
  • Discounting bills of exchange. ...
  • Credit creation. ...
  • Other functions.

What are the primary functions of a bank answer? ›

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

What is the primary functions of commercial banks definition? ›

Primary function means a major activity for which a building or facility is intended. ...

What is primary and secondary function? ›

The primary function is the main purpose or use of the product or service, while the secondary function supports the primary function in some way. Determining which functions are primary and which are secondary can be tricky, but there are a few key factors to consider that can help make the distinction clear.

What are the primary and secondary deposits of commercial banks? ›

Primary deposits are simply cash deposits made by the general public in the bank, while secondary deposits are that part of cash deposits keeping aside the mandatory reserve as specified by the central bank. The secondary deposits are used to create credit through loans.

Which of these is one of the main functions of commercial banks? ›

One of the main functions of commercial banks is to provide loans to individuals and businesses. This is often done using the money that other customers have deposited in the bank.

What is a bank and its functions? ›

A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.

What are the 5 functions of a central bank? ›

The five functions of a central bank are:
  • maintaining macroeconomic stability;
  • lender of the last resort for financial stability;
  • being a bank to the government;
  • implementing monetary policy;
  • regulating the financial sector.

What is not a primary function of a bank? ›

Facilitating import of goods is not a primary function of a bank.

What is the primary of a bank? ›

A primary bank account also refers to the main account of operation of a banking customer. This is usually the account where purchase transactions, fees and charges connected to the ATM/Debit Card are debited.

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 are the secondary functions of commercial banks? ›

Secondary Functions

Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to individuals and organizations that export or import goods from overseas. However, only certain banks which have the license to deal in foreign exchange are eligible for such transactions.

What are the primary functions of commercial bank Mcq? ›

Explanation: Accepting deposits, providing loans, mortgages, cash, borrowing, overdraft, and bill discounting are all primary responsibilities.

What are the primary functions of money? ›

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.

What is the function of CBE? ›

CBE provides credit for working capital and expansion and facilitation of local and international trading activities. It also provides short, medium and long term loans. The following are the major loan types provided by CBE.

What are the 4 main functions of money? ›

The Four Basic Functions of Money

Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.

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