1. Commercial Bank

2. Functions of Commercial Banks:

2.1 Primary functions

2.2 Secondary functions

Commercial Bank

The two most distinctive options of a poster bank square measure borrowing and disposition, i.e., acceptance of deposits and disposition of cash to come to earn Interest (profit). In short, banks borrow to lend. The speed of interest offered by the banks to depositors is named the borrowing rate whereas the speed at that banks lend out is named disposition rate. The distinction between the rates is named ‘spread’ that is taken over by the banks. Mind, all money establishments don’t seem to be business banks as a result of solely those that perform twin functions of (i) accepting deposits and (ii) giving loans square measure termed as business banks. For instance, post offices don’t seem to be banks as a result of they are doing not provide loans.

Functions of Commercial Banks:

Commercial banks square measure establishments that conduct business for profit motive by accepting public deposits for varied investment functions. Functions of business banks square measure classified into 2 main categories—(A) Primary functions and (B) Secondary functions.

Primary functions

  • Accepts deposit – The bank takes deposits within the style of saving, current, and glued deposits. The excess balances collected from the firm and people square measure Lent to the temporary need of business transactions.
  • Current Account deposits: Such deposits square measure owed on-demand and square measure, therefore, known as demand deposits. These are withdrawn by the depositors any variety of times relying upon the balance within the account. The bank doesn’t pay any interest on these deposits however provides cheque facilities. These accounts square measure usually maintained by businessmen and Industrialists WHO receive and build business payments of enormous amounts through cheques.
  • fixed deposits (Time deposits): Fixed deposits have a set amount of maturity and square measure brought up as time deposits. These square measure deposits for a set term, i.e., the amount of your time starting from some days to some years. This square measure neither owed on demand nor they fancy cheque facilities. They can be withdrawn solely once the maturity of the desired fastened amount. They carry a higher rate of interest. They’re not treated as a district of cash offer revenant deposit during which an everyday deposit of associate degree united add is formed is additionally a variant of fastened deposits.
  • Saving account deposits: These square measure deposits whose main objective is to avoid wasting. The bank account is most fitted for individual households. They mix the options of each accounting and glued deposits. They owed on-demand and conjointly withdraw in a position by cheque. However bank provides this facility with some restriction.
  • Provides Loan and Advances – Another crucial perform of this bank is to supply loans and advances to the entrepreneurs and business people and collect interest. For each bank, it’s the first supply of creating profits. during this method, a bank retains a tiny low variety of deposits as a reserve and offers (lends) the remaining quantity to the borrowers in demand loans, overdraft, money credit, and short loans, etc.
  • Cash Credit: An eligible receiver is 1st sanctioned a credit limit and among that limit, he’s allowed to withdraw a definite quantity on a given security. The retreating power depends upon the borrower’s current assets, the stock statement of that is submitted by him to the bank because of the basis of security. Interest is charged by the bank on the drawn or used portion of the credit (loan).
  • Demand Loans: A loan that might be recalled on demand is named call a loan. There’s no expressed maturity. The whole loan quantity is paid in payment by crediting it to the loan account of the receiver. Those like security brokers whose credit desires fluctuate usually, take such loans on personal security and money assets.
  • Short-term Loans: Short-term loans square measure given against some security as personal loans to finance capital or as priority sector advances. The whole quantity is repaid either in one installment or in an exceeding variety of installments over the amount of loan.

Secondary functions

  • Discounting bills of exchange – it’s an instrument acknowledging the number of cash to be paid against the products purchased at a given purpose of your time within the future. The number may also be cleared before the quoted time through a discounting methodology of a poster bank.
  • Overdraft Facility – it’s associate degree advance given to a client by keeping this account to overdraw up to the given limit.

Difference between overdraft facility and Loan:

  • Order of payment is formed while not security in accounting however loans square measure given against security.
    • Within the case of a loan, the receiver needs to pay interest on the full quantity sanctioned however within the case of an order of payment, the receiver is given the power of borrowing solely the maximum amount as he needs.
    • Whereas the receiver of the loan pays Interest on quantity outstanding against him however a client of the order of payment pays interest on the daily balance.
  • Purchasing and merchandising of the Securities – The bank offers you the power of merchandising and shopping for the securities.
  • Locker Facilities – Bank provides lockers facility to the shoppers to stay their valuable happiness or documents safely. Banks charge a minimum of associate degree annual fee for this service.
  • Paying and Gather the Credit – It uses totally different instruments sort of a note of hand, cheques, and bill of exchange.

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Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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