What is commercial bank? Its functions

A Commercial bank is a type of bank or financial institution that provides services such as accepting deposits, making business loans and offering basic investment products.

According to Prof. Kinley," A bank is an establishment which makes individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use."

FUNCTIONS

The modern bank performs a large variety of functions and services. Some of the fundamental functions performed by the bank are discussed below:-

1) ACCEPTING DEPOSITS:- Generally, the banks accept four types of deposits from the public which are as follows:
(a) Current Account or Demand Deposit:
Under this account the depositor can withdraw the money whenever he requires it. Normally no interest is paid by the bank because the bank cannot utilise this money in earning and he must keep himself ready to meet the demand of the customer. He must keep cent per cent reserve against the deposit. In this account the depositor has to maintain minimum balance. Occasionally a small interest is paid to the people.
(b) Savings Bank Account:

Under this account the depositor is not free to withdraw any amount like current account. He can withdraw only a specified sum of money in a week. Here the depositor gets less interest in comparison to Fixed Account.
(c) Fixed or Time Deposit Account:
Under this account deposits are accepted for a fixed period say one, two, four or five years or above. The money deposited in this account cannot be normally withdrawn before the expiry of the agreed period. The rate of interest on this account is higher than on other accounts.
2) ADVANCING LOANS:- A bank lends a certain percentage of cash lying in deposits on higher interest rate than it pays to the depositors. This is how it earns profits and carries on its business.
The bank advances loan in the following manner:
(a) Cash Credit:
This type of loan is granted to businessmen against certain specified securities. To a new customer, a loan account has to be opened from where the money is withdrawn by cheque but he pays interest on the full amount.
(b) Call Loans/Money at Call and Short Notice:
They are very short-term loans and are mostly given to bill brokers for 15 days. They are advanced against first class securities. This can be recalled at a very short-notice.
(c) Overdraft:
Overdraft is the facility extended by the banker to draw a sum greater than the balance lying in his current account. The businessman is charged interest only on that amount by which his current account is actually withdrawn and not by the full amount of the overdraft sanctioned.
4) CREDIT CREATION:- Credit creation is one of the most important functions of the commercial banks. In order to earn profit the bank accept deposits and advance loans by keeping a small cash in reserve to meet the day to day needs of the customers.
When a bank gives loan, it opens an account in the name of the loan taker and does not pay him in cash but allows him to draw the money according to his requirements. By granting a loan, the bank creates credit or deposit. 

 5) Financing Foreign Trade:
A commercial bank helps in foreign trade by financing his customers and by accepting foreign bills of exchange. The bank encourages the documents like D/A (Documents against acceptance) and D/P (Documents against payments) in foreign payments. Further, it transact foreign exchange business and buys and sells foreign currency.

5. Agency Service:


A bank discharges agency services on behalf of its customers which are as follows:
(i) The bank collects payments of bills of exchange, cheques dividends etc. on behalf of his customers.
(ii) It buys and sells shares, securities, debentures etc. for its customers.
(iii) The bank remits money to different places by bank drafts on telegraphic transfer (T/T) on behalf of its customers.
(iv) It discharges the functions of marketing, work as a trustee, administrator or executor for its customers.
(v) It gives proper advice to the customers in the matter of correspondence and other matters of business.

6. Miscellaneous Services:

Besides the above mentioned services the commercial bank performs a number of other services the important of them are as follows:
(i) It provides lockers facility to the customers where the customers can keep the valuable documents and ornaments etc.
(ii) It underwrites the company debentures and shares.
(iii) It provides information’s about the customers.
(iv) It issues travellers cheques, letter of credit etc. to the customers and it accepts bills on behalf of the customers.



Comments

Post a Comment

Popular posts from this blog

World bank

INTRODUCTION The World bank group consists of 3 international institutions - The World Bank itself ( formerly IBRD) and its 2 affiliates - IDA and IFC ( International Development Association and International Finance Corporation). All of them are devoted to the same general objective- The provision of financial and technical assistance for economic development. The World Bank was established in 1945 under the Bretton Woods Agreement of 1944 to assist in bringing about a smooth transition from a war-time to peace-time economy. It is a sister institution of the IMF. MEMBERSHIP The members of the IMF are the members of the World Bank. It had 182 members in 2000. Currently it has 189 members. If a country resigns its membership, it is required to pay back all loans with interest on due dates. If the Bank incurs a financial loss in the years in which a member resigns, it is required to pay its share of the loss on demand. OBJECTIVES The following objectives are assigned by the...
Read more

Credit Creation by banks

Image
A central bank is the primary source of money supply in an economy through circulation of currency.However, for this purpose, the central bank needs to depend upon the reserves of commercial banks. These reserves of commercial banks are the secondary source of money supply in an economy. The most important function of a commercial bank is the creation of credit. Let us learn the process of credit creation by commercial banks with the help of an example. Suppose you deposit Rs. 10,000 in a bank A, which is the primary deposit of the bank. The cash reserve requirement of the central bank is 10%. In such a case, bank A would keep Rs. 1000 as reserve with the central bank and would use remaining Rs. 9000 for lending purposes. The bank lends Rs. 9000 to Mr. X by opening an account in his name, known as demand deposit account. However, this is not actually paid out to Mr. X. The bank has issued a check-book to Mr. X to withdraw money. Now, Mr. X writes a check of Rs. 9000 in favor o...
Read more

Instruments of credit control by C.B.

Central Bank controls credit in two ways:- Quantitative Credit Control and Qualitative credit Control (A) QUANTITATIVE CREDIT CONTROL :- The main objective of quantitative credit control is to control the total volume of bank credit and rate of interest. In other words, those methods by which Central Bank controls the quantity of credit in a country are called Quantitative methods. These methods include:- bank rate,  open Market Operations, Change in CRR and Change in SLR.                                        (1) BANK RATE It is the rate at which the Central Bank rediscounts the first class securities of other banks. With the help of Bank Rate policy the Central Bank controls the credit creation of other banks. Whenever Central Bank wants to control credit in the country it raises the Bank Rate. As a consequence the commercial banks would have to increase it's market rate...
Read more