Functions of Commercial Banks
Commercial bank is described as financial institution which accepts deposits, grand loans and
provide wade range of financial services to their customers.
Functions of commercial banks can be classified in to two categories
Primary functions
Secondary functions
Primary functions
• Receiving deposits from public
• Making loas and advances
• Credit creation
• Use of cheque system and plastic cards
• Transfer of funds
1. Receiving deposits from public: It accepts different types of deposits from every class
and from every source
Types of deposits
• Fixed deposits: it also known as time/term deposits. Money is deposited for a
fixed period of time. It can be withdrawn only after the expiry of fixed period.
Provides high interest rate to this type of deposits.
• Current account: These types of deposits are suitable for business man. No
restriction on withdrawal and deposits. Bank provides no interest to this type of
accountholders. Bank provide overdraft facility to these type of accounts
• Savings account: it is mainly done to encourage saving habit of the people.
This account is suitable for low- and middle-income groups. Certain restrictions
are imposed on withdrawal and deposits. Low rate of interest is offered to this
account.
• Recurring deposits: This account is suitable to people having fixed amount of
income. A fixed sum is to de posited in each month or period to this account.
Repayment will be done in total after the stipulated period with interest.
• Home safe deposits: under this scheme, a small pot/box is supplied o depositor.
The depositor can save the amount in box. Periodically, bank collects the
amount from box and credit the same to account.
2. Making loans and advances
After keeping required amount of reserves, bank lend the balance of deposits to needy
persons against personal security or movable or immovable securities.
Types of loans and advances
• Loan: A loan is granted by the banker to the customer for a fixed period of time.
Amount is given to customer in lumpsum. Repayment is done in installment
with interest.
• Overdraft: This is a facility provided to current account holders to withdraw
money more than their deposits. Interest is charged on amount is overdrawn.
• Cash credit: it is a type of loan account is granted to customers in separate cash
credit account against current assets. The borrower is entitled to withdraw
amount from cash credit account
• Discounting of bills of exchanges: The holder of the bill of exchange can
discount the bills with banks and get money before the date of maturity of bill.
• Money at call and short notice: These loans are granted for very short period
and normally take place between banks.
• Consumer credit: These are loans given for purchasing consumer durable
goods such as television, vehicles etc.
• Miscellaneous advances: it includes other loans such as loan for export, self-
employment, co-operative sectors etc.
3. Credit creation
When a bank gives loans to the customer, it does not lend cash directly, instead bank
open an account in the borrowers’ name and credit the amount. So, when a loan is given,
it creates an equivalent deposit which may increase in money stock of the economy.
Creation of such deposits is called credit creation.
4. Use of cheque and plastic cards
The depositors are allowed to withdraw from their deposits by using cheque. Now it is
replaced by plastic cards, commonly known as ATM cards.
VISA and MASTER cards are the popular cards accepted all over the world.
5. Transfer of funds
Commercial banks provide fund transfer facility from one account to another within
same country or another country by using drafts, mail transfer etc.
Secondary functions
It includes
• Agency services
• General utility services
Agency services include all the functions which are performed by commercial banks
on behalf of the customers by acting as their agent.
General utility services include all the functions which are beneficial for community as
a whole
I. Agency services
• Collection of credit instruments such as bill of exchanges, promissory
notes etc.
• Collection of dividends
• Purchase and sale of securities
• Deals in foreign exchange
• Act as representatives for passports, travel tickets etc.
• Act as agent of government, or local government
• Execution of standing orders: Standing order is an order given by the
customers to the bank to pay insurance premium, rent etc. on certain
specific dates. A small commission is charged for these services.
II. General utility services
• Safe custody of valuables
• Locker facility
• Fund transfer
• Provides information
• Underwriting of shares
• Issue of gift cheques
• Credit cards
• Travellers’ cheque
• Collection of statistics
Innovative functions of Commercial banks
Nationalization of banks, globalization and liberalization of the economy resulted in
the modernization and diversification of banking companies. That resulted in adopting
progressive approach instead of conservative approach. Now commercial banks started
to provide more value -added services to the customers apart from the traditional
banking functions.
Following are the modern functions performed by a commercial bank
1. Provision of ATM services: ATM stands for Automated Teller Machine. for
withdrawal, transfer of funds, balance enquiry, banking statement etc. can be done
using ATM. It provides 24 x 7 services.
2. Credit card: credit cards are issued to good customers having good financial
records and worthiness. Credit card holders can purchase goods or get services up
to a certain limit without making immediate payment. It is a plastic card which
contains the details of name of the holder, name of the bank, expiry etc.
3. Tele banking: a customer can perform different banking functions anywhere they
have access to phone
4. Personal computer banking: the customer can access information on their
accounts through personal computer (dial up connection).
5. Internet banking: Internet banking, also known as online banking, is a service that
allows people to conduct financial transactions over the internet. Users can access
their bank accounts, transfer money, pay bills, and manage other financial activities
using a computer or mobile device without needing to visit a physical bank branch.
6. Electronic Fund Transfer (EFT): Electronic Fund Transfer (EFT) is a system of
transferring money from one bank account to another electronically. It allows
individuals and businesses to move funds without the physical exchange of cash or
checks. Common methods of EFT include direct deposits, wire transfers, ATM
transfers, and online bill payments. It works on the principle of “next day
availability of fund”
7. Electronic Clearing Services
Credit clearing: Electronic Credit Clearing is a process that facilitates the transfer
of funds from one bank account to multiple recipients' bank accounts electronically. It
is commonly used for bulk payments like salaries, dividends, pensions, and supplier
payments.
Debit clearing: Electronic Debit Clearing is a process that allows businesses or
organizations to automatically withdraw funds from multiple customers' bank accounts.
It is typically used for recurring payments such as utility bills, loan repayments,
subscriptions, and insurance premiums.
8. Real Time Gross Settlement (RTGS): RTGS stands for Real-Time Gross
Settlement. It is a system used for transferring large sums of money between banks
in real time and on a "gross" basis.
• Real-Time: Transactions are processed immediately as they are initiated,
without any delay.
• Gross Settlement: Each transaction is settled individually, without bundling
with other transactions
9. Bancassurance: It is a partnership between a bank and an insurance company. This
arrangement allows the bank to sell insurance products to its customers, providing
convenience by offering banking and insurance services at one place.
10. Mobile banking: is a service provided by banks that allows customers to conduct
financial transactions and manage their bank accounts using a mobile device, such
as a smartphone or tablet. This service provides convenience and flexibility,
enabling customers to Check account balances, Transfer money between accounts,
Pay bills etc.
