Explainthe functions of a commercial bank. (2024)

Commercialbanks perform various functions that are as follows:

1.Accepting deposits

The basicfunction of commercial banks is to accept deposits of the customers.These deposits are of the following types:

(i)Saving Accounts

Savingaccounts cater to the needs of those individuals who wish to save apart of their income and earn interest on the amount saved. Accountholders of saving accounts can deposit cheques, drafts, etc. However,there is a limit on withdrawal.

(ii)Fixed deposit accounts

As thename suggests, fixed deposit accounts imply deposits are kept forfixed periods of time; for example, Rs.500 per month for 5 years. Theperiod has to be decided in advance, while opening the account.Holders of these accounts do not enjoy the cheque facility. Higherthe time period, higher will be the interest rate, which is decidedby RBI.

(iii)Current deposits accounts

Currentdeposit accounts are also called ‘demand deposits’ as thedepositor can withdraw money at any time through cheques. Businessmenuse this account to make many transactions in a single day; however,they do not earn interest on the deposits. Banks provide accountstatements to the current account holders at regular intervals.

2.Granting loans and advances

The secondmost important function of the commercial banks is to give loans andadvances. The rate of interest charged by the banks on loans ishigher than the rate of interest paid by the banks on demand depositsand saving deposits. Loans granted by commercial banks are generallyfor long term and are given against securities. Advancesare given by a bank only for a short span of time.

3.Agency functions

Thecommercial banks perform various agency functions with the primepurpose of acceptance of deposits and granting of loans. Theirfunctions include:

(i) Transfer of funds − The banks provide easy flow of fundsfrom place to place via mail transfers, demand drafts, etc.

(ii) Collection of funds − The banks also collect funds onbehalf of its customers through bills, cheques, etc.

(iii)Banks collect insurance premiums, dividends, interest on debentures,etc.

(v) Banksassist in the process of tax payment by the accountholders.

(vi) Banksalso play the role of trustees or executors.

4.Discounting bills of exchange

CommercialBanks provide financial assistance to the business community bydiscounting bills of exchange. The banks purchase these bills,produced by customers, by deducting interest fromthe face value of the bill, thus providing easy finances to thebusiness community when required.

5.Credit creation

Commercialbanks create credit in the economythrough demand deposits. Credit creation paves the path for thegrowth of the economy.

6.Other functions

(i)Providing locker facility

(ii)Purchase and sale of foreign exchange

(iii)Issue of gift cheques

(iv)Underwriting of shares and debentures

(v)Providing information and statistical data useful to customers


Explainthe functions of a commercial bank. (2024)

FAQs

Explainthe functions of a commercial bank.? ›

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.

What are the functions of the commercial bank? ›

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. Q2.

What is the primary functions of commercial banks definition? ›

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

Which of the following is the main function of commercial banks? ›

Granting Loans

One of the primary functions of commercial banks is to lend funds, and these loans can be in cash credit, advances, or otherwise.

What are the functions of banks? ›

Banks in India offer a wide range of banking services, such as savings and checking accounts, loans (personal, business, and mortgages), credit cards, investment services, and electronic banking options like online and mobile banking.

What are the advantages of a commercial bank? ›

The Advantages of Commercial Banks are as follows:
  • Location. The commercial banks are large companies thus, these companies are to be found all over the town, state or country. ...
  • Discounts. Commercial banks also serve the customers with low prices. ...
  • Product Offerings. ...
  • Online Banking. ...
  • Electronic Banking.

Can a commercial bank create money? ›

Commercial banks perform the function of credit creation in an economy. Therefore, the money that is created by commercial banks is known as credit money.

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 primary and secondary functions of commercial banks? ›

Commercial banks have the following functions: Accepting deposits, issuing loans, advances, cash, credit, overdraft, and bill discounting are all primary functions. Secondary functions include issuing letters of credit, safekeeping valuables, providing consumer financing, and educational loans.

What are the two essential functions of a bank? ›

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

What is the management of commercial bank? ›

Mostly it deals with the management of deposits, lending activities, investments, bank capital, bank liquidity and off-balance sheet activities. It also covers the use of derivatives and asset backed securities such as credit derivatives etc. to manage the market risk.

Which three services do many commercial banks offer to customers? ›

Individual Banking—Banks typically offer a variety of services to assist individuals in managing their finances, including: Checking accounts. Savings accounts. Debit & credit cards.

How does a commercial bank create credit? ›

All commercial banks create credit by advancing loans and purchasing securities. They lend money to the individuals as well as to the businesses out of deposits accepted from the public. Commercial banks are not allowed to use the entire amount of public deposits for lending purposes.

What are the three 3 main functions of a 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.

What are the 3 general functions of a bank? ›

Commercial banks are important to the economy because they create capital, credit, and maintain liquidity in the market.

What are 4 functions that define a bank? ›

What are the four main functions of banks today? storing money, transferring money, lending money, and financial services.

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.

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