Functions of Commercial Banks: meaning, functions, types, example (2024)

What is Commercial Bank?

A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.

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Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.

Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.

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Examples of Commercial Banks

Few examples of commercial banks in India are as follows:

1.State Bank of India (SBI)

2.Housing Development Finance Corporation (HDFC) Bank

3.Industrial Credit and Investment Corporation of India (ICICI) Bank

4.Dena Bank

5.Corporation Bank

This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for commerce students. To know about more such concepts, stay tuned to BYJU’S.

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Frequently Asked Questions on Function of Commercial Banks

Q1

What is the most important function of a Bank?

The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.

Q2

What is the first commercial bank of India?

Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.

Q3

What is the main purpose of commercial banks?

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.

Functions of Commercial Banks: meaning, functions, types, example (2024)

FAQs

Functions of Commercial Banks: meaning, functions, types, example? ›

Commercial banks play a vital role in the economy by: Providing a safe and convenient place for individuals and businesses to store their money. Making loans that help to finance economic activity. Offering payment services that make it easy for individuals and businesses to make payments to each other.

What are the functions of commercial bank with an example? ›

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.

What is the primary functions of commercial banks definition? ›

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

What are the functions of the banks? ›

Banking services mainly include accepting deposits, lending money, facilitating transactions, and offering various financial products like savings accounts, loans, and credit cards. Banking plays a crucial role in the economy by facilitating the flow of money and enabling economic activities.

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 four functions of commercial banks? ›

Commercial banks have the primary functions of accepting customer deposits in the current account, savings, and fixed deposits, lending money as credit to borrowers who then pay with interest, and disbursing payments in the form of transactions and customer payments.

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 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.

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 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 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.

How many functions are there in banking? ›

It is largely a division of a large bank which deals with loan and deposit services provided to large and small size businesses. Thus, there are many functions of commercial banks in India. Mainly there are two functions, primary and secondary.

What are the five most important banking services? ›

The 5 most important banking services are checking and savings accounts, loan and mortgage services, wealth management, providing Credit and Debit Cards, Overdraft services. You can read about the Types of Banks in India – Category and Functions of Banks in India in the given link.

What are three ways banks make money? ›

They earn interest on the securities they hold. They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).

How do banks create money? ›

When a bank makes a loan it creates money. For example when I got a loan to buy my boat, my credit union called an told me that the loan was approved and that I should come in and get the check. I told them to just deposit it in my checking account. So they did.

Is Wells Fargo a commercial bank? ›

Who we are. Wells Fargo Commercial Banking provides market-leading solutions, industry expertise, and insights to help enable our clients' growth and success, enhancing the communities we serve.

What is an example of a universal bank? ›

Notable examples of universal banks include Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo of the United States; UBS and Credit Suisse of Switzerland; BNP Paribas, Crédit Agricole and Société Générale of France; Barclays, HSBC, Lloyds Banking Group, NatWest Group and Standard Chartered of the United ...

What is an example of a thrift bank? ›

What Are Some Types of Thrift Banks? Thrift banks include savings banks, private development banks, and stock savings and loan associations.

References

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