Functions of commercial banks

The functions of commercial Banks can be classified into two types.

  1. Primary functions; and
  2. Secondary functions.

1.Primary functions : This is the main function which is performed compulsoraly by every bank and include:

  1. a) Accepting deposits; and
  2. b) Granting loans and advances.

a) Accepting deposits

The most important function of a commercial Bank is to mobilise deposits from the public, accepting deposits from people who have surplus income and savings . Depending upon the type of deposit accounts, people can earn interest.

b) Grant of loans and advances

The second important function is to grant loans and advances to members of the public and to the business enterprises. The rate of interest on such loans is higher than allowed by banks on various deposit accounts and varies according to the purpose, period of loan and mode of repayment.

2.Secondary functions

There are some additional functions performed by bank which are called secondary functions. These are as follows :

  1. Issuing letters of credit, travellers’ cheque, etc.
  2. Providing safe deposit vaults or lockers.
  3. Providing customers with facilities of foreign exchange dealings.
  4. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft. Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc.

Various Types of Loans and Advances

  1. Loans

A loan is granted for a specific time period. Commercial banks provide short-term as well as long-term loans. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is repaid in instalments or in lump sum.

  1. Advances

An advance is a credit facility provided by the bank to its customers normally granted for a short period of time. The purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest in this case varies from bank to bank and is charged only on the amount withdrawn.

Types of Advances

Banks grant short-term financial assistance by way of cash credit, overdraft

and bill discounting bills of exchange. Let us learn about these.

  1. Cash Credit

Cash credit is a facility whereby the bank allows the borrower to draw amount up to a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn and not on the limit..

  1. Overdraft

Overdraft is also a temporary credit facility granted by bank to customer having current account with the bank whereby he is allowed to withdraw more than the amount of credit balance in his account. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both.

  1. Discounting Bills of Exchange

Banks help its customers by making payment of the amount before the due date of the bills after deducting a certain rate of discount. The person gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

Types of bank deposit accounts

Bank deposits serve different purposes for different people. On the basis of purpose they serve, bank deposit accounts can be classified as:

  1. Savings Bank Account
  2. Current Deposit Account
  3. Fixed Deposit Account
  4. Recurring Deposit Account.

1.Savings Bank Account :

This type of account can be opened with a minimum initial deposit that varies from bank to bank.

Money can be deposited any time and withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using ATM card. Normally banks put some restriction on the number of withdrawals from this account.

Interest is allowed on the balance of deposit in the account and varies from bank to bank and changes from time to time.

A minimum balance has to be maintained in the account as prescribed by the bank.

It is suitable for a person with limited income who wants to save money for future.

2.Current Deposit Account :

This is an account from which withdrawals can be made any number of times.

This account requires certain minimum amount of deposit while opening the account.

It is suitable for big businessmen, companies and institutions such as schools, colleges, and hospitals who have to make regular payment through their bank accounts.

No interest is paid on this deposit rather the accountholder pays certain amount each year as operational charge.

Some specific accountholders are allowed withdrawals of up to a particular amount  in excess of the balance of deposit. This facility is known as overdraft facility.

3.Fixed Deposit Account:

It is also known as Term Deposit Account.

In this case money is deposited for a specific period of time and can be withdrawn only after that period. This period of deposit may be from 15 days to three years or more. Interest is paid at a higher rate. But if on request, the depositor encashes the amount before its maturity bank gives lower interest. The interest on fixed deposit account can be withdrawn at certain intervals of time.

At the end of the period, the deposit may be withdrawn or renewed for a further period. Banks also grant loan on the security of fixed deposit receipt.

4.Recurring Deposit Account :

While opening this account a person has to agree to deposit a fixed amount once in a month for a certain period and the total deposit along with the interest therein is payable on maturity.

The depositor can also be allowed to close the account before its maturity and get back the money along with the interest till that period.

The rate of interest allowed on the deposits is higher than that on a savings Bank deposit but lower than the rate allowed on a fixed deposit for the same period.

This type of account is suitable for those who can save regularly and expect to earn a fair return on the deposits over a period of time.

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