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Meaning and Functions of Commercial Bank

Meaning and Functions of Commercial Bank

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Published by barashraman

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Published by: barashraman on Nov 27, 2009
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10/06/2014

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MEANING
AND
FUNCTIONS OF COMMERCIAL BANK
Meaning of commercial banks
A banking company is one which transacts the business of bankingwhich means the accepting for the purpose of lending allinvestments, of deposits of money form the public, repayuable ondemand or otherwise and withdrawable by cheque, draft orotherwise.There are two essential functions that a financial institution mustperform to become a bank. These area)Accepting of the chequable deposit form the publicb)LendingMain features:
1.
It accepts deposits from the public. These deposits can bewithdrawn by cheque and are repayable on demand.
2.
A commercial bank uses the deposited money for lendingand for investment in securities.3.It is a commercial institution , whose aim is to earn profit
4.
It is a unique financial institution, that creates demanddeposits which serves as the medium of exchange.5.Money created by commercial banks is known as depositmoney.
Functions of commercial Banks
Various functions of commercial banks can be divided into threemain groups;i.Primary functionsii.Agency functions
iii.
General utility functions
 
PRIMARY FUNCTIONS - There are two main primary functionsof the commercial banks which are discussed below :
1.
Accepting deposits 
– The primary function of commercialbank is to accept deposits form every class and from everysource. To attract savings the bank accepts mainly threetypes of deposits. They are namely demand deposits, savingdeposits, fixed deposit.
Demand deposit 
( also known as current deposit) are thosedeposits which can be withdrawn by the depositor at any timeby means of cheque. No interest is paid on such deposits.Rather, the depositor have to pay something to the bank forthe services rendered by the businessmen and industrialists.It is also called current account.Saving deposits – These are those deposits on the withdrawalof which bank places certain restrictions. Cheque facility isprovided tosd the depositors. Saving deposits accounts aregenerally held by households who have idle or surplus moneyfor shor period.Fixed deposit – These are those deposit which can bewithdrawn onlyh after the expiry of the certain fixed timeiperiod. These deposits carry high rate of interest. The longerthe period, higher will be the rate of interest.Distingusish between demand deposit and fixed depositDemand depositFixed deposit1. Demand deposit can bewithdrawn by the depositor atanytime without notice.These deposit can bewithdrawn only afgter theexpiry of the certain fixedtime period.2.They are chequable i.e.,demand deposits arewithdrawable through chequesThey are not chequable.
 
3.No interest is paid on thesedeposits. Rather depositorshave to pay something to thebank for its services.These deposits carry high rateof ihterest.4. These deposits constituteof a part of money supplyThey fall under sthe categoryuof near money assests.Advancing of loansCommercial banks give loans and advances to businessmen,farmers, consumers and employers against approved securities.Approved secutities refer to gold, silver, vullion, govt.securities, easily savable stock and shares and marketablegoods. The bank advances following types of loans-a.Cash credit – Under this the borrower is allowed towithdraw upto a certain amount on a given securitywhich comprise mainly stocks of goods and B/R fromothers., But interest is charged on the amount actuallywithdrawn.b.Overdraft – It is a most common way of lending. Underit, the borrower is allowed to overdraw hios currenta/c balance.Overdraft is a temporary facility.c.Short term loans – Under it loans of a fixed amountare sanctioned. The sancgtioned amount is credited inthe debtors a/c. Bank charges ihterest on the wholeamount form the day it was sanctiuoned.The difference between a loan and an overdraft is that, while incase of loan, the borrower payus interest on the amountoutstanding against his a/c. But is the case of an overdraft, thecustomerpays interest on the deal balance standing against hisa/c further. Loans are given against security, while overdrafgtsare made without securities. From the borrowers point of view,

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