A commercial bank (or business bank) is a type of financial institution and inte rmediary.

It is a bank that lends money and provides transactional, savings, and money market accounts and that accepts time deposit. An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. Privately owned financial institution which (1) accepts demand and time deposits , (2) makes loans to individuals and organizations, and (3) provides services su ch as documentary collections, international banking, trade financing. Functions of Commercial Banks Commercial bank being the financial institution performs diverse types of functi ons. It satisfies the financial needs of the sectors such as agriculture, indust ry, trade, communication, etc. That means they play very significant role in a p rocess of economic social needs. The functions performed by banks are changing a ccording to change in time and recently they are becoming customer centric and w idening their functions. Generally the functions of commercial banks are divided into two categories viz. primary functions and the secondary functions. The fol lowing chart simplifies the functions of banks. Primary Functions of Commercial Banks Commercial Banks performs various primary functions some of them are given below 1 Accepting Deposits : Commercial bank accepts various types of deposits from pu blic especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certa in time period 2 Making Advances : The commercial banks provide loans and advanc es of various forms. It includes an over draft facility, cash credit, bill disco unting, etc. They also give demand and demand and term loans to all types of cli ents against proper security. 3 Credit creation : It is most significant functio n of the commercial banks. While sanctioning a loan to a customer, a bank does n ot provide cash to the borrower Instead it opens a deposit account from where th e borrower can withdraw. In other words while sanctioning a loan a bank automati cally creates deposits. This is known as a credit creation from commercial bank. Secondary Functions of Commercial Banks Along with the primary functions each commercial bank has to perform several sec ondary functions too. It includes many agency functions or general utility funct ions. The secondary functions of commercial banks can be divided into agency fun ctions and utility functions. a) Agency Functions : Various agency functions of commercial banks are 1 2 3 4 5 6 To To To To To To collect and clear cheque, dividends and interest warrant. make payment of rent, insurance premium, etc. deal in foreign exchange transactions. purchase and sell securities. act as trusty, attorney, correspondent and executor. accept tax proceeds and tax returns.

b) General Utility Functions : The general utility functions of the commercial b anks include 1 To provide safety locker facility to customers. 2 To provide money transfer facility. 3 To issue traveller's cheque.

4 To 5 To etc. 6 To 7 To .

act as referees. accept various bills for payment e.g phone bills, gas bills, water bills, provide merchant banking facility. provide various cards such as credit cards, debit cards, Smart cards, etc

SSOURCES OF BANK FUNDS A bank is a business firm. Its main aim is to earn profit. In order to achieve t his objective it provides services to the customers. It offers a variety of inte rest bearing obligations to the public. These obligations are the sources of fun ds for the bank and are shown on the liability side of the balance sheet of a co mmercial bank. The main sources which supply funds to a bank are as follows: A Bank s Own Funds. B Borrowed Funds. 1. Bank s own funds. Bank s own funds are mainly of three types; (a) Paid up capital , (b) Reserve fund and (C) Portion of undistributed profit. (A) Banks Own Funds. Bank s own paid up capital. The amount with which a banking company is registered is called nominal or authorized capital. It is the maximum amount of capital whi ch is mentioned in the capital clause of the memorandum of association of the co mpany. Capital is further divided into (i) paid up capital and (ii) subscribed c apital. The banks in Pakistan raise authorized capital by issuing ordinary share s of Rs. 10 each which are fully paid up. 2. Reserve fund. Reserve is another source of fund which is maintained by all co mmercial banks. At the time of declaring dividend, a certain portion of the prof it is transferred to the reserve fund. This reserve belongs to the .shareholders and at the time of liquidation, the Shareholders are entitled to these reserves along with the capital. The main purpose of setting aside part of profit is to meet unforeseen expenses of the bank. The Banking Companies Ordinance has made it obligatory (binding) fo r every banking company incorporated in Pakistan to create a reserve fund. 3. Profit. Profit is another source to a bank for the purpose of business. Profi ts signify the credit balance of the profit and loss account which has not been distributed. The accumulated profits over the years increase the working capital of the bank and strengthens its financial position. (B) Borrowed Funds. The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in d ifferent accounts. Bank s borrowing is mostly in the form of deposits. Bank collects three kinds of d eposits from its customers (1) current or demand deposits (2) saving deposits an d (3) fixed or time deposits. The larger the deposits of bank, the larger will b e its (use) fund for employment and so higher are its profit. 1. Borrowing from central bank. The commercial banks in times of emergency borro w loans from the central bank of the country. The central bank extends help as a nd when financial help is required by the commercial banks. 2. Other sources. Bank also raise funds by issuing bonds, debentures, cash certi ficates etc. etc. Though it is not common but is a dependable source of borrowin

g. 3. Deposits. Public deposits are a powerful source of funds to a bank. There are three types of bank deposits (i) current deposits (ii) saving deposits and (iii) time deposits. Due to the spread of literacy, banking habits and growth in the volume of business operations, there is a marked increase in deposit money with banks. principles of lending

There are few general principles of good lending which every banker follows when appraising an advance proposa 1. Safety "Safety first" is the most important principle of good lending. When a banker le nds, he must feel certain that the advance is safe; that is, the money will defi nitely come back. If, for example, the borrower invests the money in an unproduc tive or speculative venture, or if the borrower himself is dishonest, the advanc e would be in jeopardy. Similarly, if the borrower suffers losses in his busines s due to his incompetence, the recovery of the money may become difficult. The b anker ensures that the money advanced by him goes to the right type of borrower and is utilized in such a way that it will not only be safe at the time of lendi ng but will remain so throughout, and after serving a useful purpose in the trad e or industry where it is employed, is repaid with interest. square 2. Liquidity It is not enough that the money will come back; it is also necessary that it mus t come back on demand or in accordance with agreed terms of repayment. The borro wer must be in a position to repay within a reasonable time after a demand for r epayment is made. This can be possible only if the money is employed by the borr ower for short-term requirements and not locked up in acquiring fixed assets, or in schemes which take a long time to pay their way. The source of repayment mus t also be definite. The reason why bankers attach as much importance to 'liquidi ty' as to safety' of their funds, is that a bulk of their deposits is repayable on demand or at short notice. If the banker lends a large portion of his funds t o borrowers from whom repayment would be coming in but slowly, the ability of th e banker to meet the demands made on him would be seriously affected in spite of the safety of the advances. For example, an advance of Rs.50 lakhs (approx. $11 1,354.60 USD) on the security of a legal mortgage of a bungalow of the market va lue of Rs. 100 lakhs (approx. $222,716.82 USD), will be very safe. If, however, the recovery of the mortgage money has to be made through a court process, it ma y take a few years to do so. The loan is safe but not liquid. square 3. Purpose The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. The purpose should also be short terme d so that it ensures liquidity. Banks discourage advances for hoarding stocks or for speculative activities. There are obvious risks involved therein apart from the anti-social nature of such transactions. The banker must closely scrutinize the purpose for which the money is required, and ensure, as far as he can, that the money borrowed for a particular purpose is applied by the borrower accordin gly. Purpose has assumed a special significance in the present day concept of ba nking.

square 4. Profitability Equally important is the principle of 'profitability' in bank advance like other commercial institutions, banks must make profits. Firstly, they have to pay int erest on the deposits received by them. They have to incur expenses on establish ment, rent, stationery, etc. They have to make provision for depreciation of the ir fixed assets and also for any possible bad or doubtful debts. After meeting a ll these items of expenditure which enter the running cost of banks, a reasonabl e profit must be made; otherwise, it will not be possible to carry anything to t he reserve or pay dividend to the shareholders. It is after considering all thes e factors that a bank decides upon its lending rate. It is sometimes possible th at a particular transaction may not appear profitable in itself, but there may b e some ancillary business available, such as deposits from the borrower's other concerns or his foreign exchange business, which may be highly remunerative. In this way, the transaction may on the whole be profitable for the bank. It should , however, be noted that lending rates are affected by the Bank Rate, inter-bank competition and the Federal / Central Bank's directives (e.g Directives of Rese rve Bank of India, RBI), if any. The rates may also differ depending on the borr ower's credit, nature of security, mode of charge, and form and type of advance, whether it is a cash credit, loan preshipment finance or a consumer loan, etc. square 5. Security It has been the practice of banks not to lend as far as possible except against security. Security is considered as an insurance or a cushion to fall back upon in case of an emergency. The banker carefully scrutinizes all the different aspe cts of an advance before granting it. At the same time, he provides for an unexp ected change in circumstances which may affect the safety and liquidity of the a dvance. It is only to provide against such contingencies that he takes security so that he may realize it and reimburse himself if the well-calculated and almos t certain source of repayment unexpectedly fails. It is incorrect to consider an advance proposal from the point of view of security alone. An advance is grante d by a good banker on its own merits, that is to say with due regard to its safe ty, likely purpose etc., and after looking into the character, capacity and capi tal of the borrower and not only because the security is good. Apart from the fa ct that taking of security reserves as a safety valve for an unexpected emergenc y it also renders very difficult, if not impossible, for the borrower to raise a secured advance from another source against the very security. square 6. Spread Another important principle of good lending is the diversification of advances. An element of risk is always present in every advance, however secure it might a ppear to be. In fact, the entire banking business is one of taking calculated ri sks and a successful hanker is an expert in assessing such risks. He is keen on spreading the risks involved in lending, over a large number of borrowers, over a large number of industries and areas, and over different types of securities. For example, if he has advanced too large a proportion of his funds against only one type of security, he will run a big risk if that class of security steeply depreciates. If the bank has numerous branches spread over the country, it gets a wide assortment of securities against the advances. Slump does not normally af fect all industries and business centres simultaneously.