MEANING AND FUNCTIONS OF COMMERCIAL BANK

Meaning of commercial banks A banking company is one which transacts the business of banking which means the accepting for the purpose of lending all investments, of deposits of money form the public, repayuable on demand or otherwise and withdrawable by cheque, draft or otherwise. There are two essential functions that a financial institution must perform to become a bank. These are a) Accepting of the chequable deposit form the public b) Lending Main features: 1. It accepts deposits from the public. These deposits can be withdrawn by cheque and are repayable on demand. 2. A commercial bank uses the deposited money for lending and 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 demand deposits which serves as the medium of exchange. 5. Money created by commercial banks is known as deposit money. Functions of commercial Banks Various functions of commercial banks can be divided into three main groups; i. Primary functions ii. Agency functions iii. General utility functions

PRIMARY FUNCTIONS - There are two main primary functions of the commercial banks which are discussed below : 1. Accepting deposits – The primary function of commercial bank is to accept deposits form every class and from every source. To attract savings the bank accepts mainly three types of deposits. They are namely demand deposits, saving deposits, fixed deposit. Demand deposit ( also known as current deposit) are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits. Rather, the depositor have to pay something to the bank for the services rendered by the businessmen and industrialists. It is also called current account. Saving deposits – These are those deposits on the withdrawal of which bank places certain restrictions. Cheque facility is provided tosd the depositors. Saving deposits accounts are generally held by households who have idle or surplus money for shor period. Fixed deposit – These are those deposit which can be withdrawn onlyh after the expiry of the certain fixed time iperiod. These deposits carry high rate of interest. The longer the period, higher will be the rate of interest. Distingusish between demand deposit and fixed deposit Demand deposit 1. Demand deposit can be withdrawn by the depositor at anytime without notice. 2.They are chequable i.e., demand deposits are withdrawable through cheques Fixed deposit These deposit can be withdrawn only afgter the expiry of the certain fixed time period. They are not chequable.

3.No interest is paid on these deposits. Rather depositors have to pay something to the bank for its services. 4. These deposits constitute of a part of money supply

These deposits carry high rate of ihterest.

They fall under sthe categoryu of near money assests.

Advancing of loans Commercial 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 marketable goods. The bank advances following types of loansa. Cash credit – Under this the borrower is allowed to withdraw upto a certain amount on a given security which comprise mainly stocks of goods and B/R from others., But interest is charged on the amount actually withdrawn. b. Overdraft – It is a most common way of lending. Under it, the borrower is allowed to overdraw hios current a/c balance.Overdraft is a temporary facility. c. Short term loans – Under it loans of a fixed amount are sanctioned. The sancgtioned amount is credited in the debtors a/c. Bank charges ihterest on the whole amount form the day it was sanctiuoned. The difference between a loan and an overdraft is that, while in case of loan, the borrower payus interest on the amount outstanding against his a/c. But is the case of an overdraft, the customerpays interest on the deal balance standing against his a/c further. Loans are given against security, while overdrafgts are made without securities. From the borrowers point of view,

overdraft is preferable thorough a loan because, in case of loan, he will have to pay interest on the full amount of loan sanctioned whether he uses it fully or not. But in the case of overdraft, he has the facility of borrowing only as much as he requires. d. Discounting of trhe bill of exchange This is another popular type of lending by the conmmdercial banks. Through this method, the holder of the bills of exchange ( written durning trade transactions) can get it discounted by the banks. The banks after demanding the comm. Pays the value of the bills to the holder. When the bills of exchange matures, the bank gets its payment from the party which had accepted the bill. e. Money at call Such loans are very short period loans and can be called back by the bank at a very short notice of say one day to 14 days. These loans are generally made by one bank to another bank or financial institutions.

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