Assignment 2

Commercial banking system

Name Iqra Urooj Jadoon

Submitted to Mam Muzna

Subject SFI

Roll No 5288

Department Management Sciences

Semester 8th
Bank

A bank is a financial institution that accepts deposits from the public and creates a demand
deposit while simultaneously making loans.

Commercial bank

The term commercial bank refers to a financial institution that accepts deposits, offers checking
account services, makes various loans, and offers basic financial products like certificates of
deposit and savings accounts to individuals and small businesses. A commercial bank is where
most people do their banking.

Commercial banks make money by providing and earning interest from loans such as
mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks
with the capital to make these loans.

Background of commercial banks

The Commercial Bank was founded in 1924 by local businessmen in Oglethorpe County with the
mission of serving the financial needs of the citizens and businesses of the area. Much has
changed since 1924, but The Commercial Bank’s commitment to the communities that we serve
remains the same. As one of the few remaining locally owned and operated community banks
in the Athens area, The Commercial Bank has the unique ability to customize common sense
solutions for each of our customers. This approach allows us to differentiate ourselves from the
regional and national banks that often use an impersonal “one-size fits all” approach.

Through the years, The Commercial Bank has made many positive changes. We have focused
on making investments in both people and technology, ensuring our customers have access to
both unparalleled service and great products. We never want our customers to feel they have
to choose between technology and service; we continually strive to provide the best of both.
The bank’s senior management team has almost 100 years of banking experience and is
devoted to meeting the needs of its customers. We believe in empowering each employee to
make the common sense decisions our customers deserve and expect. We pride ourselves on
providing quality customer service and making fast, local decisions. In today’s banking
environment many banks become too large to make reasonable decisions when it relates to
customers. “Too big to fail” seems to also mean “Too big to serve.” While we continue to
grow, we will remain consistent in making customers our top priority.

Roles of commercial banks

Mobilizing Savings for Capital Formation

People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs to individual depositors. To mobilize
dormant savings and to make them available to the entrepreneurs for productive purposes, the
development of a sound system of commercial banking is essential.

Existence of a Large Non-monetized Sector

A developing economy is characterized by the existence of a large non-monetized sector,
particularly, in the backward and inaccessible areas of the country. The existence of this non-
monetized sector is a hindrance in the economic development of the country. The banks by
opening branches in rural and backward areas can promote the process of monetization in the
economy.

Financing Industrial Sector

Commercial Banks provide short-term and medium- term loans in the industry. In India, they
undertake financing of small scale industries and also provide hire-purchase finance. These
banks not only provide finance for industry but also help in developing the capital market which
is underdeveloped in such countries.

They Help in Monetary Policy

The Commercial Banks help the economic development of a country by following the monetary
policy of the Central Bank. The Central Bank is dependent upon those Commercial Banks for the
success of the monetary management in keeping with requirements of a developing economy.
Commercial Banks Help in Financing Internal and External Trade
The banks provide loans to wholesalers and retailers to stock goods in which they deal. They
also help in the movement of goods from one place to another by providing all types of facilities
such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts
etc. They help by giving finance both exports and imports of developing countries.

Provision for Long-term Finance for the Improvement of Agriculture

Normally, commercial banks grant short-term loans to the trade and industries in developed
countries. But in developing countries new businesses and improvement in agriculture need
long-term loans for proper development. Therefore, the commercial banks should change their
policies in favor of granting long-term loans to trade and industries.

They help in financing various Consumers’ Activities

People in developing countries do not possess sufficient financial resources to buy costlier
goods like house, scooter, refrigerator etc. They help by giving loans to purchase these items
which raise the standard of living of the people in developing countries

Function of Commercial Bank:

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

1. 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 required of commercial
transactions.

Provides Loan and Advances another critical function of this bank is to offer loans and advances to
the entrepreneurs and businesspeople 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 and short-run loans, etc.

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 a bank to create money.

2. 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 Bank provides lockers facility to the customers to keep their valuable belonging or

documents safely. Banks charge a minimum of an annual fee for this service.

Paying and Gather the Credit It uses different instruments like a promissory note, cheques and bill
of exchange.