1.

Explain origin of commercial banking

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.

It all started with a simple philosophy back in 1924. A community bank dedicated to providing
personalized financial services with a commitment to the community.  While we have
continued to build on our heritage and adapted to changes, The Commercial Bank has never
strayed from this philosophy.

2. Function of commercial bank

Commercial banks are authorized to provide a variety of financial services which includes loans,
savings accounts, etc. In this article, we will talk about various functions that a commercial bank
performs.

Broadly speaking, the functions are of two categories – primary and secondary.

Primary Functions of Commercial Banks

The primary functions of a commercial bank are as follows:

1. Accepting Deposits
Commercial banks accept deposits from people, businesses, and other entities in the form of:

 Savings deposits – The commercial bank accepts small deposits, from households or
persons, in order to encourage savings in the economy.

 Time deposits – The bank accept deposits for a fixed time and carry a higher rate of interest
as compared to savings deposits.

 Current deposits – These accounts do not offer any interest. Further, most current accounts
offer overdrafts up to a pre-specified limit. The bank, therefore, undertakes the obligation
of paying all cheques against deposits subject to the availability of sufficient funds in the
account.

2. Lending of Funds

Another important activity is lending funds to customers in the form of loans and advances, cash
credit, overdraft and discounting of bills, etc.

Loans are advances that a bank extends to his customers with or without security for a specified
time and at an agreed rate of interest. Further, the bank credits the loan amount in the customers’
account which he withdraws as per his needs.

Under the cash credit facility, the bank offers its customers a facility to borrow cash up to a certain
limit against the security of goods. Further, an overdraft is an arrangement that a bank offers to
customers wherein a temporary facility is offered to overdraw from the current account without
any security.

The limit is pre-specified. Additionally, banks also discount and purchase bills. In both of these
cases, a bank credits the amount of the bill in the customer’s account after deducting discounts
and commissions. Subsequently, this amount is recovered from the debtors on the maturity of the
instrument.

Secondary Functions of Commercial Banks

The secondary functions of a commercial bank are as follows:

Bank as an Agent

A bank acts as an agent to its customers for various services like:

 Collecting bills, draft, cheques, etc.

 Paying the insurance premium, rent, loan installments, etc.

 Working as a representative of a customer for purchasing or redeeming securities, etc. in

the stock exchange.

 Acting as an executor, administrator, or trustee of the estate of a customer

 Also, preparing income tax returns, claiming tax refunds, etc.

General Utility Services

There are several general utility services that commercial banks offer like:

 Issuing traveler cheques

 Offering locker facilities for keeping valuables in safe custody

 Also, issuing debit cards and credit cards, etc.

3. Role of commercial banks

Commercial Banks have always played an important position in the country’s economy. They
play a decisive role in the development of the industry and trade. They are acting not only as
the custodian of the wealth of the country but also as resources of the country, which are
necessary for the economic development of a nation.

1. Capital Formation
Banks play an important role in capital formation, which is essential for the economic
development of a country. They mobilize the small savings of the people scattered over a wide
area through their network of branches all over the country and make it available for
productive purposes.

Now-a-days, banks offer very attractive schemes to attract the people to save their money with
them and bring the savings mobilized to the organized money market. If the banks do not
perform this function, savings either remains idle or used in creating assets, which are low in
scale of plan priorities.
2. Creation of Credit
Banks create credit for the purpose of providing more funds for development projects. Credit
creation leads to increased production, employment, sales and prices and thereby they cause
faster economic development.

3. Channelizing the Funds to Productive Investment

Banks invest the savings mobilized by them for productive purposes. Capital formation is not
the only function of commercial banks. Pooled savings should be distributed to various sectors
of the economy with a view to increase the productivity of the nation. Then only it can be said
to have performed an important role in the economic development of the nation.

Commercial Banks aid the economic development of the nation through the capital formed by
them. In India, loan lending operation of commercial banks subject to the control of the RBI. So
our banks cannot lend loan, as they like.

4. Fuller Utilization of Resources

Savings pooled by banks are utilized to a greater extent for development purposes of various
regions in the country. It ensures fuller utilization of resources.

5. Encouraging Right Type of Industries

The banks help in the development of the right type of industries by extending loan to right
type of persons. In this way, they help not only for industrialization of the country but also for
the economic development of the country. They grant loans and advances to manufacturers
whose products are in great demand. The manufacturers in turn increase their products by
introducing new methods of production and assist in raising the national income of the country.

6. Bank Rate Policy

Economists are of the view that by changing the bank rates, changes can be made in the money
supply of a country. In our country, the RBI regulates the rate of interest to be paid by banks for
the deposits accepted by them and also the rate of interest to be charged by them on the loans
granted by them.

7. Bank Monetize Debt

Commercial banks transform the loan to be repaid after a certain period into cash, which can be
immediately used for business activities. Manufacturers and wholesale traders cannot increase
their sales without selling goods on credit basis. But credit sales may lead to locking up of
capital. As a result, production may also be reduced. As banks are lending money by
discounting bills of exchange, business concerns are able to carry out the economic activities
without any interruption.
8. Finance to Government
Government is acting as the promoter of industries in underdeveloped countries for which
finance is needed for it. Banks provide long-term credit to Government by investing their funds
in Government securities and short-term finance by purchasing Treasury Bills.
9. Bankers as Employers
After the nationalization of big banks, banking industry has grown to a great extent. Bank’s
branches are opened in almost all the villages, which leads to the creation of new employment
opportunities. Banks are also improving people for occupying various posts in their office.

10. Banks are Entrepreneurs

In recent days, banks have assumed the role of developing entrepreneurship particularly in
developing countries like India. Developing of entrepreneurship is a complex process. It
includes the formation of project ideas, identification of specific projects suitable to local
conditions, inducing new entrepreneurs to take up these well-formulated projects and
provision of counseling services like technical and managerial guidance.

Banks provide 100% credit for worthwhile projects, which is also technically feasible and
economically viable. Thus commercial banks help for the development of entrepreneurship in
the country.

4. Difference between commercial banking and credit creation

A commercial bank is a financial institution which performs the functions of accepting deposits
from the general public and giving loans for investment with the aim of earning profit.

In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do
banking business to earn profit.

Credit creation separates a bank from other financial institutions. In simple terms, credit

creation is the expansion of deposits. And, banks can expand their demand deposits as a
multiple of their cash reserves because demand deposits serve as the principal medium of
exchange.
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