Commercial Banks: It’s Functions and

Types
Commercial banks are the most important
components of the whole banking system.
A commercial bank is a profit-based financial
institution that grants loans, accepts deposits, and
offers other financial services, such as overdraft
facilities and electronic transfer of funds.
 Types of Commercial banks

(a) Public Sector Banks:

Refer to a type of commercial banks that are

nationalized by the government of a country. In
public sector banks, the major stake(MORE
THAN 50%) is held by the government. Public
sector banks operate under the guidelines of
central bank
 (b) Private Sector Banks:

• Refer to a kind of commercial banks in which

major part of share capital (more than 51%) is
held by private businesses and individuals.
These banks are registered as companies.
 (c) Foreign Banks:

• Refer to commercial banks that are

headquartered in a foreign country, but
operate branches in different countries.
 Functions of Commercial Banks:

• Commercial banks are institutions that

conduct business for profit motive by
accepting public deposits for various
investment purposes.
 (a) Primary Functions:

• (i) Accepting Deposits:

• There are two types of deposits, which are discussed as
follows:

• (1) Demand Deposits:

• Refer to kind of deposits that can be easily withdrawn by
individuals without any prior notice to the bank. In other words,
the owners of these deposits are allowed to withdraw money
anytime by simply writing a check. These deposits are the part
of money supply as they are used as a means for the payment of
goods and services as well as debts. Receiving these deposits is
the main function of commercial banks.
 (2) Time Deposits:

• Refer to deposits that are for certain period of

time. Banks pay higher interest on time
deposits. These deposits can be withdrawn
only after a specific time period is completed
by providing a written notice to the bank.
 (3) Advancing Loans:
• Refers to one of the important functions of
commercial banks. The public deposits are
used by commercial banks for the purpose of
granting loans to individuals and businesses.
Commercial banks grant loans in the form of
overdraft, cash credit, and discounting bills of
exchange.
 (b) Secondary Functions:
• (1) Agency Functions:
• (i) Collecting Checks:

• Refer to one of the important functions of

commercial banks. The banks collect checks
and bills of exchange on the behalf of their
customers through clearing house facilities
provided by the central bank.
 (ii) Collecting Income:
• Constitute another major function of
commercial banks. Commercial banks collect
dividends, pension, salaries, rents, and
interests on investments on behalf of their
customers. A credit voucher is sent to
customers for information when any income is
collected by the bank.
 (iii) Paying Expenses:

• Commercial banks make the payments of

various obligations of customers, such as
telephone bills, insurance premium, school
fees, and rents. Similar to credit voucher, a
debit voucher is sent to customers for
information when expenses are paid by the
bank.
 (2) General Utility Functions:
• (i) Providing Locker Facilities:
• Commercial banks provide locker facilities to its
customers for safe keeping of jewellery, shares and
other valuable items. This minimizes the risk of
loss due to theft at homes.
• (ii) Issuing Traveler’s Checks:
• Banks issue traveler’s checks to individuals for
traveling outside the country. Traveler’s checks are
the safe and easy way to protect money while
traveling.
• (iii) Dealing in Foreign Exchange:
• Commercial banks help in providing foreign exchange
to businessmen dealing in exports and imports.
However, commercial banks need to take the
permission of the central bank for dealing in foreign
exchange.
• (iv) Transferring Funds:
• Refers to transferring of funds from one bank to
another. Funds are transferred by means of draft,
telephonic transfer, and electronic transfer.
 (3) Other Functions:
• (i) Creating Money:
• One of the important functions of commercial banks
that help in increasing money supply. For instance, a
bank lends Rs. 5 lakh to an individual and opens a
demand deposit in the name of that individual.
• Bank makes a credit entry of Rs. 5 lakh in that account.
This leads to creation of demand deposits in that
account. The point to be noted here is that there is no
payment in cash. Thus, without printing additional
money, the supply of money is increased.
 Types of Credit Offered by Commercial
Banks:
• Bank Loan:
• Bank loan may be defined as the amount of money
granted by the bank at a specified rate of interest for
a fixed period of time. The commercial bank needs to
follow certain guidelines to extend bank loans to a
client. For example the bank requires the copy of
identity and income proofs of the client and a
guarantor to sanction bank loan. The banks grant
loan to clients against the security of assets so that,
in case of default, they can recover the loan amount.
• Cash Credit:
• Cash credit can be defined as an arrangement made by the bank
for the clients to withdraw cash exceeding their account limit.
The cash credit facility is generally sanctioned for one year but it
may extend up to three years in some cases. In case of special
request by the client, the time limit can be further extended by
the bank.
• The extension of the allotted time depends on the consent of
the bank and past performance of the client. The rate of interest
charged by the bank on cash credit depends on the time
duration for which the cash has been withdrawn and the
amount of cash.
• Bank Overdraft:
• Bank overdraft is the quickest means of the short-term
financing provided by the bank. It is a facility in which
the bank allows the current account holders to overdraw
their current accounts by a specified limit. The clients
generally avail the bank overdraft facility to meet urgent
and emergency requirements. Bank overdraft is the
most popular form of borrowing and do not require any
written formalities. The bank charges very low rate of
interest on bank overdraft up to a certain time.
Rights and Duties of Banker and Customer
• It is very difficult to live without a bank
account as it is required for many things. It is
very important for you to know the rights and
duties of both bankers and customers. In this
blog, we will discuss the rights and duties of
bankers and customers.
 Rights of a Banker

• 1. Right to charge interest

• Every bank has the right to charge interest on the loans and
advances sanctioned to customers. Interest is usually
charged monthly, quarterly, semiannually or annually.
• 2. Right to levy commission and service charges
• Along with interest, banks also have the right to levy a
commission and service charges for the services rendered.
The service rendered by the bank might be SMS
notification service, retail banking and so on. Banks can
also debit these charges from the customer's bank account.
• 3. Right of Lien
• Another important right enjoyed by banks is the Right of Lien.
Banks have the right to keep goods and securities belonging to
the debtor as a security, until the loan is repaid by the debtor.
Banks have only the right to maintain the security of the debtor
and not to sell. 
• 4. The Right of Set-off
• The banker has the right to set off customer accounts. Banks can
merge a couple of accounts which are in the name of the
customer and set off the debit balance in one account with the
credit balance in the other, provided the funds belong to the
customer.
• 5. Right of Appropriation
• Let us consider that a customer has taken
many loans from the bank and he deposits
some money in the bank without any
instructions. If that amount is not sufficient to
discharge all loans, the bank has the right to
appropriate the amount deposited to any loan,
even to a time-barred debt. But the customer
should be informed on the same.
• 6. Right to Close the Account
• If the customer’s account is not properly
maintained, banks have all the right to close
the account by sending a notice to the
customer. Bankers have no right to close the
account, without sending a written notice.
 Rights of a Customer

• 1. Right to fair treatment

• According to this right, banks cannot
discriminate between customers on the basis
of gender, age, religion, caste, and physical
ability while providing services. This does not
mean that banks cannot offer schemes which
are designed for a particular set of people.
Banks have all the right to offers differential
rates of interest or products to customers.
• 2. Right of transparent, fair and honest dealing
• The contract between the banks and customers should
be easily understood by the common man. It is the
responsibility of the bank to make the customer
understand interest rates, the risk involved and all other
terms and conditions. Banks should not hide anything
from the customer before the signing of the agreement.
Even if there are any short comings, they should be
communicated to the customer. The language in the
contract should be simple and easily understood.
• 3. Right to suitability
• You might have come across a lot of cases of mis-
selling of financial products, especially life insurance
policies. Usually, customers are forced to buy the
product which offers the highest commission to an
agent. As per this right, customers should be sold
the product which is suitable to them. So, banks
should always keep customers needs in mind,
before selling any product.
• 4. Right to privacy
• As per this law, the personal information
provided by the customers to the bank, must
be kept confidential. Bankers can disclose only
such information, which is required by law or
only after customers have given permission.
Banks are not allowed to provide your details
to telemarketing companies or for cross-
selling.
• 5. Right to grievance redressal and compensation
• Banks are responsible for all the products and
services offered by them and customers have the
right to easy and simple grievance redressal systems
in case the bank fails to adhere to basic norms. Along
with their own products, bankers are responsible for
the products of third parties like insurance
companies and fund houses. If the customer
complaint is not resolved by the bank, customers can
go to the banking ombudsman.
 Termination of the relationship between a
Banker and a customer -
The relationship between banker and customer may be terminated in any of the following
ways -

1.By mutual agreement

2. Death of customer

3.Lunacy of customer

4. Notice to terminate

5. Bankruptcy

6. Order of court

7. Transfer of balance amount

• 1. By mutual agreement -

        The relationship between banker and customer may be terminated by mutual agreement.

2. Death of customer -

         Death of a customer is an obvious reason for terminating the relationship between banker
and customer. On the receiving the notice of death of the customer the bank stops the
payment. The dissolution of a corporation customer is equivalent to death.

3. mental illness of customer - 

      The mental illness of a Customer terminates the relationship between banker and a
customer. Bankers authority to pay cheques is revoked by notice of insanity. But unless the
evidence of insanity is fairly conclusive, the banker's wisest course would appear to be to treat
the customer as sane in so that the banker is not held liable for damages for wrongful dishonor.
• 4. Notice to terminate - 

      In case of any current account, no such notice by the customer to a banker appears necessary. But if it is a
deposit account the banker could insist on the notice period specified on the fixed deposit receipt/book.

5. Bankruptcy - 

        The bankruptcy or winding up of the bank is a sufficient ground for terminating the relationship between
a Banker and customer.

6. Order of court - 

       If the court restrains the banker to carry on further of the banking business, the account of the customer
comes to an end.

 7. Transfer of balance amount - 

      If the customer transfers the whole amount of balance of his account to any other person, then the
account may be closed by the banker. In this way the relationship of banker and customer comes to an end.