2-1 Commercial Banking Institutions-Role and functions 2. Commercial banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their customers. Required fields are marked *. But according to the time and changing economic scenario, banks have diversified their functions. Under this account the depositor is not free to withdraw any amount like current account. The banks make loans to the customers in the form of term loans, cash credit, overdraft and discounting of bills of exchange. To a new customer, a loan account has to be opened from where the money is withdrawn by cheque but he pays interest on the full amount. He can withdraw only a specified sum of money in a week. For these agency services, the banks charge a nominal amount. Welcome to EconomicsDiscussion.net! Functions and Roles of Central Bank and Commercial Bank and their relationship. The bank receives the rent, dividend, interest of shares and debentures. Overdraft is the facility extended by the banker to draw a sum greater than the balance lying in his current account. In order to earn profit the bank accept deposits and advance loans by keeping a small cash in reserve to meet the day to day needs of the customers. The following points highlight the top six functions of commercial banks. These banks are established in foreign countries and have branches in other countries. (ii) It buys and sells shares, securities, debentures etc. It can be classified their functions into three several categories, Primary functions. The primary functions of a commercial bank are as follows: 1. The surplus balances collected from the firm and individuals are lent to the temporary required of commercial transactions. The bank advances loan in the following manner: This type of loan is granted to businessmen against certain specified securities. (a) Primary functions – Accepts deposit – The bank takes deposits in the form of saving, current and fixed deposits. objectives definition of a bank. A commercial bank is an institution that operates for profit. Function of Commercial Bank: The functions of commercial banks are classified into two main divisions. The commercial bank works as an agent of their customers. Miscellaneous Services to Customers. Miscellaneous Services to Customers. He must keep cent per cent reserve against the deposit. Normally no interest is paid by the bank because the bank cannot utilise this money in earning and he must keep himself ready to meet the demand of the customer. A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment to earn the profit. Similarly, it receives and make payments of insurance premium, income tax, electricity fee, etc on behalf of its customers. (iii) The bank remits money to different places by bank drafts on telegraphic transfer (T/T) on behalf of its customers. (b) Secondary Functions: Refer to crucial functions of commercial banks. That means they play a very significant role in a process of economic social needs. By granting a loan, the bank creates credit or deposit. A commercial bank is a kind of financial institution which carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, etc. Accepting of Deposits 2. Privacy Policy3. It is that type of bank that is nationalised, and the government holds a significant stake. Following is a brief overview of both primary and secondary functions undertaken by a commercial bank – Primary Functions 1. A bank lends a certain percentage of cash lying in deposits on higher interest rate than it pays to the depositors. Foreign Currency Transaction; Commercial bank not only accepts money but also accept the currency. Advancing Loans: Next important function performed by the commercial bank is lending money to the individuals and companies. Your email address will not be published. conclusion. Commercial banks, as their name suggests, ax profit-seeking institutions, i.e., they do banking business to earn the profit. The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. Accepting Deposits: It is the most important function of commercial banks. Functions of a commercial bank 1. This can be recalled at a very short-notice. Few examples of commercial banks in India are. a financial institution which aims at making profits by initiating deposits from the public The money deposited in this account cannot be normally withdrawn before the expiry of the agreed period. Primary Functions of Commercial Banks. Functions of Commercial Banks An institution that provides services like accepting the deposits, providing business loans, and offering basic investment products is known as the commercial banks. A bank is like a pool into which the flow of savings, the idle surplus money of households and from which loans are given on interest to individuals and … for its customers. Banks offer the following types of deposit schemes to attract money from all quarters of public. That means they play very significant role in a process of economic social needs. Commercial banks function as he agent of their customers and help them several ways. Primary Functions of Commercial Banks will help you to acquire knowledge of banking business. When a bank advances a loan to its customer, it does not lend cash but opens an account in the borrower’s name and credits the amount of loan to this account. (iv) It discharges the functions of marketing, work as a trustee, administrator or executor for its customers. Secondary Functions 1. 3. Share Your PPT File, Bank Types: 10 Important Types of Banks Found in India. It satisfies the financial needs of the sectors such as agriculture, industry, trade, communication, etc. The traditional functions of a commercial bank relate to the acceptance of deposits from the public and … These banks are profit-making institutions and do business only to make a profit. Accepting Deposits – Commercial banks accept deposits from their customers in the form of … Besides the above mentioned services the commercial bank performs a number of other services the important of them are as follows: (i) It provides lockers facility to the customers where the customers can keep the valuable documents and ornaments etc. FUNCTIONS OF COMMERCIAL BANK Following are the important functions of the commercial bank. (1) Primary Function: 1. Banks also ensure economic stability and sustainable growth of a country’s economy. Derived from a German word “BACK” which means “joint stock fund”. Credit creation: This is an unique function of commercial bank. Disclaimer Copyright, Share Your Knowledge So first function of the commercial bank is to receive deposits. Banks charge interest from the borrowers and this is the main source of their income. 2-2 Definitions of Bank The word “BANK” is derived from Latin word “BANKO/BANCUS” which means a bench. The basic functions of commercial banks are accepting deposit from the public and lending them to borrowers to earn profit. on behalf of his customers. The commercial bank is the financial institution performs diverse types of functions. Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank. Before publishing your Articles on this site, please read the following pages: 1. Occasionally a small interest is paid to the people who keep large balances. The banking institutes are the most important part of modern developing countries. The rate of interest that a bank offers to the depositors are known as the borrowing rate, while the rate at which banks lends the money is called the lending rate. Content Guidelines 2. It is one type of commercial banks where private individuals and businesses own a majority of the share capital. functions of commercial banks. (I) Fixed deposits: Ans: Commercial bank is an institution by which the customers can easily deposit and receive the bulk or short amount of money. Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. Constitute another major function of commercial banks. (b) Call Loans/Money at Call and Short Notice: They are very short-term loans and are mostly given to bill brokers for 15 days. A nominal rate of interest is allowed to the customer. Advancing Loans 3. Credit Creation 4. Financing Foreign Trade 5. Credit card interest, payments, small loans, deposits, checking, and basic securities trading all contribute significantly to the bottom line. Function of commercial banks may be classified in two categories : 1. Besides the primary functions of accepting and lending, bank performs a number of other functions which can be categorized under secondary function. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank and Punjab National Bank. It is the primary function of a commercial bank to accept deposit from general public, who possess surplus held with th… The commercial banks also issue the letter of credit means any person who has issued the letter of credit can cash it anywhere in the world. The second important function of commercial banks is to advance loans to its customers. Additional information would be more helpful for the primary functions of commercial banks. (iii) It provides information’s about the customers. What is Commercial Bank Functions | Download PDF free. The above mentioned concept ‘Functions of Commercial Banks’ is elucidated in detail for Commerce students. Commercial bank being the financial institution performs diverse types of functions. Primary Functions 1. What are the Functions of Commercial Bank. There are three different types of commercial banks. It satisfies the financial needs of sectors such as agriculture, industry, trade, communication, etc. (iv) It issues travellers cheques, letter of credit etc. Really benefited for students and for job seekers in the banking industry. These are profit-generating organizations. When the bill matures the bank gets payment from the banker. Online Banking. You might also want to know: What are the 4Ps of Marketing? Primary Functions 2. 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