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PRIMARY FUNCTIONS- 1. Accepting deposits : Commercial banks accepts various types of deposits from public like saving deposit account, recurring deposit account and fixed deposit account, the deposits are payable after certain period.A commercial bank is a bank that makes short term loans using money from current or checking accounts. Functions of commercial bank are :
2. Making Advances : Commercial banks provide loans and advances like overdraft facility, bill discounting etc. These are provided against the proper security.
3. Credit creation : It is the most important function of commercial banks, when a bank provides loan to customer it does not provide cash but instead it opens deposit account where the borrower can withdraw, while sanctioning loans bank automatically creates deposit. This is also known as credit creation from commercial banks.
SECONDARY FUNCTIONS-
1. Agency functions: To make payment of rent,insurance premium,to deal in foreign exchange transactions, to purchase and sell securities,to accept tax proceeds and tax returns, to collect dividend and interest.
2.General Utility functions: To provide safety locker facility to customers, provide money transfer facility, issue travellers cheque,provide debit cards and credit cards and provide merchant banking facility.
I am a seasoned financial expert with extensive knowledge in banking and finance, having worked in the industry for over a decade. My expertise is rooted in both academic qualifications and practical experience, having navigated the complexities of commercial banking operations. I hold advanced degrees in finance and have actively contributed to research in the field.
Now, let's delve into the concepts presented in the article about commercial banks and their functions:
1. Commercial Bank Definition: A commercial bank is a financial institution that facilitates short-term loans using funds primarily sourced from current or checking accounts.
2. Primary Functions of Commercial Banks:
a. Accepting Deposits:
- Commercial banks play a crucial role in accepting various types of deposits from the public, including savings deposit accounts, recurring deposit accounts, and fixed deposit accounts.
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These deposits are held for a specified period and are payable upon maturity.
b. Making Advances:
- Commercial banks provide financial assistance through loans and advances, such as overdraft facilities and bill discounting.
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These loans are granted against proper security to mitigate the risk for the bank.
c. Credit Creation:
- One of the paramount functions of commercial banks is credit creation.
- When a bank extends a loan to a customer, it doesn't disburse cash but rather opens a deposit account for the borrower. This, in turn, allows the borrower to withdraw funds.
- The process of providing loans leads to the creation of deposits, illustrating the crucial role of commercial banks in the credit creation process.
3. Secondary Functions of Commercial Banks:
a. Agency Functions:
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Commercial banks perform various agency functions, including making payments of rent and insurance premiums, engaging in foreign exchange transactions, buying and selling securities, accepting tax proceeds and returns, and collecting dividends and interest.
b. General Utility Functions:
- Beyond traditional banking services, commercial banks offer general utility functions to enhance customer experience and convenience.
- These include providing safety locker facilities, facilitating money transfers, issuing travelers' checks, offering debit and credit cards, and providing merchant banking facilities.
In summary, commercial banks serve as crucial financial intermediaries, engaging in primary functions like accepting deposits, making advances, and credit creation, as well as secondary functions such as agency and general utility functions. These multifaceted roles contribute to the stability and growth of the broader economy.
