MEANING AND DEFINATION OF COMMERCIAL BANK
In modern economy commercial Banks plays an important role in the
financial sector. A Bank is an institution dealing in money and credit. Credit
money is the major component of money supply in a modern economy. Commercial
banks are the creators of credit. The strength of economy of any country
basically depends on a sound and solvent banking system.
A Commercial bank is a profit seeking business firms dealing in money or
rather claims to money. It safeguards the savings of the public and give loans
and advances. The Banking Companies Act of 1949 defines banking company as
“accepting for the purpose of lending or investment of deposit money from the
public, repayable on demand or otherwise and withdrawable by cheque, drafts, and
order or otherwise”.
FUNCTIONS OF COMMERCIAL BANKS:
Modern commercial banks perform a variety of functions. They keep the
wheels of commerce, trade and industry always revolving. Major functions of a
commercial bank are:
I.
Primary or Banking functions
II.
Secondary or Non-Banking functions.
III.
Subsidiary Activities
I. Primary
/ Banking Functions: Commercial banks have two important banking functions. One
is accepting deposits and other is advancing loans.
1) Deposits:
One of the main functions of a bank is to accept deposits from the public.
Deposits are accepted by the banks in various forms.
a) Current
Account Deposits: Current Accounts are usually opened by businessmen who have a
number of regular transactions with the bank, both deposits and withdrawals. No
interest is paid on current deposits. Banks may even charge interest for
providing this facility.
b) Saving
Account Deposits: Saving Accounts are opened by salaried and other less income
people. There is no restriction on number and amount of deposits. Withdrawals
are subject to certain restrictions. It earns Interest but less than fixed deposits.
c) Fixed
Account Deposits: Deposits in fixed account are time deposits. Money under this
account is deposited for a certain fixed period of time varying from 15 days to
several years. A high rate of interest is paid on such deposits.
d) Recurring
Account Deposits: In Recurring deposit, a specified amount is regularly
deposited by account holder, at an internal of usually a month. This is to form
the habit of small savings among the people. At the end of maturity period, the
account holder gets a substantial amount. Interest on this type of deposit is
almost equal to fixed deposits.
2) Loans
and Advances: Banks not only mobilize money but also lend to its credit worthy
customers for maximizing profits. Loans and Advances are granted to:
a) Business
and Trade: Commercial banks grant short-term loans to business and trade
activities in following forms: i)
Overdraft ii) Cash
Credit iii) Discounting of Bills iv) Money
At Call v) Direct
Loans
b) Loans
to Agriculture: Banks grant short-term credit to agriculture at a lower rate of
interest. Loans are granted for irrigation, purchase of equipments, inputs,
cattle etc.
c) Loans To Industries: Banks grant secured loans to
small and medium scale industries to meet their working capital needs. The time
period may be from one to five years. It may be in the form of Overdraft, cash
credit or direct loan.
d) Loans To Foreign Trade: Loans are granted to export
and import in the form of direct loans, discounting of bills, guarantee for
deferred payments etc. Here the rate of interest is low.
e) Consumer
Credit / Personal loans: grant credit to household in a limited amount to buy
some durable consumer goods like television sets, refrigerators, washing
machine etc. Such consumer credit is repayable in installments. Under 20-point
programme, the scope of consumer credit has been extended to cover expenses on
marriage, funeral etc., as well.
f) Miscellaneous Advances: Banks also gives advances
like packing credits to exporters, export bill purchased or discounted, import
finance, finance to self-employed, credit to weaker sections of society at
concessional rates etc.
II.
Secondary / Non-banking Functions: Banks gives various forms of services
to public. Such services are termed as non- banking or secondary functions:
1. Agency
Services: Banks perform certain functions on behalf of their customers. While
performing these services, banks act as agents to their customers, hence these
are called as agency services. Important agency functions are:
a) Collection: Commercial banks collect cheques, drafts,
bills, promissory notes, dividends, subscriptions, rents and any other receipts
which are to be received by the customer. For these services banks charge a
nominal amount.
b)
Payment: Banks also makes payments on behalf of their customers
like paying insurance premium, rent, taxes, electricity and telephone bills etc
for such services commission is charged.
c) Income
– Tax Consultant: Commercial banks act as income-tax consultants. They prepare
and finalise the income tax returns of their clients.
d) Sale And
Purchase Of Financial Assets: As per the customers instruction banks undertake
sale and purchase of securities, shares and any other financial assets. Nominal
charges are charged by a bank.
e) Trustee, Executor And Attorney: As a trustee, banks
become the custodian and manager of customer funds. Bank also acts as executor
of deceased customer’s will. As an Attorney the banks sign the documents on
behalf of customer.
f) E-
Banking: Through Electronic Banking, a customer can operate his bank account
through internet. He can make payments of various bills. He can even transfer
money from one place to another.
2. Utility
Services: Modern Commercial banks also performs certain general utility
services for the community, such as:
a) Letter Of Credit: Banks also deal in foreign
trade. They issue letter of credit and provide guarantee to foreign traders for
the soundness of their customers.
b) Transfer Of Funds: Banks arrange transfer of
funds cheaply and safely from one place to another. Transfer can be in the form
of Demand draft, Mail transfer Travelers cheques etc.
c) Guarantor: Banks offer a guarantee of payment on
behalf of importer to facilitate imports with deferred payments.
d) Underwriting: This facility is provided to Joint
Stock Companies and to government to enable them to raise funds. Banks
guarantee the purchase of certain proportion of shares, if not sold in the
market.
e) Locker Facility: Safe Lockers are provided to
the customers. So that they can deposit their valuables like Jewellery,
Securities, Shares and other documents.
f) Referee: Banks may act as referee with respect
to financial standing, business reputation and respectability of customers.
g) Credit Cards: Credit card facility has been
introduced by commercial banks. It enables the holder to minimize the use of
hard cash. Credit card is a convenient medium of exchange which enables its
holder to buy goods and services from member – establishment without using
money.
III.
Subsidiary Activities: Many commercial banks also undertake subsidiary
activities such as:-
a.
Housing Finance
b.
Mutual Funds intermediary
c.
Merchant Banking
d.
Venture Capital Fund
e.
Factoring
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