Functions of commercial banks
Modern banks not only deal in money and credit
creation, other useful functions management of foreign trade, finance etc. The
meaning of modern banks is used in narrow sense of the term as commercial
banks. Functions of commercial banks are divided in the following main
categories:
A) Primary Functions:
I. Accepting deposits
II. Advancing loans
III. Investments of funds
IV. Credit creation
B) Secondary Functions:
I. Agency functions
II. General utility functions
I. Accepting Deposits: The most
important function of commercial banks is to accept deposits from public. This
is the primary functions of a commercial bank. Banks receives the idle
savings of people in the form of deposits and finances the temporary
needs of commercial and industrial firms. A commercial bank accept
deposit from public on various account, important deposit account generally kept
by bank are:
a) Saving
Bank Deposits: This type of deposits suit to those who just want to keep their
small savings in a bank and might need to withdraw them occasionally. One or
two withdrawals upto a certain limit of total deposits are allowed in a week.
The rate of interest allowed on saving bank deposits is less than that on fixed
deposits. Depositor is given a pass book and a cheque book. Withdrawals are
allowed by cheques and withdrawal form.
b) Current
Deposits: This type of account are generally kept by businessmen and
industrialists and those people who meet a large number of monetary
transactions in their routine. These deposits are known as short term deposits
or demand deposits. They are payable demand without notice. Usually no interest
is paid on these deposits because the bank cannot utilize these deposits and
keep almost cent per cent reserve against them. Overdraft facilities are also
available on current account.
c) Fixed
Deposits: These are also known as time deposits. In this account a fixed
amount is deposited for a fixed period of time. Deposits are payable after the
expiry of the stipulated period. Customers keep their money in fixed deposits
with the bank in order of earn interest. The banks pay higher interest on fixed
deposits. The rates depend upon the length of the period and state of money market.
Normally the withdrawals are not allowed from fixed deposits before the
stipulated date. If it happens, the depositor entails an interest penalty.
d) Other
Deposits: Banks also provide deposit facilities to different type of
customers by opening different account. They also open. ‘Home Safe Account’ for
housewife or very small savers. The other accounts are : ‘Indefinite Period Deposit
a/c’; ‘Recurring Deposit’ a/c; ‘Retirement Scheme’ etc.
II. Advancing of Loans: The second
main function of the commercial bank is to advance loans. Money is lent to
businessmen and trade for short period only. These banks cannot lend
money for long period because they must keep themselves ready to meet
the short term deposits. The bank advances money in any one of the following
forms:
a)
Cash Credit: Cash Credit is a type of advance
wherein a banker permits his customer to borrow money upto a particular limit
by a bond of credit with one or more securities. The advantage associated with
this system is that a customer can withdrawn money as and when required. The
bank will charge interest only on the actual amount withdrawn by the customer.
Many industrial concerns and business houses borrow money in this form.
b)
Overdraft: An overdraft is an arrangement by
which the customer is allowed to overdraw his account. It is granted against
some collateral securities. The facility to overdraw is allowed through current
account only. Interest is charged on the exact amount of overdrawn subject to
the payment of minimum amount by way of interest.
c)
Loan: Loan is an advance in lump sum amount
the whole of which is withdrawn and is supported to be rapid generally wholly at
one time. It is made with or without security. It is given for a fixed period
at in agreed rate of interest. Repayments may be made in installments or at the
expiry of a certain period.
d)
Discounting Bill of Exchange: The bank also
gives advances to their customers by discounting their bills. The net amount
after deducting the amount of discount is credited to the account of customer.
The bank may discount the bills with or without any security from the debtor in
addition to the personal security of one or more person already liable on the
bill.
III. Investment
of funds: Besides loan and advances, banks also invest a part of its funds
in govt. and industrial securities. Banks purchases both govt. and industrial
securities like govt. bills, share, debentures, etc from their market.
IV. Credit
Creations: The banks create credit. When a bank advances a loan, it does not
give cash to the borrower. It opens an account in the name of the borrower. The
borrower is allowed to withdraw money by cheque whenever he needs. This is
known as Credit Creation.
Secondary
Functions of banks: It is divided into two parts:
I. Agency Services: Modern Banks render
service to the individual or to the business institutions as an agent. Banks
usually charge little commission for doing these services. These services are
as follows:
a) Remittance
of Funds: Banks help their customers in transferring funds from one place to
another through cheques, drafts etc.
b) Collection
and payment of Credit Instruments: Banks collects and pays various credit
instruments like cheques, bill of exchange, promissory notes etc.
c) Purchasing
and Sale of securities: Banks undertake purchase and sale of various securities
like shares, stocks, bonds, debentures etc. on behalf of their customers. Banks
neither give any advice to their customers, regarding this investment, nor levy
any charge of them for their services, but simply perform the function of a
broker.
d) Income Tax
Consultancy: Sometimes bankers also employ income tax experts not only to
prepare income tax returns for their customer but to help them to get refund of
income tax in appropriate cases.
e) Acting as
Trustee and Executor: Banks preserve the wills of their customers and execute
them after their death.
f) Acting as
Representatives and Correspondent: Sometimes the banks act as representatives
and correspondents of their customers. They get passports, travelers tickets
secure passages for their customers and receive letters on their behalf.
II. General Utility Services: A modern
bank now a days serves its customers in many other ways :
a) Locker
facility: Banks provides locker facility to their customers. The customers can
keep their valuables and important documents in these lockers for safe custody.
b) Traveler’s
cheques: Bank issue travelers cheques to help their customers to travel without
the fear of theft or loss of money.
c) Gift
cheque: Some banks issue cheques of various denominators to be used on
auspicious occasions. These are known as “gift cheques” as they are gifted to
others.
d) Letter of
Credit: Letter of credit are issued by the banks to their customers certifying
their credit worthiness. Letter of credit are very useful in foreign trade.
e) Foreign
Exchange Business: Banks also deal in the business of foreign currencies.
Again, they may finance foreign trade by discounting foreign bills of exchange.
f) Collection
of Statistics: Banks collects statistics giving important information relating
to industry, trade and commerce, money and banking. They also publish journals
and bulletins containing research articles on economic and financial matters.