Easy Learning of Functions of the Commercial Bank
Banking is the main subject studied by the students in the field of finance. The students studying in MBA needs to have in-depth knowledge of the commercial bank and its working.
WHAT IS A BANK?
A bank can be defined as a financial institution which provides various financial services, which may include accepting deposits and issuing loans. A bank is also a place where money and other valuables are kept.
WHAT IS THE MEANING OF COMMERCIAL BANK?
A commercial bank can be defined as the financial institution that offers banking services to the general public and companies with the main aim of making profits. A commercial bank is a bank that offers services such as accepting deposits, making business loans and offering investment products. It also accepts deposits from customers with the aim of using the money to do business or serve as a loan to other people with the aim of earning profits. These are the companies with limited liability
WHAT ARE THE MAJOR FUNCTIONS PERFORMED BY THE COMMERCIAL BANK?
The two major distinctive features of a commercial bank are borrowing and lending which indicates acceptance of deposits and lending of money to earn profits. In other words, banks borrow to lend. The rate of interest offered by the banks to depositors is called the borrowing rate while the rate at which banks lend out is called lending rate.
The difference between both the rates is known as “spread” which is appropriated by the banks. However, all the financial institutions are not commercial banks because only those who perform dual functions of giving loans and accepting deposits are termed as commercial banks. We can take the example of post offices; they are not banking as they do not provide loans.
The functions are majorly divided into two categories: primary and secondary
• Acceptance of deposits
The commercial bank accepts deposits in the form of current, savings and fixed deposits. It performs the function of a collection of surplus balances of the individuals, firms and finances and the temporary needs of commercial transactions. Therefore, the first task is the collection of the savings of the people. The bank does this by accepting deposits from its customers.Deposits are the lifelines of the banks.
Deposits are of three main types as mentioned below:
Current account deposits
Such deposits have to pay on demand and are, therefore, called the demand deposits. These can be withdrawn by the deposits any number of times depending upon the balance in the account. The bank does not pay any interest on these deposits but provides cheque facilities. These accounts are maintained by the businessmen and the industrialists who receive and make business payments of large amount through cheques.
Fixed deposits or time deposits
Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are deposits for a fixed term, a period ranging from a few days to a few years. These are not payable on demand, and they do not even enjoy cheque facilities. These can be withdrawn only after the maturity of its fixed period. They also carry the rate of interest higher than the normal. It cannot be treated as a part of the money supply recurring deposits in which there is a regular deposit of the agreed sum which is made a variant of fixed deposits.
Saving account deposits
These are the deposits whose main objective is to save. Saving account is the most suitable for individuals. The features of the current account and fixed deposits are combined for them. These are payable on the demand and can be withdrawn by using a cheque. But banks offer this with some restriction such as banks allow only four or five cheques per month. Interest paid on savings account deposits is lesser than the interest paid on fixed deposits.
• Offering loans and advances
The other main function of a commercial bank is to give loans and advances to the businessmen and the business enterprises and to earn interest on that loans. It is the main source of income for the bank. The bank keeps a certain portion of the deposits with it as a reserve of the amount and lends the balance to the borrowers as advances and loans in the cash credit, demand loans, short-term loans, overdraft form. These are explained in detail as under:
• The credit of the cash
The borrower that is found eligible is sanctioned as a limit for the credit, and within that limit, he is allowed to withdraw a certain amount on the given security. The power of the withdrawal depends upon the current assets of the borrowers, his stock statement submitted to the bank as security. Banks charge the interest on the drawn or the used part of the loan.
• Demand loans
A loan which can be recalled on demand is called demand loans. There is no stated maturity. The entire loan amount is paid in lump sum by the giving it as a credit for the loan account of the borrower. The security brokers whose credit needs fluctuate take such loans on the personal security and financial assets.
• Short-term loans
These are given against some security as personal loans to finance working capital or as priority sector advances. The whole amount is paid back in instalments over the period.
Apart from the features that are mentioned above, there are some other functions performed by the commercial bank.
• Discounting bills of exchange
A bill of exchange represents a promise to pay a fixed amount of money at a specific point of time in future. The cash can be claimed earlier also in this. A bill of exchange is a document that acknowledges the amount of money owed in consideration of the goods received. It is a paper asset signed by the creditor and the debtor for a particular amount payable on a decided date.
• Facility of overdraft
An overdraft is an advance given by allowing a customer is keeping the current account for the overview of his current account up to an agreed limit. It is a facility to a depositor for the overdraw of the amount than the balance amount.
• Agency functions of the bank
The bank acts as an agent of its customers and gets a commission for performing agency functions as under:
• Transferring the funds
It provides the facility for cheap and easy remittance of funds from one place to another through demand drafts, mail transfers etc.
• Fund collection
It collects the funds through bills, cheques, bundles and demand drafts on behalf of its customers.
It also makes payment of taxes, bills, insurance premium, etc. as per the directions of the customers.
• Sale and purchase of shares and securities
It buys, sells and keeps in safe custody the securities and shares on behalf of its customers. It also includes the collection of dividends, interest on shares and debentures is made on behalf of its customers.
Banks also provide some other facilities such as traveller’s facility, locker facility, underwriting securities issued by the government, private and public bodies. Also, there is the sale and purchase of foreign exchange.