What is Commercial Bank? – Functions of Commercial Banks

Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949. Bank Offices comprise of branches doing banking business (i.e. accepting deposit and/or offering credit to their customers) and administrative offices.

1. Scheduled Commercial Banks

Scheduled Commercial Banks are as follows :

  • State Bank of India and its Associates (Public Sector Bank)
  • Nationalised Banks (Public Sector Banks)
  • Foreign Banks
  • Regional Rural Banks
  • Other Scheduled Commercial Banks (Private Sector Banks)

2. Non-Scheduled Commercial Banks

Functions of the Commercial Banks

  • Primary Functions of  Commercial Banks
  • Secondary Functions of Commercial Banks

          1. Agency Functions

           2. General Utility Functions

Primary Functions of Commercial Banks

The primary functions of the commercial banks include the following:

1. Accepting Deposits

The bank collects deposits from the public. These deposits can be of different types, such as :-

  • Saving Deposits
  • Current Deposits
  • Fixed Deposits
  • Recurring Deposits: Recurring Deposits are a kind of Term Deposits offered by banks in India in which you have to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain amount in monthly installments, for example Rs 2,000 every month.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits.

The types of bank loans and advances are as follows :-

  • Loans
  • Overdraft: Overdraft facility is a credit given to an individual against his or her assets as collateral with banks. As collateral, you can offer you house, insurance policies, bank fixed deposits, shares and bonds, etc to banks. However, interest rates charged and overdraft sanctioned by banks vary on each of the collateral.
  • Cash Credits: This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess of the amount deposited in the account.
  • Discounting of bill of exchange: A bill of exchange is an order by the creditor (usually the exporter) to the debtor (the buyer) to pay a debt at a certain date.

If the drawer of the bill does not want to wait till the due date of the bill and is in need of money, he may sell his bill to a bank at a certain rate of discount. The bill will be endorsed by the drawer with a signed and dated order to pay the bank. The bank will become the holder and the owner of the bill. After getting the bill, the bank will pay cash to the drawer equal to the face value less interest or discount at an agreed rate for the number of days it has to run. This process is known as discounting of a bill of exchange.

 

Secondary Functions of Commercial Banks

The bank performs a number of secondary functions, also called as non-banking functions. These functions are as follows:

1. Agency Functions

The bank acts as an agent of its customers. The bank performs a number of agency functions which includes:-

  • Collection of Cheques ,
  • Interest etc on behalf of their customer,
  • Purchase and sale of securities,
  • Trustee and executer,
  • Purchase and sale of foreign exchange,
  • letter of references etc.
  • Transfer of Funds
  • Periodic Payments & Collections
  • Portfolio Management
  • Periodic Collections
  • Representation of clients to deal with other banks and institutions.

2. General Utility Functions

The bank also performs general utility functions and these are as follows:-

  • Underwriting of Shares
  • Locker Facility
  • Dealing in Foreign Exchange
  • Issue of Drafts, Letter of Credits, etc.
  • Social Welfare Programmes etc
  • Issuing of gift cheques,
  • Merchant banking services etc