Commercialbanks perform various functions that are as follows:
1.Accepting deposits
The basicfunction of commercial banks is to accept deposits of the customers.These deposits are of the following types:
(i)Saving Accounts
Savingaccounts cater to the needs of those individuals who wish to save apart of their income and earn interest on the amount saved. Accountholders of saving accounts can deposit cheques, drafts, etc. However,there is a limit on withdrawal.
(ii)Fixed deposit accounts
See AlsoFunctions of Commercial Banks: Bank as Agent, General Utility ServicesIdentify the main source of income for banks.Britannica MoneyFunctions of Commercial Banks: meaning, functions, types, exampleAs thename suggests, fixed deposit accounts imply deposits are kept forfixed periods of time; for example, Rs.500 per month for 5 years. Theperiod has to be decided in advance, while opening the account.Holders of these accounts do not enjoy the cheque facility. Higherthe time period, higher will be the interest rate, which is decidedby RBI.
(iii)Current deposits accounts
Currentdeposit accounts are also called ‘demand deposits’ as thedepositor can withdraw money at any time through cheques. Businessmenuse this account to make many transactions in a single day; however,they do not earn interest on the deposits. Banks provide accountstatements to the current account holders at regular intervals.
2.Granting loans and advances
The secondmost important function of the commercial banks is to give loans andadvances. The rate of interest charged by the banks on loans ishigher than the rate of interest paid by the banks on demand depositsand saving deposits. Loans granted by commercial banks are generallyfor long term and are given against securities. Advancesare given by a bank only for a short span of time.
3.Agency functions
Thecommercial banks perform various agency functions with the primepurpose of acceptance of deposits and granting of loans. Theirfunctions include:
See AlsoHow do banks make profits?(i) Transfer of funds − The banks provide easy flow of fundsfrom place to place via mail transfers, demand drafts, etc.
(ii) Collection of funds − The banks also collect funds onbehalf of its customers through bills, cheques, etc.
(iii)Banks collect insurance premiums, dividends, interest on debentures,etc.
(v) Banksassist in the process of tax payment by the accountholders.
(vi) Banksalso play the role of trustees or executors.
4.Discounting bills of exchange
CommercialBanks provide financial assistance to the business community bydiscounting bills of exchange. The banks purchase these bills,produced by customers, by deducting interest fromthe face value of the bill, thus providing easy finances to thebusiness community when required.
5.Credit creation
Commercialbanks create credit in the economythrough demand deposits. Credit creation paves the path for thegrowth of the economy.
6.Other functions
(i)Providing locker facility
(ii)Purchase and sale of foreign exchange
(iii)Issue of gift cheques
(iv)Underwriting of shares and debentures
(v)Providing information and statistical data useful to customers
Commercialbanks perform various functions that are as follows:
1.Accepting deposits
The basicfunction of commercial banks is to accept deposits of the customers.These deposits are of the following types:
(i)Saving Accounts
Savingaccounts cater to the needs of those individuals who wish to save apart of their income and earn interest on the amount saved. Accountholders of saving accounts can deposit cheques, drafts, etc. However,there is a limit on withdrawal.
(ii)Fixed deposit accounts
As thename suggests, fixed deposit accounts imply deposits are kept forfixed periods of time; for example, Rs.500 per month for 5 years. Theperiod has to be decided in advance, while opening the account.Holders of these accounts do not enjoy the cheque facility. Higherthe time period, higher will be the interest rate, which is decidedby RBI.
(iii)Current deposits accounts
Currentdeposit accounts are also called ‘demand deposits’ as thedepositor can withdraw money at any time through cheques. Businessmenuse this account to make many transactions in a single day; however,they do not earn interest on the deposits. Banks provide accountstatements to the current account holders at regular intervals.
2.Granting loans and advances
The secondmost important function of the commercial banks is to give loans andadvances. The rate of interest charged by the banks on loans ishigher than the rate of interest paid by the banks on demand depositsand saving deposits. Loans granted by commercial banks are generallyfor long term and are given against securities. Advancesare given by a bank only for a short span of time.
3.Agency functions
Thecommercial banks perform various agency functions with the primepurpose of acceptance of deposits and granting of loans. Theirfunctions include:
(i) Transfer of funds − The banks provide easy flow of fundsfrom place to place via mail transfers, demand drafts, etc.
(ii) Collection of funds − The banks also collect funds onbehalf of its customers through bills, cheques, etc.
(iii)Banks collect insurance premiums, dividends, interest on debentures,etc.
(v) Banksassist in the process of tax payment by the accountholders.
(vi) Banksalso play the role of trustees or executors.
4.Discounting bills of exchange
CommercialBanks provide financial assistance to the business community bydiscounting bills of exchange. The banks purchase these bills,produced by customers, by deducting interest fromthe face value of the bill, thus providing easy finances to thebusiness community when required.
5.Credit creation
Commercialbanks create credit in the economythrough demand deposits. Credit creation paves the path for thegrowth of the economy.
6.Other functions
(i)Providing locker facility
(ii)Purchase and sale of foreign exchange
(iii)Issue of gift cheques
(iv)Underwriting of shares and debentures
(v)Providing information and statistical data useful to customers
