Commercial banks are authorized to provide a variety of financial services which includes loans, savings accounts, etc. In this article, we will talk about various functions that a commercial bank performs.
Broadly speaking, the functions are of two categories – primary and secondary.
Commercial banks accept deposits from people, businesses, and other entities in the form of:
Another important activity is lending funds to customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
Loans are advances that a bank extends to his customers with or without security for a specified time and at an agreed rate of interest. Further, the bank credits the loan amount in the customers’ account which he withdraws as per his needs.
Under the cash credit facility, the bank offers its customers a facility to borrow cash up to a certain limit against the security of goods. Further, an overdraft is an arrangement that a bank offers to customers wherein a temporary facility is offered to overdraw from the current account without any security.
The limit is pre-specified. Additionally, banks also discount and purchase bills. In both of these cases, a bank credits the amount of the bill in the customer’s accountafter deducting discounts and commissions. Subsequently, this amount is recovered from the debtors on thematurity of the instrument.
Q1. What are the primary functions of a commercial bank?
Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customersin the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
Q2. What are the secondary functions of a commercial bank?
Answer: The secondary functions of a commercial bank are acting as an agent to its customers and also providing general utility services.
The general utility services offered by commercial banks include the issuance of cheques and drafts, project reports, locker facility, underwriting services, and locker facility.
The general utility services offered by commercial banks include the issuance of cheques and drafts, project reports, locker facility, underwriting services, and locker facility.
The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.
Agency functions of commercial banks are like collecting interest, dividends, payment of rent or insurance, the conduct of stock exchange, transactions, and acting as executor trustees, and attorneys; these banks also advise their customers about investment.
Commercial banks offer basic banking services, including deposit accounts and loans, to consumers and businesses. These financial institutions make money from a variety of fees and by earning interest income from loans.
What Is Utility Function? In economics, utility represents the satisfaction or pleasure that consumers receive for consuming a good or service. Utility function measures consumers' preferences for a set of goods and services.
Agency Banking is a strategy in the Financial Industry that uses authorized Agents to deliver financial services to customers in remote areas and beyond the reach of the traditional branch network.
The primary function is the most important function of the product. If a product does not fulfil the purpose for which it is intended, its primary function, then it is useless.
Solution: Issuing currency is not the function of commercial banks. The main function of the Reserve Bank of India is to issue currency. A commercial bank is a financial institution that carries out all the operations regarding deposits, withdrawal of money, loans, and other activities.
Functions of Commercial Banks: - Primary functions include accepting deposits, granting loans, advances, cash, credit, overdraft and discounting of bills. - Secondary functions include issuing letter of credit, undertaking safe custody of valuables, providing consumer finance, educational loans, etc.
The function of a Bank is to collect deposits from the public and lend those deposits for the development of Agriculture, Industry, Trade and Commerce. Bank pays interest at lower rates to the depositors and receives interests on loans and advances from them at higher rates.
An agent bank, or agency bank, is a bank that does business on behalf of some other entity. Agent banks may be used to help corporations expand overseas, arrange loans, or manage funds. There are several types of agent banks, depending on what activity the bank is engaged in.
Agent Banking means providing limited scale banking and financial services to the underserved population through engaged agents under a valid agency agreement, rather than a teller/cashier. It is the owner of an outlet who conducts banking transactions on behalf of a bank.
A bank acts as an agent to its customers for various services like: Collecting bills, draft, cheques, etc. Paying the insurance premium, rent, loan installments, etc. Working as a representative of a customer for purchasing or redeeming securities, etc.
High-powered money is the sum of commercial bank reserves and currency (notes and coins) held by the Public. High-powered money is the base for the expansion of Bank deposits and creation of money supply. A commercial bank's reserves depend upon its deposits.
In economics, utility is a term used to determine the worth or value of a good or service. More specifically, utility is the total satisfaction or benefit derived from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility.
Commercial banks perform the function of credit creation in an economy. Therefore, the money that is created by commercial banks is known as credit money. This is achieved by the commercial banks in the form of purchasing securities and providing loans.
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