What is Commercial Bank?
A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit.
The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the lending rate.
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Function of Commercial Bank:
The functions of commercial banks are classified into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.
(b) Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.
Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.
Types of Commercial Banks:
There are three different types of commercial banks.
Private bank –: It is a type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.
Public bank –: It is a type of bank that is nationalised, and the government holds a significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.
Foreign bank –: These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.
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Examples of Commercial Banks
Few examples of commercial banks in India are as follows:
1.State Bank of India (SBI)
2.Housing Development Finance Corporation (HDFC) Bank
3.Industrial Credit and Investment Corporation of India (ICICI) Bank
4.Dena Bank
5.Corporation Bank
This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for commerce students. To know about more such concepts, stay tuned to BYJU’S.
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Frequently Asked Questions on Function of Commercial Banks
Q1
What is the most important function of a Bank?
The most important function of a bank is to collect deposits from the public and lend those deposits for the development of business, agriculture, trade and commerce.
Q2
What is the first commercial bank of India?
Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806. It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.
Q3
What is the main purpose of commercial banks?
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.
FAQs
Commercial banks have the primary functions of accepting customer deposits in the current account, savings, and fixed deposits, lending money as credit to borrowers who then pay with interest, and disbursing payments in the form of transactions and customer payments.
What are the functions of the 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 customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.
What is the function of a bank and examples? ›
Providing Loans: Banks lend money to individuals and businesses for various purposes, such as home mortgages, business expansion, or personal loans. Payments and Settlements: Banks enable transactions through various payment methods, like checks, debit/credit cards, and electronic transfers.
What are the operations functions of a commercial bank? ›
Banking operations (Ops) serve as a back office function responsible for reconciliation and the execution and settlement of transactions originating in the front office. Trade booking and adherence to risk and regulatory guidelines are important roles of Ops. Customer onboarding is another key function.
What is the function of CBE? ›
CBE provides credit for working capital and expansion and facilitation of local and international trading activities. It also provides short, medium and long term loans. The following are the major loan types provided by CBE.
Which of the following is not a function of commercial banks? ›
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.
What are the main functions of money? ›
To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.
What are two of the four functions that a bank performs? ›
The two essential functions of banks in the economy are accepting deposits and granting advances or lending loans. Banks collect deposits from the public in the form of savings deposits, fixed deposits, current deposits, and recurring deposits. This function is important because people earn interest from some deposits.
What are the three main functions of banks quizlet? ›
There are three main functions for a bank:
- Receiving money: Deposits are the sums of money that a consumer gives to the bank. ...
- Keeping money: Reserves can be kept in two ways by banks. ...
- Lending money: People are given money by the bank on the basis of time and interest.
The three main types of bank transactions are deposits, withdrawals, and transfers. Deposits put money into an account, withdrawals take money out, and transfers move money between accounts.
Commercial banks provide services for businesses, government agencies, and institutions like colleges and universitiesm to help them grow and profit. They make money mainly by loaning money to businesses and earning back interest and fees from these loans.
Which of these is one of the main functions of commercial banks? ›
Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy.
Can a commercial bank create money? ›
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.
What is the function of commercial bank primary function? ›
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.
What are 3 functions of a bank? ›
- Collection of deposits from the public.
- Issue of drafts and letter of credits for transferring money from one place to another.
- Granting of loans is an another function of the bank.
- Bank is also responsible for portfolio management.
- Bank also makes periodic payments in case of electricity bills, rent etc.
Corporate banking teams provide financial services like cash management, payment processing, credit products, and hedging strategies to large corporations.
What are the advantages of commercial banks? ›
Discounts: Commercial banks offer services to the customer at discounted rates. Product offerings: Commercial banks offer more product offerings to the customers in the form of loans, credit cards, fixed deposits, recurring deposits, mutual funds etc.
How does a commercial bank create money? ›
Banks create money during their normal operations of accepting deposits and making loans. In this example we'll use M1 as our definition of money. (M1 = currency in our pockets and balances in our checking accounts.) When a bank makes a loan it creates money.
What is the management of commercial bank? ›
Mostly it deals with the management of deposits, lending activities, investments, bank capital, bank liquidity and off-balance sheet activities. It also covers the use of derivatives and asset backed securities such as credit derivatives etc. to manage the market risk.
What is the difference between commercial bank and development bank? ›
Commercial banks primarily focus on providing comprehensive financial services to a broad range of customers while aiming for profitability. Development banks, on the other hand, concentrate on fostering economic development by providing long-term financing for projects and sectors that contribute to societal progress.
