Functions of Commercial Banks Commercial Banks Perform A Variety of Functions Which Can Be Divided As

Functions of Commercial Banks
Commercial banks perform a variety of functions which can be divided as:

(1) Accepting deposits;
(2) Advancing loans;
(3) Credit creation;
(4) Financing foreign trade;
(5) Agency services; and
(6) Miscellaneous services to customers.
(1) Accepting Deposits:

This is the oldest function of a bank and the banker used to charge a commission for
keeping the money in its custody when banking was developing as an institution. Nowadays a
bank accepts three kinds of deposits from its customers.
The first is the savings deposits on which the bank pays small interest to the
depositors who are usually small savers. The depositors are allowed to draw their money by
cheques up to a limited amount during a week or year. Businessmen keep their deposits in
current accounts. They can withdraw any amount standing to their credit in current deposits
by cheques without notice.
The bank does not pay interest on such accounts but instead charges a nominal sum
for services rendered to its customers. Current accounts are known as demand deposits.
Deposits are also accepted by a bank in fixed or time deposits.
Savers who do not need money for a stipulated period from 6 months to longer
periods ranging up to 10 years or more are encouraged to keep it in fixed deposit accounts.
The bank pays a higher rate of interest on such deposits.
The rate of interest increases with the length of the time period of the fixed deposit.
But there is always the maximum limit of the interest rate which can be paid. For instance,
the interest rate on fixed deposits over five years is 11 per cent in India.
2. Advancing Loans:
One of primary functions of a commercial banks is to advance loans to its customers.
A bank lends a certain percentage of the cash lying in deposits on a higher interest rate than it
pay on such deposits. This is how it earns profits and carries on its business.
The bank advances loans in the following ways:
(a) Cash Credit:
The bank advances loan to businessmen against certain specified securities. The
amount of the loan is credited to the current account of the borrower. In cash of a new
customer a loan account for the sum is opened. The borrower can withdraw money through
cheques according to his requirements buy pays interest on the full amount.
(b) Call Loans:
These are very short-term loans advanced to the bill brokers for not more than fifteen
days. They are advance against first class bill or securities. Such loans can be recalled at a
very short notice. In normal times they can also be renewed.
(c) Overdraft:
A bank often permits a businessman to draw cheques for a sum greater than the
balance lying in his current account. This is done by providing the overdraft facility up to a
specific amount to the businessman. But he is charged interest only on the amount by which
his current account is actually overdrawn and not by the full amount of the overdraft
sanctioned to him by the banks.
(d) Discounting Bills of Exchange:
If a creditor holding a bill of exchange wants money immediately, the bank provides
him the money by discounting the bill of exchange. It deposits the amount of the bill in the
current account of the bill-holder after deducting its rate of interest for the period of the loan
which is not more than 90 days. When the bill of exchange matures, the bank gets its
payment from the banker of the debater who accepted the bill.
3. Credit Creation:
Credit creation is one of the most important functions of the commercial banks. Like
other financial institutions, they aim at earning profits. For this purpose, they accept deposits
and advance loans by keeping a small cash in reserve for day-to-day transactions.
When a bank advances a loan, it opens and account in the name of the customer and
does not pay him in cash but allows him to draw the money by cheque according to his needs.
By granting a loan, the bank creates credit or deposit.
4. Financing Foreign Trade:

A commercial bank finances foreign trade of its customers by accepting foreign bills
of exchange and collecting them from foreign banks. It also transacts other foreign exchange
business and buys and sells foreign currency.
5. Agency Services:
A bank acts as an agent of its customers in collecting and paying cheques, bills of
exchange, drafts, dividends, etc. It also buys and seUs shares, securities, debentures, etc. for
its customers. Further, it pays subscriptions, insurance premia, rent, electric and water bills,
and other similar charges on behalf of its clients.
It also acts as a trustee and executor of the property and will of its customers.
Moreover, the bank acts as an income tax consultant to its clients. For some of these services,
the bank charges a normal fee while it renders others free of charge.
6. Miscellaneous Services:
Besides the above noted services, the commercial bank performs a number of other
services. It acts as the custodian of the valuables of its customers by providing them lockers
where they can keep their jewellery and valuable documents.
It issues various forms of credit instruments, such as cheques, drafts, travellers’
cheques, etc. which facilitate transactions. The bank also issues letter of credit and acts as a
referee to its clients. It underwrites shares and debentures of companies and helps in the
collection of funds from the public. Some commercial banks also publish journal which
provide statistical information about the money market and business trends of the economy.

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Functions of Commercial Banks

Commercial banks perform a variety of functions which can be divided as:

(1) Accepting Deposits:

4. Financing Foreign Trade:

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