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Unit - Vii Commercial Banks

Commercial banks perform primary functions like accepting deposits, advancing loans, creating credit, and clearing checks. They accept various types of deposits like current accounts, fixed deposits, and savings accounts. They provide loans and advances like cash credits, demand loans, and short term loans. When sanctioning loans, banks create new deposits in the form of credit. Banks also perform secondary functions like acting as agents to collect payments, purchase and sell securities, act as trustees, and provide foreign exchange services and general utility services like locker facilities and travelers' cheques.

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65 views14 pages

Unit - Vii Commercial Banks

Commercial banks perform primary functions like accepting deposits, advancing loans, creating credit, and clearing checks. They accept various types of deposits like current accounts, fixed deposits, and savings accounts. They provide loans and advances like cash credits, demand loans, and short term loans. When sanctioning loans, banks create new deposits in the form of credit. Banks also perform secondary functions like acting as agents to collect payments, purchase and sell securities, act as trustees, and provide foreign exchange services and general utility services like locker facilities and travelers' cheques.

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sheetal rajput
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UNIT-VII COMMERCIAL BANK

and ITS FUNCTIONS


Definition (Banking Companies Ordinance
1962)
• The Banking Companies Act of India defines a bank as
“A Bank is a financial institution which accepts money from the public for
the purpose of lending or investment repayable on demand or otherwise
withdraw able by cheques, drafts or order or otherwise.”
According to CULBERSTON
“Commercial banks are the institutions that make short term loans to
business and in the process create money.”
Functions of Commercial Bank
• Commercial banks have to perform a variety of functions which are
common to both developed and developing countries. These are
known as ‘General Banking’ functions of the commercial banks. The
modern banks perform a variety of functions. These can be broadly
divided into two categories:
(a) Primary functions.
(b) Secondary functions.
Primary Functions
Acceptance of deposits
Advancing loans
Creation of credit
Clearing of cheques
1. Acceptance of Deposits
• It is the most important function of commercial banks.
• They accept deposits in several forms according to requirements of
different sections of the society.
Types of Deposits:
Current account deposits: These deposits refer to those deposits
which are repayable by the banks on demand:
1. Such deposits are generally maintained by businessmen with the
intention of making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose
service charges for running these accounts.
Cont…

Fixed deposits refer to those deposits, in which the amount is deposited


with the bank for a fixed period of time.
• 1. Such deposits do not enjoy cheque-able facility.
• 2. These deposits carry a high rate of interest.

Saving account deposits: These deposits combine features of both


current account deposits and fixed deposits:
1. The depositors are given cheque facility to withdraw money from their
account. But, some restrictions are imposed on number and amount of
withdrawals, in order to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed
deposits. It must be noted that Current Account deposits and saving
deposits are cheque able deposits, whereas, fixed deposit is a non-
cheque able deposit.
2. Advancing of Loans
• The deposits received by banks are not allowed to remain idle. So,
after keeping certain cash reserves, the balance is given to needy
borrowers and interest is charged from them, which is the main
source of income for these banks.
Types of Loans and Advances:
Cash credit: refers to a loan given to the borrower against his current
assets like shares, stocks, bonds, etc. A credit limit is sanctioned and
the amount is credited in his account. The borrower may withdraw
any amount within his credit limit and interest is charged on the
amount actually withdrawn
Demand Loans: Demand loans refer to those loans which can be
recalled on demand by the bank at any time. The entire sum of
demand loan is credited to the account and interest is payable on the
entire sum.
• Short Term Loans: They are given as personal loans against some
collateral security. The money is credited to the account of borrower
and the borrower can withdraw money from his account and interest
is payable on the entire sum of loan granted.
3. Creation of Credit
Credit Creation is most significant function of commercial banks.
While sanctioning a loan to a customer, they do not provide cash to
the borrower. instead, they open a deposit account from which the
borrower can withdraw. In other words, while sanctioning a loan,
they automatically create deposits, known as a credit creation from
commercial banks.
4. Clearing of Cheques
It is the process of moving a cheque from the bank in which it was
deposited to the bank on which it was drawn, and the movement of
the money in the opposite direction. This process is called the
clearing cycle and normally results in a credit to the account at the
bank of deposit, and an equivalent debit to the account at the bank
on which it was drawn
Secondary Functions
1. Agency Services: Banks act as agents to their customers in different
ways:
• Collection and Payment of Various Items: Banks collect cheques,
rent, interest etc. on behalf of their customers and also make
payment of taxes, insurance premium etc. on their behalf.
• Purchase and Sale of Security: Banks normally are more
knowledgeable with regard to stock and share business. As such they
buy, sell and keep in safe custody the securities on behalf of their
customers.
• Trustee and Executor: Banks also act as trustees and executors of the
property of their customers on their advice.
• Purchase and Sale of Foreign Exchange: Banks buy and sell foreign
exchange and thus promote international trade. This function is
mainly discharged by Foreign Exchange Banks.
• Letter of Reference: Banks also give information about economic
position of their customers to domestic and foreign traders and
likewise provide information about economic position of domestic
and foreign traders to their customers.
General Utility Services
Commercial banks also provide certain services of general utility to the
society:
• Locker Facilities: Banks provide locker facilities to their customers.
People can keep their gold or silver jewellery or other important
documents in these lockers. Their annual rent is very nominal.
• Travelers' Cheque: Banks issue traveller’s cheque and letters of credit
to their customers so that they may be spared from the risk of
carrying cash during their journey.

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