Commercial bank is a financial
institution that provides various services to business community and general
public. The functions performed by commercial banks are given below in detail.
1. Primary functions.
2. Secondary functions.
1. Primary Functions
The primary functions of
commercial banks are:
a. Accepting deposits.
b. Granting loans.
a. Accepting Deposits
Commercial banks are mainly
depend on public deposits. People deposit their money in banks for safety,
convenience and earning interest. Businessmen,
manufacturers, and traders, deposit their money in the banks for safety and
convenience of payment. While low income group deposit their money in small
amounts for the purpose of earning interest or profit. Commercial banks receive
deposits from their accountholders under the main categories of current, saving
or fixed deposit accounts. The banks returned deposits to accountholders
whenever they demand or after a certain period of time.
b. Granting Loans
Commercial banks advance loans
to individuals, businesses, and Government bodies to earn interest. The banks
charge higher interest than what it pays on deposits. This difference of
interest charged and paid is the main source of the bank income. Usually, commercial banks provide short term
loans. They make loans in the form of overdraft, cash credit, loan, and
discounting bill of exchange. The loans may be secured or unsecured. While
providing loan bank always consider the financial position of the firm or
applicant.
2. Secondary Functions
The secondary functions of
commercial banks are:
a. Public utility services
b. Agency services.
a. Public Utility Services
The public utility services
are following.
Transfer of Funds
Commercial banks transfer
funds from one place or person to another. The funds are transferred through cheques,
pay orders, drafts, telephonic or electronic transfer.
Dealing in Foreign Exchange
Commercial banks also deal in
foreign exchange. They provide foreign currency to businessmen dealing in
imports and exports.
Issue Letter of Credit
Bank issues letter of credit,
usually for import trade. Letter of credit is a letter from a bank requesting
exporter to send goods to the importer and guarantees payment. It also issues
traveler’s cheque which is safe and easy way to protect money while traveling.
Underwriting of Shares
Underwriting is an agreement
in which underwriter agrees to take offered shares and debentures from the
principle company which will not be subscribed by the public. The bank sells
the balanced shares and debentures to the public and receives commission from
issuing company.
Locker Facility
Banks offer locker facility
for the save custody of ornaments, documents, currency and other valuable
items.
b. Agency Services
1. Banks collect cheques, bill
of exchange, drafts, salary, pensions, premium, dividends, interest, rent and
other collections on behalf of their clients.
2. Banks make payment of
electricity, gas, water, phone, rent, insurance premium and such other periodic
payments for their clients.
3. Banks buys and sells shares
and debentures on the instructions of their clients.
4. The Bank acts as trustee
and executor. After the death of its customer, bank takes care of his funds and
executes the “Will”.
4. Commercial bank also
provides legal and commercial assistance to its clients.
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