Question

Explain the primary functions of commercial banks.

Answer 1

Meaning:

The commercial bank is that bank that accepts deposits from the public for the purpose of lending. It also performs secondary functions.

Primary Functions of Commercial Banks:

The primary functions of a commercial bank, also known as banking functions

1. Accepting Deposits: The bank collects deposits from the public. The deposits can be of different types, such as:
   1. Saving Deposits:
      
      1. It encourages saving habits among the people.
      2. The rate of interest is low. At present it is about 3.5% p.a.
      3. Withdrawals are allowed subject to certain restrictions.
      4. It is suitable for salary and wage earners.
   2. Fixed Deposits:
      1. A lump sum amount is deposited for a specific period.
      2. A higher rate of interest is paid, which varies with the deposit period.
      3. Withdrawals (or renewals) take place on maturity.
      4. The account holder can close the account before the maturity.
   3. Current Deposits:
      1. This type of account is operated by a businessman.
      2. Withdrawals are freely allowed.
      3. No interest is paid; in fact, there are service charges.
      4. The account holders can get the benefit of an overdraft facility.
   4. Recurring Deposits:
      1. It is operated by salaried persons and small traders.
      2. A certain sum of money is periodically deposited into the bank.
      3. Withdrawals are permitted only after the expiry of a certain period.
      4. A higher rate of interest is paid.
2. Granting of Loans and Advances: The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and deposit rate) is its profit.
   1. Overdraft:
      1. A specific limit is sanctioned for a period, say one to three months.
      2. A separate account is not maintained. It is included in the current account.
      3. It is provided only to current account holders.
      4. It is charged on the amount withdrawn.
      5. The bank may not ask for security if the amount is less.
   2. Cash Credits:
      1. A specific limit is provided by a bank for a period, say 6 months to one year.
      2. Separate cash credit is to be maintained by the bank.
      3. It is given to any party who fulfils certain conditions.
      4. It is charged on the amount withdrawn.
      5. The bank demands security of tangible assets to sanction cash credit.
   3. Loans:
      1. A lumpsum amount is advanced for a period of one year or more
      2. A separate loan account is to be maintained by bank
      3. It is given to any party who fulfils certain conditions.
      4. It is charged on the amount sanctioned, whether utilised or not.
      5. The bank demands security for sanctioning the loan.