Question

Justify the following statement:
The primary function of commercial banks include-Accepting deposits and leading funds?

Answer 1

The primary functions of Commercial banks include:
(1) Accepting deposits: A bank accepts deposits from the public and business organisation under the following heads, viz.
(1) Demand deposits and (2) Time deposits.
(a) Demand deposits include saving deposits and current deposits. A saving deposit account aims at promoting the habit of saving among the fixed income earners. Interest at certain rates is paid on the minimum balance in this account. There are restrictions on the number of withdrawals. A current deposit account is meant for businessmen and institutions. There are no restrictions on the number and amount of withdrawals from this account there is sufficient balance in the account. Interest is not payable on the balance standing in this account. Overdraft facility is granted only to current account holders.
(b) Time deposits: Any deposit which is not repayable on demand is called time deposit. Time deposits may be classified as fixed deposit and recurring deposit. Under Fixed deposit account, certain amount is deposited for fixed period (minimum 45 days or more). Usually higher rate of interest is paid depending on the period. Under Recurring deposit account depositor is required to deposit with the bank a fixed sum of money every month for 12, 24, or 60 months. On maturity, depositor gets the total amount deposited plus interest accrued on it.
(2) Lending money: The deposits accepted by banks are used for lending money to the people who need it for different periods. Short-term loans are advanced in the form of overdrafts, cash credits, and discounting of bills. The bank also advances medium-term and long-term loans to businessmen and industrialists. In an overdraft facility, the bank allows the current account holder to overdraw from his existing current account up to a specified limit. Under cash credit, the borrower is required to open a separate account where the bank credits the sanctioned loan amount. Besides, the bank discounts bills and hundies and provides ready money to the traders. The bank charges interest on the amount it lends.