Tamil Nadu Board of Secondary EducationHSC Commerce Class 11th
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Discuss the various primary functions performed by the commercial banks. - Commerce

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Answer in Brief

Discuss the various primary functions performed by the commercial banks.

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Solution

The primary functions of a commercial bank are of three types. They are:

  1. Accepting Deposits
  2. Granting Loans and Advances
  3. Creation of Credit

1. Accepting Deposits: The basic deposit accounts offered by commercial banks are listed below. Broadly deposit accounts can be classified into demand deposits and time deposits.

A. Demand Deposits: These deposits are repayable on demand on any day. This consists of savings deposits and current deposits.

a. Savings Deposits: General public deposit their savings into this account. This account can be opened in one individual’s name or more than one name.
b. Current Deposits: This account is suitable for business institutions. Individuals too can open this account. A higher minimum balance should be kept in this account.

B. Time Deposits: These include fixed deposits and recurring deposits which are repayable after a period.

a. Fixed Deposits (FD): Certain amount is deposited for a fixed period for a fixed rate of interest.
b. Recurring Deposits (RD): Certain sum is deposited into the account every month for one year or five years or the agreed period. Interest rate is more than savings deposits and almost equal to fixed deposits.

Granting Loans and Advances: The second primary function of commercial banks is lending money in order to earn interest income.

A. Advances
a. Overdraft: It is a credit facility extended mostly to the current account holding business community customers.
b. Cash Credit: It is a secured credit facility given mostly to business institutions. Stock in hand, raw materials, other tangible assets, etc. are provided as collateral.
c. Discounting of Bills: Business customers approach banks to discount the commercial bills of exchanges and provide money.

B. Loans: 
Short-term and medium-term loans are provided by commercial banks against eligible collaterals to business concerns.
a. Housing Loan
b. Consumer Loans
c. Vehicle Loans
d. Educational Loan
e. Jewel Loan

3. Creation of Credit: Apart from the currency money issued by the RBI, the credit money in circulation created by commercial banks influence the economic activities of a country to a large extent. The credit money of commercial banks is far greater in volume than the currency money.

Concept: Functions of Commercial Banks - Primary Functions
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APPEARS IN

Tamil Nadu Board Samacheer Kalvi Class 11th Commerce Answers Guide
Chapter 12 Functions of Commercial banks
Exercise | Q IV. 1. | Page 117
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