Question

Explain three important functions of a commercial bank.

Explain briefly the main functions that a commercial bank performs.

State two important functions of commercial banks.

Describe the functions of a Commercial Bank.

Write a short note on any two functions of a Commercial Bank.

Explain the functions of a commercial bank.

Answer 1

1. Accepting Deposits: A commercial bank accepts deposits from the public. People can deposit their cash balances as chequable or non-chequeable deposits. Banks accept mainly three types of deposits:
   1. Current Account Deposits: Deposits in current account are payable on demand. That is why current accounts are also known as demand deposits. Money from these deposits can be withdrawn by cheques without any restriction on the amount or number of withdrawals made.
   2. Saving Account Deposits: Saving account deposits (Saving bank accounts) are payable on demand and money can be withdrawn by cheques. But there are certain restrictions imposed on the. depositors of this account. Banks impose a limit on the amount and number of withdrawals made from this account during a particular period.
   3. Fixed Deposit Accounts: Money in these accounts is deposited for a specified period like 6 months, one year, two years, five years or more. These deposits are not payable on demand. They do not enjoy cheque facilities, i.e., cheques cannot be issued against these deposits for making payments. These deposits are also known as time deposits as the money deposited in these accounts cannot be withdrawn before the expiry of the period for which the deposit is made.
2. Advancing loans: A bank advances loans both for productive purposes as well as consumption purposes. Through credit creation (i.e., by creating demand deposits through loans), it contributes to money supply in the economy. Banks these days extend loans and advances to their customers in the following ways:
   1. Cash Credit: Cash credit is a type of loan which is given to the borrower against his current assets, such as shares, bonds, stock of goods, etc.
   2. Outright Loans and Advances: Banks provide outright loans for a fixed period. The loans are advanced for the short term and medium term. In this case, the entire amount of the loan sanctioned is credited in a lump sum to the borrower's current account.
   3. Overdraft Facilities: In many cases, banks provide overdraft facilities to their customers who maintain a current account with the bank.
3. Agency functions: Commercial banks act as an agent on behalf of their customers. Agency functions include the transfer and collection of funds, the purchase and sale of shares, the collection of dividends and interest, the payment of bills and premiums, the execution of wills, etc.
4. Facilitation of Payments through Cheques: Banks have created a very handy method of payment in the shape of cheques. We can accept payments from others via cheque and deposit them in our bank. These cheques could be drawn on other commercial banks, but our bank will collect payment from them on our behalf. Similarly, we can make payments to others using cheques. In recent years, the cheque has become the most used form of payment in business. It is a convenient, inexpensive, and secure method of making payments.
5. Transfer of Funds: Banks facilitate the rapid and secure transfer of payments from one location to another by utilising a variety of credit instruments such as cheques, drafts, pay orders, mail transfers, telegraphic transfers, e-mail, and so on. This job is extremely important nowadays, given the massive growth of trade and commerce.
6. General Utility Services: Commercial banks offer a variety of general utility services, such as locker facilities for the safe custody of jewellery and other valuables, the issuance of travellers' cheques and gift cheques, the provision of credit cards, the assistance of their customers with tax and investment and finance advice, and so on.
7. Credit Creation: Commercial banks have the unique ability to create credit, which is a critical function. Commercial banks can create credit by accepting deposits and granting loans. This means they can grant more loans than the consumers' initial or primary deposits.