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Write Answers in ‘One’ Or ‘Two’ Paras Each. What Are the Primary Functions of Commercial Banks? - Economics

Write answers in ‘one’ or ‘two’ paras each.

What are the primary functions of commercial banks?  

 

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Solution

The following are some of the functions performed by commercial banks:
i. Acceptance of Deposits- Accepting deposits from the general public is the basic function of a commercial bank. There are various kinds of public deposits such as fixed account deposit, savings account deposit and current account deposits through which the commercial banks deposit the money from the public.
ii. Discounting Bills of Exchange- The commercial banks provide financial assistance to the business community by discounting bills of exchange. A bill of exchange is a document that acknowledges the amount of money that is owed by the debtors as against the goods and services received by him. The banks purchase these bills produced by the customers (after deducting interest on the face-value of the bill). In this sense, by purchasing the bills they provide easy means of finance to the business community as and when required.
iii. Credit Creation- The commercial banks create credit in the economy through demand deposits. Credit creation paves the path for the growth of the economy.
iv. Investment of Funds- Apart from granting loans and advances, the banks also invest their surplus funds in securities. Investment in the securities helps the commercial banks to meet their future requirement of funds. The banks can borrow from the RBI against such securities. Also, if required the banks can sell their securities in the open market to meet their requirement of funds. 

Concept: Commercial Banks
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