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Write Explanatory Note.Primary Functions of Commercial Bank. - Economics

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Question

 Write explanatory note.

Primary functions of commercial bank.

Solution

The following are some of the functions performed by commercial banks:

iAcceptance of DepositsAccepting 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 ExchangeThe 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 CreationThe commercial banks create credit in the economy through demand deposits. Credit creation paves the path for the growth of the economy.

iv. Investment of FundsApart 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. 

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APPEARS IN

 2012-2013 (March) (with solutions)
Question 4.2.3 | 5.00 marks
Solution Write Explanatory Note.Primary Functions of Commercial Bank. Concept: Commercial Banks.
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