Importance of Commercial Banks:
Promoting Capital Formation
Facilitator of Monetary Policy
Influence Economic Activity
Directing Funds into Desired Channels
Implementation of the Policies of Govt.
Functions of Commercial Banks
Commercial Banks perform following functions:
A) Traditional Functions
I. Primary Functions
Granting Loans and Advances
II. Secondary Function
General Utility Services
B) New Services
I. Primary Functions of Banks :
The primary functions of a bank are also known as banking functions.
They are the main functions of a bank.
These primary functions of banks are explained below.
1. Accepting the deposits
2.Granting the loans and advances
I. Accepting Deposits
The bank collects deposits from the public. These deposits can be of
different types, such as :
1. Saving Deposits
2. Fixed Deposits
3. Current Deposits
4. Recurring Deposits
1. This type of deposits encourages saving habit among the public.
2. The rate of interest is low. At present it is about 3% p.a.
3. Withdrawals of deposits are allowed subject to certain
4. This account is suitable to salary and wage earners.
5. This account can be opened in single name or in joint names.
Fixed deposits are deposits repayable after the expiry of a certain period.
Which generally varies from 3 months to 5 years.
Higher rate of interest. The longer the period, the higher will be the rate of
No introduction is needed.
Higher security to the deposited amount.
It can also be opened in joint names.
These are also called as time deposits
*Even though a FD is payable after expiry of specified period, banks allow
encashment even before maturity. In such case, certain interest will be charged for
An account which can be operated any number of times on a working day without
any restrictions on the number and amount of withdrawals is known current
Overdraft facility is given on this account.
No interest is paid on this account.
Suitable to customers like businessman, joint stock companies, public authorities
Incidental charges are charged on these accounts.
Third party cheques and cheques with endorsement are deposited and collected.
The loans and advances are granted through current accounts.
In order to inculcate the habit of savings on a regular basis, the banks have
started various daily, weekly, or monthly deposit schemes recently.
Rate of interest is provided by banks in accordance with the rates prescribed
for various term deposits. Therefore the rate of interest is almost equal to that
of fixed deposits.
This account can be opened by any person.
2. Granting Loans and Advances:
The deposits received by banks are not allowed to remain idle. So,after keeping certain
cash reserves, the balance is given to needy borrowers and interest is charged from
them, which is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:
Discounting of Bill of Exchange
It is an arrangement by which a banker allows his customer to borrow money
up to a certain limit against his current assets like shares, stocks, bonds, etc.
A credit limit is sanctioned and the amount is credited in his account. The
borrower may withdraw any amount within his credit limit and interest is
charged on the amount actually withdrawn.
It is an arrangement where by a customer has been allowed temporarily to
overdraw his current account with or without security.
It is a kind of advance made with or without security.in this case the bank
makes a lump sum payment to the borrower or credits his deposit account
with the money advanced.it is given for fixed period at agreed rate of
interest. Loans may be secured or unsecured.
Discounting of Bill of Exchange:
Time bills are discounted while demand bills are purchased by the banks.
In both the cases the banks credit the accounts of their customers by the
amount of bills after deducting discount amount or commission.
1.Agency Services (Functions):
i. Collection of bills , drafts ,cheques ,dividends etc. on behalf of customers.
ii. Remittance of Funds
iii. Execution of standing orders of the customers viz payment of subscription ,rent , bills ,
iv. Purchasing and selling of securities.
v. Acting as a correspondent or representative of customers.
vi. Functioning as an executor, trustee or administrator of an estate of a customer.
vii. Preparation of income tax returns, claiming of tax refunds etc.
General Utility Services:
i. Safe deposit vaults
ii. Issuing of Letter of Credit, Travellers Cheques, Gift Cheques and Credit
iii. Giving credit information
iv. Under writing work
v. Dealing in foreign exchange
vi. Compilation of statistics/ publishing information
B) New Services:
i. New schemes for Accepting Deposits
ii. Housing Deposit Scheme
iii. ATM Services
iv. Different Personal Scheme
v. Loan Participation
vi. Educational Loans
vii. Loan for self employment
viii. Teller system
ix. Technical Advice
x. Mobile Banking and Extension Centre Services
xi. Tax consultancy
xii. Rural Card and Green Card
xiii. Loans to Women
xiv. Social Banking
xv. Online Banking
xvi. Network Banking
xvii. Core Banking
xiv. Merchant Banking
xx. Financing for Import and Export