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Money and Banking

Functions of Commercial Banks

Commercial banks are authorized to provide a variety of financial services which includes loans, savings accounts, etc. In this article, we will talk about various functions that a commercial bank performs.

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Broadly speaking, the functions are of two categories – primary and secondary.

Primary Functions of Commercial Banks

The primary functions of a commercial bank are as follows:

1. Accepting Deposits

Commercial banks accept deposits from people, businesses, and other entities in the form of:

  • Savings deposits – The commercial bank accepts small deposits, from households or persons, in order to encourage savings in the economy.
  • Time deposits – The bank accepts deposits for a fixed time and carries a higher rate of interest as compared to savings deposits.
  • Current deposits – These accounts do not offer any interest. Further, most current accounts offer overdrafts up to a pre-specified limit. The bank, therefore, undertakes the obligation of paying all cheques against deposits subject to the availability of sufficient funds in the account.

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2. Lending of Funds

Another important activity is lending funds to customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.

Loans are advances that a bank extends to his customers with or without security for a specified time and at an agreed rate of interest. Further, the bank credits the loan amount in the customers’ account which he withdraws as per his needs.

Under the cash credit facility, the bank offers its customers a facility to borrow cash up to a certain limit against the security of goods. Further, an overdraft is an arrangement that a bank offers to customers wherein a temporary facility is offered to overdraw from the current account without any security.

The limit is pre-specified. Additionally, banks also discount and purchase bills. In both of these cases, a bank credits the amount of the bill in the customer’s account after deducting discounts and commissions. Subsequently, this amount is recovered from the debtors on the maturity of the instrument.

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Secondary Functions of Commercial Banks

The secondary functions of a commercial bank are as follows:

Bank as an Agent

A bank acts as an agent to its customers for various services like:

  • Collecting bills, draft, cheques, etc.
  • Paying the insurance premium, rent, loan installments, etc.
  • Working as a representative of a customer for purchasing or redeeming securities, etc. in the stock exchange.
  • Acting as an executor, administrator, or trustee of the estate of a customer
  • Also, preparing income tax returns, claiming tax refunds, etc.

General Utility Services

There are several general utility services that commercial banks offer like:

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Solved Question

Q1. What are the primary functions of a commercial bank?

Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.

Q2. What are the secondary functions of a commercial bank?

Answer: The secondary functions of a commercial bank are acting as an agent to its customers and also providing general utility services.

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