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Functions of commercial banks


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Most of us have savings and other accounts with some or the other banks but very few are aware of the vast number of the functions that the banks perform.The article informs the members about the various functions of the banks so that we can utilize and avail their services.



Banking is defined as the accepting for the purpose of lending or investment of deposits,money from the public,repayable on demand and with drawable by cheques,drafts,orders or otherwise.

Functions of commercial banks


1)Accepting Deposits:

The most significant and traditional function of commercial bank is accepting deposit from the public.In case of current deposits,no interest is paid by the bank but the depositor can withdraw his money anytime he likes without notice.Savings deposits are paid a small rate of interest and the bank imposes certain restrictions on the withdrawal of money.Fixed deposits are made by the persons who have idle money with them.They can withdraw their money only after the expiry of th fixed period of time.These deposits carry the highest rate of interest that depends on the period for which the money is deposited.

2)Providing Loans

Banks provide loans against approved securities to the public and companies.Loans can be granted in the form of cash credit,short term loan,overdraft,discounting of bills and demand loans.Under cash credit system,borrower is sanctioned a credit limit up to which he can borrow from the bank.The interest is calculated on the amount actually withdrawn.Short term loans are given as personal loans against some security.The interest is payable on the entire sum of loan granted..In case of Overdraft,a person is allowed to overdraw his current account to a certain limit as specified by the bank.The
interest is paid on the amount outstanding against his balance and not on the amount of loan sanctioned.A bill of exchange is drawn by a creditor on the debtor specifying the amount of debt and the date on which it is payable.Before the maturity of the bill,a debtor can get it discounted from the bank paying a very small interest.

3)Credit Creation

A bank can be called the factory or the manufacturer of the credit.In the process of accepting and depositing money,banks multiply credit in the economy.It depends on cash reserve ratio.

4)Transfer of funds

Commercial banks can transfer funds of a customer to other customer's accounts in the same or the different bank through cheques, drafts, mail transfers, telegraphic transfers etc.

5)Agency Functions

i)Collection of bills, drafts etc.

ii)Collection of interest, dividends etc. on the behalf of the customers.

iii)Payment of interests, installment of loans, insurance premium etc.

iv)Purchase and sale of securities.

v)Banks also executes the will of their customers after their deaths.

6)Other Functions

i)Payment of credit letters and travellers cheques, gift cheques, bank draft etc.

ii)Banks also provide locker services for the valuable securities of their customers and charges a very nominal fee.

iii)Banks also deals in foreign exchange.Such banks are usually called foreign exchange banks.

There are various other functions that the bank performs but they cannot be cited here as some of the functions differ from bank to bank.For example,some banks provide the facility of credit cards and online banking whereas many other do not.These are some of the modern functions of the bank.Commercial banks are the backbone of any economy, be it India or America.Industries and agriculture flourish due to these banks.These banks mobilize the savings of people that results in capital formation.


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