Thursday, 9 August 2012

Functions of the Commercial Bank or explain the role of commercial banks in the modern business

Samuelson has defined the functions of the Commercial bank in the following words :

"The Primary economic function of a commercial bank is to receive demand deposits and a honour cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists."


Following are the important functions of the commercial bank. :

1. Accepting Deposits :-

Some people have an excess money and they want to deposits it to some honest man or an institution who can also give them some profit. So first function of the commercial bank is to receive deposits. There are three types of it.

2. Demand Deposits or Current Account :-

These deposits can be drawn at any time, so bank is not ready to give interest on it.

3. Fixed Deposits :-

These deposits are fixed or particular period. Commercial banks also pay an interest on these accounts.

4. Saving Deposits :-

To create the habit of savings, bank accepts the savings deposits and pays an interest on these deposits. A depositor can draw a small amount at anytime.

5. Advancing Loans :-

Bank also advances the loan a merchants and charges the interest. It is the major source of its income. It also issued the loan for short term, medium term and for long term.

6. Over Draft Facility :-

It also provides the over draft facility to is clients. The credit which a bank wants to issue, it is deposited in the account of a debtor. In this regard some times limit is fixed by the bank for customers. Upto that particular limit one person can draw an amount up to that limit.

7. Discounting Of Bill :-

Commercial banks also discount the bills and facilities the business. For example one businessman purchases anything from other person and promises to pay after one month. The seller will write a bill to the buyer and there will be an order that after a one month the buyer will pay an amount to the seller. Buyer will sign on the bill. In other words buyer will accept the responsibility of that amount. If seller is in need of money, he will take it to the bank and will receive the money by discount the bills. The commercial bank also may re discount it from the central bank.

8. Cheap Medium Of Exchange :-

By issuing cheques and drafts bank provides cheap medium of exchange.

9. Transfer Of Money :-

The commercial bank is very helpful in transferring the money from one place to another, by issuing the drafts.

10. Custodian Of Precious Articles :-

Banks also provide locker for the safety of precious articles.

11. Agency Services :-

Bank also performs the duty of an agent. It collects and pays on the behalf of the customers.

12. Investment :-

Banks also make an investment in different companies and industries.

13. Creation Of Credit :-

It also creates and extends the volume of credit.

14. Facilities Foreign Trade :-

It also provides the finance to the foreign trade. Letters of credits are issued by the commercial banks for the foreign payments.

15. Purchase and Sale Of Securities :-

The commercial bank purchases and sells the securities, for himself and some times on the behalf of the customers.

16. Collection Of Dividends :-

Bank provides a very useful services in the collection of dividends and it charges a very nominal fee.

17. Executor Of the Standing Orders :-

The customer may order in writing to his bank to make a payment of regular installment to any one person or institution. The payment can be also stopped in writing.

18. Acting As A Trustee :-

If a client directs his bank to act as a trusty in the administration of a business, the bank performs this responsibility.


Isaac,  17 May 2013 at 19:18  

indeed, this was helpful. Thanks admin

Anonymous,  25 September 2013 at 09:55  

Can we get more info abt it

Rishabh gupta,  11 February 2014 at 18:12  

It helps me

Anonymous,  12 April 2014 at 01:21  

Thanks for the information

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