Commercial Bank : Primary, Secondary and Modern Functions of Commercial Bank

1) Commercial Bank - 

      
       A bank is an institution, usually incorporated, whose business is to receive money on deposit, cash, cheques or drafts, discount commercial paper, make loans and issue promissory notes payable to bearer known as banknotes.
       A commercial bank is a monetary institution which serves the interests of its depositors by providing security to the deposits of money and on the other hand, makes profits by investing such deposits in the protective measures by extending loans. Commercial banks are the most common and important type of banking institutions.
 

2) Classification of Commercial Banks - 

Commercial Bank may be classified into - (i) Scheduled Commercial Banks and Non-Scheduled Commercial Banks (ii) Licensed Commercial Bank and Non-Licensed Commercial Bank  (iii) Public Sector Banks and Private Sector Banks (iv) Indian Banks and Foreign Banks.


See in Detail.....Classification of Commercial Banks

3) Functions of Commercial Bank 

Functions of Commercial Bank can be categorized into Primary Functions, Secondary Function and Modern Functions.

i) Primary Functions of Commercial Bank 

       Primary functions of the commercial bank consist of accepting deposits(receive deposits), lending money (making Loans and Advances) and investment of funds.

  A) Accepting Deposits-

       The primary function of commercial banks is to accept deposits from the public. Banks maintain deposit account for their customers and convert deposit money into cash and vice versa, at the discretion of the latter. Banks accept money from the public by receiving deposits by way of different accounts.

            (1) Saving Bank Account

                     Savings bank account is useful for the person who deposits money by small savings. The customer is at liberty to deposit money in this account at a number of times on the same day. In case of savings deposit, there are certain restrictions on the number of withdrawals or on the amount that can be withdrawn per week. Generally, the Bank account holder can withdraw money twice a week from such account. A minimum balance of Rs 100 should be maintained and if cheque book facility is allowed,  the minimum balance should be Rs 1000 on this saving deposit. The rate of interest in such account is comparatively lower than the other accounts.             

            (2) Current Account 

                     A current account is running account which is continuously in Operation. In this account money or funds can be deposited many times on the same day. Similarly, withdrawal can be made by the account holder many times on the same day. Usually, a bank does not allow any interest on this kind of deposit, because Bank cannot utilize this short-term deposits.  This type of deposit accounts  is generally opened by Business people for their convenience


            (3) Recurring Deposit Account

                    Recurring deposits is one form of saving deposit, in this type of deposit, at the end of every week or month, a fixed Amount deposited regularly. the amount can be withdrawn only after specified period. this deposit works on the Maxim " little drops of water make a big ocean".The rate of interest on such account stands favorably as compared to the rate of interest on the savings bank account because such account partly resembles the fixed deposit account.

            (4) Fixed or Time Deposit Account

                       Fixed or time deposit account, the money is deposited for a fixed period and cannot be withdrawn before the expiry of that specified period. The rate of interest on such deposit depends upon the length of time of deposit. This account is also called the time deposit because the money is repayable on the expiry of the fixed period of time only. The terms and condition of such accounts are regulated by Reserve Bank of India.

  B) Lending Money -

          Lending money is one of the important functions of a bank. This is the lending or advancing of money either upon or without security.  Bank accepts deposits from those persons who have surplus money and grant loan and advance to those who need. Charge comparatively higher rate of interest on the amount advanced as a loan. These loans are advanced by the bank in the following ways.

      (1) Loans:

              In this facility, certain amount in the form of an advice is given for a certain period. This sanctioned amount of Advanced is deposited the bank in the current account of the person concerned. The interest is charged on the whole amount of the loan. It is irrelevant whether the whole amount was withdrawn by the debtor or not. The loan may be refunded as a whole in one time or installments. The property is to be Pledged or mortgaged for such Loan.

      (2) Cash Credit:

               The Businessman generally need regular loans, and therefore it may be inconvenient for them to make fresh agreement every time. Thus, they make an agreement in this regard for an anticipated certain amount required in the year. Such amount is not withdrawn as a whole in one time but the customer withdrawals only such amount whichever is required at a time. The interest is charged only on the amount withdrawn. The cash credit is generally allowed on the securities only


      (3) Overdraft:

           Overdraft is an arrangement between a banker and his customer by which the
customer is allowed to withdraw over and above the credit balance in the current account up
to an agreed limit. The interest is charged only for the amount sanctioned. This is a temporary
financial assistance. It is given either on personal security or on the security of assets.The main difference between the overdraft and cash credit is that the facility of overdraft may be available to the current account holder only while such cash credit may be given to any person.


      (4) Discounting of Bills: 

                Bank grants advance to their customers by discounting bills of
exchange or pronote ( Promissory Note). When the bank gives advance on the bills before the date of maturity, then the interest till the date of maturity from the date of sanctioning the advance is deducted. This deduction is called discounting.

  C) Investments of Funds - 

           While making an investment a bank is required to observe three principles, namely liquidity,
profitability and safety. A bank invests its funds in government securities issued by central government as well as state government. It also invests in other approved securities like the units of UTI, shares of GIC and LIC, securities of State Electricity Board etc.

ii) Secondary Functions of Commercial Bank 

  a) Agency Functions 

See in detail......Agency Functions of Commercial Bank

   b) General utility Services - 

           (1)  It issues letter of credit, Traveller's cheques, gift cheques.

          (2) It provides Tax Consultancy services. It gives advice on income tax and other Personal taxes

          (3) It facilities easy and quick transfer of fund from one place to another, place by means of cheques, drafts MT, TT etc.

          (4) It deals with foreign exchange transactions thereby helping the importers and exporters

          (5) Bank makes arrangements for transport, insurance and warehousing of goods

          (6) It provides consultancy services on technical, financial, managerial and economic aspects for the benefit of micro and small enterpriserise

iii) Modern Functions of Commercial Bank 

      (1) It issues Credit Cards, Debit Cards, Smart Cards etc. 

      (2) Changing Cash for Bank deposit and Bank deposits for cash

      (3) Providing 24 hours facility of payment through ATM's

      (4) Transferring Bank Deposit between individual or companies

      (5)  Exchanging deposits for bills of exchange government Bond, secure and unsecured promises of trade and industrial units

      (6) Underwriting capital issues
See also - 

What are Different types of a Cheque | Banking Law