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Discuss the Functions of Commercial Bank

Introduction

A commercial bank is a financial institution that offers various financial services to individuals, businesses, and governments. It plays a vital role in the economy by facilitating savings, credit creation, and the smooth functioning of the financial market. The main objective of a commercial bank is to earn profits through lending activities and other financial services while also promoting economic stability and growth.

Commercial banks are the backbone of a country’s financial system and are regulated by the central bank to ensure financial discipline. These banks accept deposits from the public and provide loans, along with several other banking services.

Functions of Commercial Banks

The functions of a commercial bank can be broadly categorized into primary functions, secondary functions, and modern functions.

1. Primary Functions of Commercial Banks

(i) Accepting Deposits

One of the primary roles of a commercial bank is to accept deposits from individuals, businesses, and other entities. It offers different types of accounts to cater to varying needs:

Savings Account: Encourages savings with a nominal interest rate.
Current Account: Meant for businesses with frequent transactions; no interest is provided.
Fixed Deposit Account: Provides higher interest on money locked in for a fixed period.
Recurring Deposit Account: A scheme for saving a fixed amount regularly for a specific period.

Deposits serve as the foundation of a bank’s lending activities.

(ii) Providing Loans and Advances

The second primary function of a commercial bank is to provide loans and advances to individuals, businesses, and governments. The bank charges interest on these loans, which serves as its primary income source.

Term Loans: Offered for a fixed period (e.g., home loans, education loans).
Cash Credit: A short-term loan for businesses to meet working capital needs.
Overdraft: Allows customers to withdraw more than their account balance up to a certain limit.
Trade Credit: Loans given to businesses to facilitate trade activities.

By lending money, banks help in capital formation and economic development.

2. Secondary Functions of Commercial Banks

(i) Agency Functions

Commercial banks act as agents for their customers by performing several services on their behalf:

Fund Transfers: Transferring funds from one account to another (within the bank or across banks).
Collection of Cheques and Bills: Collecting payments on behalf of customers.
Payment of Utility Bills: Paying electricity, water, or telephone bills as instructed by customers.
Acting as Trustees: Holding securities or assets in trust for individuals or organizations.

These functions make financial transactions smoother for customers.

(ii) Utility Functions

Issuance of Bank Drafts and Pay Orders: Banks issue instruments like demand drafts for secure payments.
Locker Facility: Banks provide lockers to customers for the safe storage of valuable items.
Foreign Exchange Services: Facilitate the exchange of foreign currency for international trade and travel.
Providing Investment Services: Offer mutual funds, insurance, and other investment options to customers.

These services add convenience and enhance the bank’s role in the financial system.

3. Modern Functions of Commercial Banks

In addition to traditional services, commercial banks offer several modern banking facilities to cater to evolving customer needs.

(i) Internet and Mobile Banking

With advancements in technology, banks provide online and mobile banking services, allowing customers to perform transactions, pay bills, and check account balances from the comfort of their homes.

(ii) Credit and Debit Cards

Banks issue credit and debit cards that enable customers to make cashless payments and access funds 24/7 through ATMs.

(iii) Merchant Banking

Commercial banks also offer merchant banking services, such as helping companies raise capital through shares and debentures and providing advisory services for mergers and acquisitions.

(iv) ATM and POS Services

Banks install ATMs (Automated Teller Machines) and offer Point-of-Sale (POS) services to facilitate cash withdrawal and payments, promoting cashless transactions.

(v) Wealth Management Services

Commercial banks provide wealth management services to high-net-worth individuals, helping them manage and grow their investments effectively.

Role of Commercial Banks in Economic Development

Commercial banks are essential drivers of economic growth and stability:

Mobilization of Savings: By encouraging savings, banks generate funds that can be invested in productive activities.
Credit Creation: The loans provided by banks increase the purchasing power of businesses and individuals, boosting demand and production.
Promoting Trade and Industry: By offering trade finance and working capital loans, banks support businesses and industries.
Employment Generation: Banks themselves create jobs and indirectly support employment by funding businesses.
Financial Inclusion: With modern services like mobile banking, banks reach remote areas, ensuring financial services are accessible to all.

Conclusion

Commercial banks play a pivotal role in the economy by offering essential financial services. Their primary functions of accepting deposits and providing loans, combined with their secondary and modern services, contribute to the efficient functioning of the financial system. With evolving technology, commercial banks are adapting to new challenges by offering innovative solutions such as internet banking, credit cards, and wealth management services. In addition to earning profits, commercial banks significantly contribute to economic stability and growth by promoting savings, credit creation, trade, and employment.