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April 12, 2017

Functions of Commercial Banks

April 12, 2017


Commercial bank is a financial institution that provides various services to business community and general public. The functions performed by commercial banks are given below in detail.

1. Primary functions.
2. Secondary functions.
Functions of Commercial Banks

1. Primary Functions

The primary functions of commercial banks are:

a. Accepting deposits.
b. Granting loans.

a. Accepting Deposits
Commercial banks are mainly depend on public deposits. People deposit their money in banks for safety, convenience and earning interest.  Businessmen, manufacturers, and traders, deposit their money in the banks for safety and convenience of payment. While low income group deposit their money in small amounts for the purpose of earning interest or profit. Commercial banks receive deposits from their accountholders under the main categories of current, saving or fixed deposit accounts. The banks returned deposits to accountholders whenever they demand or after a certain period of time.

b. Granting Loans
Commercial banks advance loans to individuals, businesses, and Government bodies to earn interest. The banks charge higher interest than what it pays on deposits. This difference of interest charged and paid is the main source of the bank income.  Usually, commercial banks provide short term loans. They make loans in the form of overdraft, cash credit, loan, and discounting bill of exchange. The loans may be secured or unsecured. While providing loan bank always consider the financial position of the firm or applicant.

2. Secondary Functions

The secondary functions of commercial banks are:

a. Public utility services
b. Agency services.

a. Public Utility Services

The public utility services are following.

Transfer of Funds
Commercial banks transfer funds from one place or person to another. The funds are transferred through cheques, pay orders, drafts, telephonic or electronic transfer.

Dealing in Foreign Exchange
Commercial banks also deal in foreign exchange. They provide foreign currency to businessmen dealing in imports and exports.

Issue Letter of Credit
Bank issues letter of credit, usually for import trade. Letter of credit is a letter from a bank requesting exporter to send goods to the importer and guarantees payment. It also issues traveler’s cheque which is safe and easy way to protect money while traveling.

Underwriting of Shares
Underwriting is an agreement in which underwriter agrees to take offered shares and debentures from the principle company which will not be subscribed by the public. The bank sells the balanced shares and debentures to the public and receives commission from issuing company.

Locker Facility
Banks offer locker facility for the save custody of ornaments, documents, currency and other valuable items.

b. Agency Services

1. Banks collect cheques, bill of exchange, drafts, salary, pensions, premium, dividends, interest, rent and other collections on behalf of their clients.

2. Banks make payment of electricity, gas, water, phone, rent, insurance premium and such other periodic payments for their clients.

3. Banks buys and sells shares and debentures on the instructions of their clients.

4. The Bank acts as trustee and executor. After the death of its customer, bank takes care of his funds and executes the “Will”.

4. Commercial bank also provides legal and commercial assistance to its clients.  
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