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In: Economics

Write a summary on chapter “Commercial Bank and its function” in your own words ONLY, (500...

Write a summary on chapter “Commercial Bank and its function” in your own words ONLY, (500 to 600 words)

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Commercial banks are those financial institutions which accept deposits from the public repayable on demand and lend them for short period. They borrow money in the form of deposit at a low rate of interest and lend it at a high rate and thereby making profit for themselves. The commercial banks are chiefly concerned with the supply of short term credit requirement of trade and industry. Today commercial banks have come to be regarded as instruments of economic growth. They mobilize savings of the community and channel them into socially productive investment. The functions of commercial banks can be categorized into primary functions and secondary functions.

Primary functions.

Primary functions include accepting deposit, lending money and creation of money.

1. One of the most important primary functions of a commercial bank is accepting deposit. A commercial bank accepts deposit in three forms. They are current deposit or demand deposit, savings deposit, and fixed or time deposit.

A major portion of the deposit accepted by the commercial banks is in the form of current or demand deposit repayable on demand. This deposit can be opened with a minimum balance prescribed by the bank and any amount can be deposited in this account. This deposit can be withdrawn at any time by issuing cheque. Generally no interest is allowed on current account.

Saving deposits are maintained by the commercial banks to pool the small savings of the people. There is a limit on the maximum amount deposited and withdrawn from this account. The bank gives a nominal rate of interest on these deposits.

Time deposits are accepted for a fixed period of time. The bank gives higher interest on this deposit as the bank is able to invest such deposited amount in profitable investment.

The bank gives loans and advances to the entrepreneurs and businessmen. The usual forms of lending are loans and advances, overdraft and cash credit.

Creation of money or credit is another major function of commercial bank. When the bank gives a loan to a customer, the bank opens an account in the name of the customer and deposits the loan amount in his account. Thus every loan creates a deposit. Thus commercial bank creates money.

Secondary functions.

The secondary functions include acting as an agent to customers and providing general utility services to the customers.

A commercial bank collects cheques, drafts and bills on behalf of the customers. A commercial bank conduct stock exchange transactions like purchase and sale of securities for the customers. It acts as the executor and trustee for the customers. It pays insurance premium, rent and loan installment for the customers. It also renders income tax services for its customers. Issuing traveller’s cheque, giving locker facilities for keeping valuables of the customers and issuing credit and debit card for the convenience of the customers are other function of the commercial banks.


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