Functions of Commercial Banks

The functions of commercial banks are ever increasing with changing demands and emerging technology. Commercial banking has a vast scope and increasing function day by day.  Functions of commercial banks are discussed ahead.

Receiving Deposits

Deposits are the basis of banking business, the bank collect money from the public and use this money to invest and make profit. The lending power of a bank depends on its capital structure and value of deposits.  Commercial bank accepts money from individuals and business concerns and act as a treasury. The depositors can use their money by writing checks or adopting different withdrawal methods. There are different account categories, offering various facilities. Some account types are:   

Current Account or Demand Deposits:  Current account allows customer to withdraw and deposit any amount without any prior notice. Normally interest income cannot be earned on this type of account. This type is most suitable for business and the organizations with bulk transactions.  

Saving Account: Commercial banks offer service of saving accounts. People keep their savings in these accounts to earn profit on their money. Banks offer interest on saving accounts.  There are some limitations on theses accounts and limited transitions are allowed for a specific period. Normally fixed income class used these accounts to have some additional side income on their savings.  [sky]

Fixed Deposit: Deposited amount cannot be withdrawn before the maturity date. Fixed deposits have a higher interest rate and a longer maturity time period usually three to ten years. Interest rate is high if compared with saving accounts.

Advancing Loans

The other face of the banking business is advancing loan form the deposits. The banks provide short term loans. The rates of interest depend on maturity time and amount of loan. The people can borrow against securities like goods, shares, gold, ornaments and other assets. The banks provide funds like cash finance, running finance, demand finance terms finance, and discounting and purchase of bills of exchange.    

Bank earns a higher interest rate by lending its deposits and pay a lower rate to the depositor, the difference is bank’s profit.  Bank lends its money in following ways:  

Offer Loans: There are three types of loans offered by commercial banks.  

Short Term Loans: Loans less then one year maturity are called short term loans. Bank overdraft is an example of short term loan.  

Medium Term Loans: The loans issued for the period of one year to five years are called medium term loans.  

Long Term Loans: The loans have more the five year maturity, are called long term loans.   

Transfer of Money

The bank can transfer money from one place to another by mean of bank drafts, collection of checks, telephonic transfer, standing offers and direct debit. The bank can also purchase bills of exchange to help others for collection of money from their debtors at different places.  

Issue medium of Exchange

The banks issue checks and banks drafts which are used to settle the claims. This medium of exchange is used like currency notes in the business dealing.  

Dealer in Securities 

The banker purchases and sells securities like shares, debentures and bonds according to the needs of the customers.  

Acceptance of bills of Exchange

As an agent the banker accepts the bills of exchange on behalf of the customers.  

Commercial banks also offer many other services like evening banking, collection of income, collection of expenses, foreign exchange, lockers and status report etc.