Commercial Bank Functions

A Commercial Bank is a financial institution that accepts deposits from the public and provides loans and other financial services to individuals, businesses, and the government with the primary objective of earning profit. Commercial banks are the backbone of a country’s financial system, facilitating the flow of money, promoting trade and industry, and supporting overall economic growth.
The functions of commercial banks can be broadly divided into Primary Functions, Secondary Functions, and Developmental or Other Functions.

1. Primary Functions

These are the core banking operations that form the foundation of a commercial bank’s business.

(a) Accepting Deposits

This is the most fundamental function of a commercial bank. Banks mobilise savings from individuals, firms, and institutions by offering different types of deposit accounts:

1. Savings Deposits:
   • Intended for individuals with limited transactions.
   • Offers moderate interest and encourages saving habits.
   • Withdrawals are restricted to a certain extent.
2. Current Deposits (Demand Deposits):
   • Mainly for businesses that require frequent transactions.
   • No interest is paid; in fact, service charges may apply.
   • Money can be withdrawn any time by cheque or electronically.
3. Fixed (Time) Deposits:
   • Money is deposited for a fixed term (e.g., 6 months, 1 year, 5 years).
   • Offers higher interest rates depending on tenure.
   • Premature withdrawal may attract penalties.
4. Recurring Deposits:
   • Allows regular deposits of fixed amounts over a period.
   • Suitable for salaried individuals to build savings systematically.

Through these deposits, banks accumulate funds that form the basis for their lending activities.

(b) Lending of Money

Lending is the most important source of income for commercial banks. The funds collected through deposits are used to provide loans and advances to individuals, businesses, and government entities.
Major types of lending include:

1. Loans:
   • A fixed amount lent for a specified period at an agreed rate of interest.
   • Borrowers repay either in lump sum or instalments.
2. Cash Credit:
   • Borrowers are allowed to withdraw funds up to a sanctioned limit.
   • Interest is charged only on the amount actually withdrawn.
3. Overdraft:
   • Facility given to current account holders to withdraw more than their balance.
   • Interest is charged on the overdrawn amount.
4. Discounting of Bills of Exchange:
   • Banks buy trade bills or promissory notes from traders at a discounted price, providing them immediate cash.
   • The bank collects the full amount on maturity from the drawee.

These credit facilities promote business growth, industrial development, and trade expansion.

2. Secondary Functions

In addition to accepting deposits and granting loans, commercial banks perform several secondary or supplementary functions that support trade, industry, and the financial system.

(a) Agency Functions

Commercial banks act as agents for their customers and perform various services on their behalf:

1. Collection of Cheques and Bills:
   • Banks collect cheques, drafts, dividends, and interest payments for customers.
2. Payment and Remittance Services:
   • Banks make payments such as rent, insurance premiums, and utility bills on customer instructions.
   • Facilitate fund transfers through NEFT, RTGS, IMPS, and demand drafts.
3. Purchase and Sale of Securities:
   • Banks buy and sell shares, debentures, and government securities on behalf of clients.
4. Acting as Trustees, Executors, or Attorneys:
   • Manage wills, estates, and trusts for individuals or institutions.
5. Collection of Income:
   • Banks collect income from securities or investments for customers.
6. Standing Instructions:
   • Execute regular payments such as loan instalments or mutual fund investments automatically.

(b) Utility or General Functions

Commercial banks provide various general or utility services that enhance customer convenience and facilitate economic activities:

1. Locker or Safe Deposit Facility:
   • Banks offer lockers for safekeeping of valuables like jewellery and documents.
2. Credit Instruments:
   • Issue instruments such as cheques, demand drafts, travellers’ cheques, and letters of credit to facilitate trade and travel.
3. Credit Creation:
   • Through the process of lending, banks create credit in the economy, increasing money supply.
4. Foreign Exchange Services:
   • Deal in buying and selling of foreign currencies and issue foreign exchange instruments for international trade.
5. Merchant Banking:
   • Provide advisory services for corporate mergers, acquisitions, and capital raising.
6. Electronic Banking (E-Banking):
   • Offer digital services such as internet banking, mobile banking, ATMs, and payment gateways.
7. Issuance of Bank Guarantees:
   • Provide guarantees on behalf of clients to ensure payment or performance in commercial transactions.

3. Developmental or Other Functions

Commercial banks also play an important role in supporting economic development, especially in developing countries like India.

(a) Promotion of Trade and Industry:

• Provide working capital and long-term loans for business expansion and industrial growth.
• Facilitate both domestic and international trade through trade finance instruments.

(b) Agricultural Finance:

• Extend credit to farmers for purchasing seeds, fertilisers, machinery, and irrigation equipment.
• Participate in government-sponsored rural development schemes.

(c) Financial Inclusion:

• Expand branch networks to rural and semi-urban areas.
• Offer low-cost banking services and promote saving habits among low-income groups.
• Support schemes like Jan Dhan Yojana and Self-Help Group (SHG)–Bank Linkage programmes.

(d) Implementation of Monetary Policy:

• Act as channels through which the Reserve Bank of India (RBI) implements monetary policy by influencing credit flow and liquidity.

(e) Investment and Development Activities:

• Invest in government securities, bonds, and infrastructure projects.
• Support start-ups and small enterprises under priority sector lending.

(f) Employment Generation:

• By financing businesses and industries, banks indirectly create employment opportunities in the economy.

4. Role of Commercial Banks in Economic Development

• Mobilisation of Savings: Convert idle savings into productive investments.
• Capital Formation: Provide finance for industrial and infrastructure development.
• Credit Availability: Ensure continuous credit flow to productive sectors.
• Facilitation of Trade: Simplify domestic and foreign trade through various credit and payment services.
• Balanced Regional Growth: Expand rural and semi-urban banking to reduce economic disparities.
• Encouragement of Entrepreneurship: Support small and medium enterprises through credit and advisory services.