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Banking | Function Of Commercial Bank



Generally speaking a bank is an institution which deals with money basically and may be even properly on the contrary. The bank be draws the surplus money from the people i.e. excess of income aver consumption, which is a from of loan to the bank and is return pays interest on it for the loans of those who have saved or deposited their money.

Upon accumulating all this money, the bank then gives out loan to those people who need it particularly for productive purposes; and the bank in return charges interest on the loan upon return to the bank. Thus, the difference between these two interest (i.e. interest on deposits of the people and interest on loans given out by the bank) is the bank's earning.This is how the bank functions as a business organization.

Function Of Commercial Bank

A commercial bank performs two types of function :

Main Functions:

(i) Accepting the deposits (ii) Advancing of loans

Subsidiary Functions:

(i) Agency functions (ii) General functions (iii) Development functions

Main Functions

Accepting Deposits

The most important and traditional function of commercial banks is to accept deposits from public. Such deposits are three types:

  • Current Deposits,
  • Saving Deposits,
  • Fixed Deposits.

The current deposit are concerned with the business organizations and enterprises which have to make daily and routine payments. The banks do not play interest against such deposits. While the public deposits the saving deposits in the bank. Against such deposits the banks pay interest. There are the fixed deposits which are the deposited for the period of 5 years to 19 years. The banks pay heavy interest against such deposits.

Advancing of loans

As commercial banks are aimed at earning profits. Therefore, thy advance the amounts which are at their disposal. The banks advance loans or makes aver-drafting. They can also purchase shares, govt. bonds and securities. When the banks provide loans directly to the borrowers they ask for mortgages. The banks are often cautious regarding advancing loans.

Subsidiary Function

Agency Function

The bank make available the following services to the customers :

  • They make arrangements regarding payments and receipts of their customers. As they become source of payments and receipts of salaries, pensions, profits and insurance premium.
  • They covert the amounts of their customer through cheques and drafts.
  • They act upon the wills of their customer.
  • The business organizations use the banks as their addresses

General Functions

  • The people keep their documents in the lockers provided by the banks.
  • The commercial banks become helpful in foreign trade. They convert the domestic currency in to foreign currency and vice versa.
  • They become helpful in converting the remittance, daft's and traveler's cheqes.
  • They sell and purchase govt. securities & bonds
  • They have popularized the use of cheqs drafts and bills of exchange-which have saved the use of currency.

Development Functions

The commercial banks play an important role in the economic development of a country. As the commercial banks are called developmental store of finance. The financial resources with the banks if used effectively and properly can become helpful for promoting economic development. the industrial development can only be possible if entrepreneurs are provided with the funds can be made possible through banks.The banks divert their resources to agricultural sector, industry, mining transportation and communication.

In this way all the sectors of the economic will develop leading to a balanced growth of the economy. Moreover, when the commercial banks create credit it will have an effect on domestic princes,incomes employment and capital accumulations.The commercial banks are the important component of money market.therefore,when commercial banks grow the money market will also grow.

Kinds Of Banks.

  • Saving Banking.
  • Commercial banks.
  • Agricultural Banks.
  • Industrial Banks.
  • Mortgage Bank.
  • Exchange Bank.
  • Cooperative Banks.
  • Central Bank.

Central Bank.

Basically central bank is an institution which is owned by the govt.one of its main function is to maintain favorable monetary conditions with in the economy. The central bank also supervises the activities of the commercial banks and brings about a certain discipline in their working structure. Furthermore, the central bank regulates a policy to provide financial assistance for commercial banks.

As we already know there is only one central bank in every country and this bank acts as a banker to the govt. it is the symbol of economic and finance stability of the country. the central bank does not deal with the people in general directly and it is not a profit making institution.

Function Issuing Agency

Before the evolution of a central bank there was a big problem that banks issued their own notes. Thus in order to get rid of the problem of instability due to non-authentic notes the central bank was evolved. The central bank is specifically authorized by the govt. to issue currency and have monopoly over it as being the only note issuing agency. The advantages which arose due to its existence of a central bank are;

  • Homogeneity of notes
  • General acceptability due to legal cover
  • Controller of credit money and regulating money supply for economic and financial stability of the country.

Banker's Bank

The central bank acts as a banker to all the commercial banks. The central bank performs functions for the commercial banks. i.e. The commercial bankers maintain a certain fixed percentage of their total demand and time deposits with the central bank, making them schedule banks which allows them to draw loans from the central bank particularly during period of difficulties.

Banker To the State

The central bank performs various duties to government i.e.

  • Government deposits are keep it with the central bank. No interest is obtained as the central bank is a non-profit making institution.It merely secures the government funds.
  • All govt. taxes are paid to the central bank which has different accounts for different departments.
  • Salaries of govt. employees are from the central bank on the order of the govt, and it does not obtain any reward for such a duty.
  • Gold and other foreign exchange reserves of the govt, are kept in the Central bank
  • The central bank acts as an adviser in financed matters and helps out in budget making.
  • The current trend in the money market and capital market is made known to the government by the Central bank
  • Another main function of the C.B. to the govt. is to buy and sell govt. securities in order to repay the govt. loans or alternatively for the govt. to obtains loans from the people.
  • The central bank also provides short and long term loans to govt.on treasury bills and during economic crisis.

Custodian Of Metallic Money And Foreign Exchange

In some countries metallic money is issued by the ministry of finance, but the account is maintained by the central bank. Similarly the account of gold and foreign exchange reserves is also maintained by the Central bank.

Control Over Credit

Among all the functions of the C.B. this can be considered as the most important as the purpose of controlling credit money is so important that results in..

  • Achieving the price stability.
  • Stabilizing internal and external value of currency.
  • To promote an equilibrium between savings and investments at the high possible level.
  • Coordination of the activities in the money markets
  • A promotion in the rate of economic growth and development.
  • Above are the aims and objectives of the C.B in controlling credit money in the economic such a function in the economy is known as the monetary policy of the bank.

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