Different types of banks / functions of commercial banks
Bank is an institution which accepts deposits from the public and in turn advances loans by creating credit. It is different from other financial institutions in that they cannot create credit though they may be accepting deposits and making advances.
Types of Banks:
Banks are of various types which are explained as under:
1. Commercial Banks: Commercial banks are those banks which perform all kinds of banking functions such as accepting deposits. advancing loans, credit creation, and agency functions. They are also called joint stock banks because they are organised in the same manner as joint stock companies.
They usually advance short-term loans to customers. Of late, they have started giving medium term and long-term loans also. In India 20 major commercial banks have been nationalised, whereas in developed countries they are run like joint stock companies in the private sector. Some of the commercial banks in India are Andhra Bank, Canara Bank, Indian Bank, Punjab National Bank, etc.
2. Exchange Banks: Exchange banks are those banks which deal in foreign exchange and specialise in financing foreign trade. They are also called foreign exchange banks. In India, these exchange banks have their head offices located outside India. The Chartered Bank and the Brindlays Bank have their head officers in England, whereas the American Express Bank, and Citi Bank have their head offices in the USA. These banks also render other services such as collecting and supplying information about the foreign customers, providing remittance facilities etc.
3. Industrial Banks: Industrial banks are those banks which provide medium term and long-term finance to industries for the purchase of land, machinery etc. They underwrite the debentures and shares of industries and also subscribe to them. In India, there are a number of financial institutions which perform the functions of industrial banks such as Industrial Development Bank of India, Industrial Finance. Corporation of India, Industrial Credit and Investment Corporation of India, etc. Each State in India has its own State Financial Corporation. These institutions are also known as Development Banks.
4. Agricultural Banks: Agricultural banks are those banks which provide credit to farmers for short-term, medium-term and long-term needs. In India, commercial banks, regional rural banks and Agricultural Cooperative Banks provide short-term loans to farmers. Land Development Bank give medium-term and long-term loans to farmers on the mortgage of their land. The National Bank for Agriculture and Rural Development (NABARD) provides refinance facilities to all types of banks which give loans to agriculturists.
5. Cooperative Banks: Cooperative banks are those financial institutions which are organised on the principle of cooperation. They provide short-term and medium-term loans to their members. In rural areas, there are agricultural cooperative banks which accept deposits and give loans to agriculturists, rural artisans, etc.
In urban areas, there are also cooperative banks which perform the functions of ordinary commercial banks but give loans to their members only. There is a State Cooperative Bank in every state of India with its branches at the district level known as the Central Cooperative Bank. The Central Cooperative Bank, in turn, has is branches both in urban and rural areas.
Every State Cooperative bank is an apex bank which provides credit facilities to the Central Cooperative Banks. It mobilises financial resources from the richer sections of the urban population by accepting deposits and creating credit like commercial banks and borrowing from the money market. It also gets funds from the Reserve Bank of India.
6. Savings Banks: Savings banks help promote small savings, and mobilise them. They have been very successful in Japan and Germany. In India, post offices act as savings bank.
7. Central Bank: The central bank is the apex bank in a country which controls its monetary and banking structure. It is owned by the government of the country and operates in national interest. It regulates and issues currency, performs banking and a agency services for the state, keeps cash reserves of commercial banks, keeps and manages international currency, acts as the lender of the last resort, acts as a clearing house, and controls of credit. The Reserve Bank of India is the Central bank in India.
Functions of Commercial Banks:
Commercial banks perform a variety of functions which can be divided as: (1) accepting deposits; (2) advancing loans; (3) Credit creation; (4) financing foreign trade; (5) agency services; and (6) miscellaneous services to customers. These functions are discussed as follows:
1. Accepting Deposits: This is the oldest function of a bank and the banker used to charge a commission for keeping the money in its custody when banking was developing as an institution. Nowadays a bank accepts three kinds of deposits from its customers. The first is the savings deposits on which the bank pays small interest to the depositors who are usually small savers.
The depositors are allowed to draw their money by cheques up to a limited amount during a week or year. Businessmen keep their deposits in current accounts. They can withdraw any amount standing to their credit in current deposits by cheques without notice. The bank does not pay interest on such accounts but instead charges a nominal sum for services rendered to its customers. Current accounts are known as demand deposits.
Deposits are also accepted by a bank in fixed or time deposits. Savers who do not need money for a stipulated period from 6 months to longer periods ranging up to 10 years or more are encouraged to keep it in fixed deposit accounts.
The bank pays a higher rate of interest on such deposits. The rate of interest increases with the length of the time period of the fixed deposit. But there is always the maximum limit of the interest rate which can be paid. For instance, the interest rate on fixed deposits over five years is 11 per cent in India.
2. Advancing Loans: One of primary functions of commercial banks is to advance loans to its customers. A bank lends a certain percentage of the cash lying in deposits on a higher interest rate than it pays on such deposits. This is how it earns profits and carries on its business. The bank advances loans in the following ways:
(a) Cash Credit: The bank advances loan to businessmen against certain specified securities. The amount of the loan is credited to the current account of the borrower. In cash of a new customer a loan account for the sum is opened. The borrower can withdraw money through cheques according to his requirements buy pays interest on the full amount.
(b) Call Loans: These are very short-term loans advanced to the bill brokers for not more than fifteen days. They are advance against first class bill or securities. Such loans can be recalled at a very short notice. In normal times they can also be renewed.
(c) Overdraft: A bank often permits a businessman to draw cheques for a sum greater than the balance lying m his Current account. This is done by providing the overdraft facility up to a specific amount to the businessman. But he is charged interest only on the amount by which his current account is actually overdrawn and not by the full amount of the overdraft sanctioned to him by the banks.
(d) Discounting Bills of Exchange: If a creditor holding a bill of exchange wants money immediately, the bank provides him the money by discounting the bill of exchange. It deposits the amount of the bill in the current account of the bill-holder after deducting its rate of interest for the period of the loan which is not more than 90 days. When the bill of exchange matures, the bank gets its payment from the banker of the debater who accepted the bill.
3. Credit Creation: Credit creation is one of the most important functions of the commercial banks. Like other financial institutions, they aim at earning profits. For this purpose, they accept deposits and advance loans by keeping small cash in reserve for day-to-day transactions. When a bank advances a loan, it opens and account in the name of the customer and does not pay him in cash but allows him to draw the money by cheque according to his needs. By granting a loan, the bank creates credit or deposit.
4. Financing Foreign Trade: A commercial bank finances foreign trade of its customers by accepting foreign bills of exchange and collecting them from foreign banks. It also transacts other foreign exchange business and buys and sells foreign currency.
5. Agency Services: A bank acts as an agent of its customers in collecting and paying cheques, bills of exchange, drafts, dividends, etc. It also buys and sells shares, securities, debentures, etc. for its customers. Further, it pays subscriptions, insurance premium, rent, electric and water bills, and other similar charges on behalf of its clients. It also acts as a trustee and executor of the property and will of its customers. Moreover, the bank acts as an income tax consultant to its clients. For some of these services, the bank charges a normal fee while it renders others free of charge.
6. Miscellaneous Services: Besides the above noted services. the commercial bank performs a number of other services. It acts as the custodian of the valuables of its customers by providing them lockers where they can keep their jewellery and valuable documents. It issues various forms of credit instruments, such as cheques, drafts, travellers cheques, etc. which facilitate transactions.
The bank also issues letter of credit and acts as a referee to its clients. It underwrites shares and debentures of companies and helps in the collection of funds from the public. Some commercial banks also publish journal which provide statistical information about the money market and business trends of the economy.
