Functions of Commercial Banks in India

Functions of Commercial Bank

Commercial banks perform two types of functions-(i) Primary functions, and (2) Secondary functions. Primary functions consist of accepting deposits and lending money. Secondary functions consist of agency services and general utility services.

(1) Primary Functions

1. Accepting Deposits: Accepting deposits is the main function of commercial banks. A commercial bank accepts deposits from people who have surplus money. People deposit their money in banks for the sake of safety and for earning interest. Banks offer the following types of deposit schemes to attract savings from the people:

(a) Fixed deposit account: A fixed deposit is repayable after the expiry of the specified period. The period may vary from six months to five years. Generally, a large amount is deposited for a long period. Deposits for more than one year are known as ‘term deposits; longer is the period of deposit, higher is the rate of interest. The bank issues a receipt to the depositor acknowledging the amount received. Fixed Deposit Receipt (FDR) specifies the amount deposited, the period of deposit, the rate of interest and the full name and address of the depositor. It is signed by the branch manager. The depositor can claim from the bank the amount by submitting the receipt on the due date. In case he needs money before the due date, he can borrow from the bank against the deposit. If he wants his money back before maturity, the rate of interest is reduced.

(b) Savings deposit account: The aim of a savings account is to mobilise the small savings of the public. A person can open a savings, deposit account by depositing a small sum of money. He can withdraw, money from his account and make additional deposits at will. However, there may be some restrictions on the number of withdrawals and the amount to be withdrawn in a given period. A cheque facility is available. A pass book is given to the depositor. All the amounts deposited and withdrawn by the depositor are recorded in this book. The rate of interest on savings deposits is lower than that on fixed deposits.

(c) Recurring deposit account: The aim of recurring or cumulative deposits is to encourage regular savings by the people. A depositor can deposit a fixed amount, say Rs 100 every month for a fixed period. The amount together with interest is repaid on maturity. A pass book consisting the deposits made is issued to the depositor. The rate of interest on recurring deposits is higher than that on savings deposits.

(d) Current deposit account: Current deposit accounts are opened by businessmen. The account-holder can deposit and withdraw money whenever desired. As the deposit is repayable on demand, current deposits are also known as demand deposits. Withdrawals are always made by cheques. Overdraft facility is available. No interest is paid on current accounts. Rather a certain incidental charge is made for the services rendered by the bank. A statement of account is sent to the account holder every week/fortnight/month showing the transactions made during the period. Thus, a current account is a running account between the bank and the account-holder.

2. Lending Money: With the help of money collected through various types of deposits, commercial banks lend finance to businessmen, farmers, artisans and others. The main ways of lending money are as follows:

(a) Overdraft: Overdraft is the most common and convenient method of bank lending. Under this arrangement, a customer having a current account is allowed to withdraw more than he has deposited. He can overdraw upto a specified limit and for an agreed period. Interest is charged on the amount actually overdrawn during the period. Overdraft facility is generally offered to businessmen against the security of some assets or on the personal security of the customer. Bank overdraft is a temporary arrangement.

(b) Cash credit: Under this arrangement, the bank advances cash loan up to a specified limit against current assets and other securities. The bank opens an account in the name of the borrower and allows him to withdraw the borrowed money from time to time subject to the sanctioned limit. Interest is charged on the amount actually withdrawn and not on the sanctioned amount. This arrangement is very useful to businessmen. The borrower can withdraw money in instalments as and when necessary. He can also deposit back any surplus amount from time to time.

(c) Loans and advances: A loan is a lump-sum advance repayable on the expiry of the specified period. It may be secured or unsecured. Generally, a loan is granted against the security of assets or the personal guarantee of the borrower. Interest is charged on the whole amount sanctioned, irrespective of the amount actually utilised.

The bank may allow the borrower to repay the loan in a lump-sum or in instalments.

(d) Discounting of bills of exchange: Commercial banks also extend financial assistance by discounting bills of exchange. Under this system, a customer can get the amount of a bill receivable from the bank before the date of maturity. The bank pays the amount of the bill after deducting the usual discount (interest) charges. On the date of maturity the bank presents the bill to the acceptor liable to pay the bill and gets the amount. In case the bill so discounted is dishonoured, the bank claims the full amount from the customer together with the incidental expenses incurred in this connection.

(II) Secondary Functions

The secondary functions of commercial banks are as under:

1. Agency Functions: As an agent of its customers, a commercial bank provides the following services:

(a) Collecting bills of exchange, promissory notes and cheques.

(b) Collecting dividends, interest, rent, etc.

(d) Payment of interest, insurance premium, taxes, subscriptions, etc.

(e) Transferring funds from one branch to another and from one place to another.

(f) Acting as a trustee or executor.

(g) Acting as an agent or representative while dealing with other banks and financial institutions.

A commercial bank performs the above functions on behalf of and as per the instructions of its customers.

2. General Utility Services: Commercial banks also perform the following miscellaneous functions:

(a) Providing lockers for the safe custody of jewellery, valuable documents and other valuables of customers