Introduction
Banks operate multiple functionalities. In this way, we can not assume the functions of banks in a small sense but in a broad sense. In our lives, we often visit banks and use their various functions according to our needs. Commercial Banks operate their functions as a part of service to customers.
Banks cover multiple banking activities, which are parts of their financial services. That activity helps people manage their savings account, cash deposit process, cash withdrawal, transaction of money from one account to another, transaction from one bank to another, etc. All kinds of services are covered under the function of commercial banks. Banks provide that to the citizens of India. In this article, we will address the various functions of commercial banks in detail. So please stay tuned and read the details below;
What are Commercial banks?
Commercial banks are entities mainly involved in financial activities in terms of intermediaries. In other words, we can say that commercial banks are a financial institution that conducts the financial functions of money transactions for the citizens. These institutions perform various financial activities, like providing deposit facilities, withdrawal of money, and providing loans for investment and personal purposes., and such kinds of activities.
These commercial banks aim to provide financial services to the people and, in this way, make a profit from those services. Every commercial bank is involved in different financial activities and profits from them.
The Central Bank of India and the Reserve Bank of India govern all Commercial Banks. Suppose we talk about the functionality of Commercial banks, mainly involved in lending and borrowing money. Commercial banks can receive loans from the Reserve Bank of India at a lower interest rate. And utilize those funds to provide loans to the larger and small business sectors at higher interest rates and make a profit from them.
Commercial banks are a crucial part of the growing and developing banking sector and the economy of India. As per the suggested name of that bank, commercial banks are money-making Institutions. They provide all kinds of financial services with marginal charges and earn profits from them.
For example, they deal with finance and trade by giving short-term, high-interest-rate loans to the small and large-scale business sectors. They have large depositor customers who are paid much lower interest rates. In short, receiving lower-rate money as a deposit and lending sort-terms money with higher rates to the various business sectors are commercial banks’ main earned profits models. Commercial banks have multiple functions that are given below;
Functions of Commercial Banks
As discussed above, Commercial Banks deal with various functions as a part of their services. They are involved in different kinds of financial activities that can be divided into different parts. The basic functions of Commercial banks are divided into primary and secondary functions, which are described in detail below;
Primary Functions of Commercial Banks:
Accepting Deposits
The main funding source for Commercial banks is deposited customers provide in various terms. The depositor receives some prefixed interest rate on that deposit from the bank. That can be in the form of fixed, current, and saving deposits. Commercial banks accept all these deposits in terms of money, not assets.
Saving deposits
It is helpful for those customers who have a fixed income. Generally, it is preferred by an individual, a salaried person, and a small income. They can easily save their money by using savings deposits. Customers can credit their funds to a certain limit in these deposits.
Fix deposit
This type of deposit comes with a certain time for the lock-in period. It is known as a time deposit. Here, the customer can put their investment for a specified period.
Current deposits
In this type of deposit, the customer can deposit and withdraw their fund when required. The current account holder is sometimes offered an overdraft facility for a certain amount.
Providing Loans
Providing loan facilities is the primary function of every commercial bank. Like financial institutions, banks also loan to various business sectors and individuals. By delivering that loan, banks earn profits from the interest rates. Different types of loans can be offered to customers, like short-term and long-term loans. Commercial banks reserve some parts of deposits through this primary function, and the remaining funds are distributed as loans to their customers.
Credit Creation
When the bank grants a loan or credit to the customer, the loan amount is not given in cash to them. The banks open a customer’s account, and the loan amount is transferred to that account. Via this process, the bank can create credit and create funds.
Cash Credit
Commercial banks also provide advance loans against individuals’ and organizations’ securities, bonds, and inventories. This facility is known as cash credit. Banks provide more substantial amounts through these services compared to other credit services.
Short-term credits
Banks provide short-term loans to customers based on their credit reports and credit score. A personal loan is one of the best examples of this. This credit is usually offered without any security.
A cheque for pay funds
The bank provides a cheque facility to the customer for paying money. A cheque is a negotiable instrument a customer can use for making a payment. It is also a credit functionality in the banking sector.
Secondary functions of commercial banks:
Commercial banks have some Secondary functions, some of which are given below;
Providing a locker facility
Commercial banks provide a bank locker facility to the customers. Customers can safely store their valuables, securities, or any important documents. And can reduce the risk of theft and loss where they keep that at home. Here, the customer has to pay rent for the locker facility.
Dealing with foreign exchange
By providing this facility, commercial banks help their customers with deals with foreign exchange. Individuals or organizations can import or export goods from other countries. Commercial banks provide foreign exchange services to the customer, which helps them to make easy and safe fund transactions with other countries. These days, some specific banks have this license, and only these are eligible to deal in foreign exchange transactions.
The function of securities of exchange
It is a crucial function of commercial banks. They trade in bonds and securities. As discussed above, a Commercial bank is an entity of financial institutions. Here, Customers can directly buy or sell securities from financial institutions in an easy way.
Bill of exchange
Bill of exchange is one of the main functions of a commercial bank. Through this function, banks provide a facility to the business entity to discount business bills. This facility is a good way for a commercial bank to earn more money, which enables it to create a stable cash flow. Paying money from bills is safe because it can be changed.
Bank as an agent
Commercial banks maintain the various functions required to provide financial services to their customers. In this way, they play the role of an agent. For example, they act as administrative, trustees, and executors of a customer’s estate. Many services can be included in these activities.
- The commercial bank provides help to their customers related to tax matters, such as helping with tax returns, refunds, etc.
- Provides a direct platform for customers to pay their insurance premiums, loan EMI, etc.
- Commercial bank provides facilities to their customers to make transactions digitally, cheques, bills, etc.
Other Functions of Commercial Banks
Providing finance to Agriculture Sectors
Commercial banks provide finance to the agriculture sector in different modes. They provide loans for agricultural commodities. India is a developing country, and most agriculturists live in rural areas. To reach out to them, financial institution opens their branches in rural areas for helping purposes and arrange agriculture-related loans. In these ways, commercial banks directly provide finance facilities to agriculturists for research and development of products, land development and implementation of new farming technologies, etc.
Providing finance for consumer goods
This function of commercial banks plays a significant role in improving the living standard of people in a developing country. They provide consumer credit to buy goods, either movable or immovable. In this way, buyers can purchase consumer goods such as home appliances, vehicles, etc.
Providing finance for entrepreneurs
Entrepreneurs play a significant role in developing countries. Suppose we talk about India, which is a fast-growing country. Commercial banks help entrepreneurs by providing loan facilities. As a result, they help generate more employment and create a healthy and wealthy atmosphere for the nation.
Types of banks
Many types of financial institutions perform the functions of commercial banks. Commercial banks can be categorized into three types, which are given below;
Public sector banks
Public sector banks are types of financial institutions owned by a government body. These banks include the State Bank of India, Dena Bank, Bank of Baroda, etc. The crucial part of these institutions is that the government acquires a majority share of these organizations.
Private Sector Banks
Private sector banks are such types of financial institutions that are registered as companies. The majority of these banks are owned by individuals and private business sectors. These banks have limited liabilities towards financial functions.
Foreign Banks
Foreign banks are financial institutions that operate financial services and trade with other countries and overseas. These banks own their headquarters in their own countries. They acquire branches in other countries. Let’s see the examples of these banks,- Hong Kong and Shanghai Corporation (HSBC), Standard Chartered Bank, City Bank, etc.
Importance of commercial banks
Commercial banks play a crucial part in the growth of a nation’s economy. Commercial banks function not only to do profitable business for them but also to help in the speedy development of the nation’s economy. Commercial banks provide different banking services by operating their banks’ various functions.
Financial institutions provide financial facilities and banking services, which are basic needs for every business. As a result, business sectors increase production and employment, which helps to increase the economy. More so, commercial banks are regulated by the Central and Reserve Banks of India, and the government holds the majority share of these financial institutions. It helps consumers to build trust. They deposit funds without any hesitation. By using various financial services and deposit schemes, consumers can create savings.
These financial institutions put some of the fund reserves of their deposits. The remaining funds are distributed to other business sectors and individuals at a higher interest rate and earn profits.
By using financial and non-financial services, individuals and business sectors can easily make transactions digitally and cashless, reducing financial risks. These financial institutions help to develop markets that positively impact the country’s development. I hope this article will help to understand the functions of commercial banks.
