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Commercial Banks

Meaning: A Banking company is one which transacts the business of banking which means the accepting for the purpose of lending all investments, of deposits of money from the public, repayable on demand or otherwise and withdrawble by cheque, draft or otherwise.

The discussion in the preceding pages indicate that commercial banks provide useful services in all walks of life. They function as a catalytic agent for bringing about economic, industrial and agricultural growth and prosperity of the country. The banking can therefore be conceived as a ‘a sector of economy on the one hand and as a lubricant for the whole economy on the other’.


The functions of the commercial banks are now wide and diverse. They have assumed great significance in the role of an agent for economic renaissance and social transformation because of their vital role in mobilization of resources well as their deployment for meeting the said objectives. They are no longer considered as institutions only for affluent sections of the population. They have acquired broad base and have emerged as effective catalytic agents of social economic change.

In order to understand better the functions of commercial banks, it will be better to study them under the following two categories.

  1. Primary Functions of commercial Banks.
  2. Secondary Functions of commercial Banks.

Primary Functions of Commercial Banks

The primary functions of commercial banks are: (i) Accepting of deposits, and (ii) Lending of money.

Accepting of Deposits: Deposits are an important source of a banks funds. They can broadly be classified into three categories.

  1. Savings Deposits: These deposits are of small amounts and are accepted by banks to encourage persons of small means to make savings; frequent withdrawals are not allowed.
  2. Fixed Deposits: These deposits are made with the banks for fixed periods specified in advance. They are also known as term deposits.
  3. Current Deposits: These deposits are repayable on demand. The banks undertake the obligation of paying all cheques drawn against these deposits by the customers till they have adequate funds of the customer. The banks usually do not pay any interest in respect of such deposits. These deposits accounts are usually kept by large business houses.

Lending of Money: A major portion of the deposits received by a bank is lent by it. This is also the major source of a bank’s income. However, lending money is not without risk and, therefore, a banker must take proper precautions in this process. The lending may be in any of the following forms:

  1. Loan: It is a kind of advance made with or without security. It is given for a fixed period at an agreed rate of interest. The amount of loan is usually credited to the credit of the customer’s account who may withdraw from there as per his requirements. The loan may be secured or unsecured.
  2. Cash Credit: It is an arrangement by which a banker allows his customer to borrow money upto a certain limit against security of goods.
  3. Overdraft: It is an arrangement whereby a customer has been allowed temporarily to overdraw his current account. It is without any security.
  4. Discounting and Purchasing of Bills: Time bills are discounted while demand bills are purchased by the banks. In both the cases the banks credit the account of their customers by the amount of bills less any discount or commission charged for such discounting or purchasing of the bills.

Thus, commercial banks render a unique service by tapping savings from a wide spectrum of people and lending to those who really need and use them for various productive purposes. They play an active and not a passive role in the economic development of the country.

Secondary Functions of Commercial Banks

These functions can be classified into the following two categories:

(a)Agency Service: In many cases the commercial banks act as the agents of their customers.

As agents they provide the following services:

  1. Collection of drafts, bills, cheques, dividend etc. on behalf of customers.
  2. Execution of standing orders of the customers viz-payment of subscription, rent, bills, promissory notes, insurance premium etc.
  3. Conducting stock exchange transactions i.e., purchasing and selling of securities for the customers.
  4. Acting as a correspondent on representative of customers, other banks and financial corporations.
  5. Functioning as an executor, trustee or administrator of an estate of a customer.
  6. Preparation of income tax return, claiming of tax refunds and checking of assessments on behalf of the customers.

(b)General Utility Services: Commercial banks provide a variety of general utility services viz. issue of letters of credit, travelers cheques, accept valuables for safe custody, acting as a referee as to the respectability and financial standing of the customers, providing specialized advisory services to customer, issue of credit cards, providing of information through regular bulletins about general trade and economic conditions both inside and outside the country etc.

With the opening up of the insurance sectors, banks can now take up insurance business. In the discussion paper issued by the RBI in 1999, it was stated that insurance comes within the scope of universal banking. The term universal banking refers to the combination of commercial banking and investment banking. In other words universal banks refer to those banks that offer a wide range of financial services beyond commercial banking and investment banking such as Insurance. However, as per the guidelines issued by the Reserve Bank of India, banks are not allowed to conduct insurance business departmentally. They cannot also set up separately subsidiary companies for this purpose. However, they can set up joint venture companies for insurance as per government or insurance regulatory and development authority guidelines and with prior permission of Reserve Bank of India.

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