Hello guys, how are you? I hope you’re doing well. Today we will discuss about one of the most important topics under the banking industry chapter, “FUNCTIONS OF COMMERCIAL BANKS”. Without further due, let’s start.
FUNCTIONS OF COMMERCIAL BANK
The functions of commercial banks are of 2 types:
1- PRIMARY FUNCTIONS
2- SECONDARY FUNCTIONS
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The primary functions of a commercial bank includes:
1- ACCEPTING DEPOSITS
2- GRANTING LOANS AND ADVANCES
The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amount with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest. If the rate of interest is higher, public gets motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
GRANTING LOANS AND ADVANCES
The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment.
A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loan i.e, loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.
An advance is a credit facility provided by the bank to the customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest in charged only on the amount withdrawn and not on the sanctioned amount.
TYPES OF ADVANCES
1. CASH CREDIT
Cash credit is an arrangement whereby the bank allows the borrower to draw amount upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash credit is granted as per terms and conditions agreed with the customers.
Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both.
3. Discounting of bills
Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonored on the due date, the bank can recover the amount from the customer.
In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions.
These are as follows:
- Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers.
- Providing customers with facilities of foreign exchange dealings.
- Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order and demand draft.
- Standing guarantee on behalf of it’s customers, for making payment for purchase of goods, machinery, vehicles,etc.
- Collecting and supplying business information.
- Providing reports on the credit worthiness of customers.
- Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc.
- Education loans to students at reasonable rate of interest for higher studies, especially for professional courses.
E-BANKING (ELECTRONIC BANKING)
With advancement in information and communication technology, banking services are also made available through computer. Now, in most of the branches you see computers being used to record banking transactions. Information about the balance in your deposit account can be known through computers. In most banks now a days human or manual teller counter is being replaced by the AUTOMATED TELLER MACHINE (ATM). Banking activity carried on through computers and other electronic means of communications is called “ELECTRONIC BANKING” or “e-banking”.
AUTOMATED TELLER MACHINE
Banks have now installed their own Automated Teller Machine (ATM) troughout the country at convenient locations. By using this, customers can deposit or withdraw money from their own account any time.
Banks are now providing Debit Cards to their customers having saving or current account in the banks. The customers can use this card for purchasing goods and services at different places in lieu of cash. The amount paid through debit card is automatically debited (deducted) from the customer’s account.
Credit cards are issued by the bank to persons who may or may not have an account in the bank. Just like debit cards, credit cards are used to make payments for purchase, so that the individual does not have to carry cash. Banks allow certain credit period to the credit card holder to make payment of the credit amount. Interest in charged if a cardholder is not able to pay back the credit extended to him within a stipulated period. This interest rate is generally quite high.
A smart card is a plastic made pocket size card that is embedded with an integrated circuit. Smart card are also known as chip cards or integrated circuit card (ICC). The circuit installed integrated circuit (IC Chip) on a smart card consist of a memory, a processor and communicates to the external world through the card surface. It stores data, help in identification and authentication, application processing, etc.
With the extensive use of computer and internet, banks have now started transactions over internet. The customers having an account in the bank can log into the bank’s website and access his bank account. He can make payments for bills, give instructions for money transfer, fixed deposits and collection of bills, etc.
In case of phone banking, a customer of the bank having an account can get information of his accounts, make banking transactions like, fixed deposits, money transfers, demand draft, collection and payments of bills etc. by using telephone.
As more and more people are now using mobile phones, phone banking is possible through mobile phones. In mobile phone a customer can receive and send messages (SMS) from and to the bank in addition to all the functions possible through phone banking.
So, that’s it for today friends. I hope you will go through the whole article to understand better about functions of commercial bank. In the next post, we will study about the types of bank deposit accounts.
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