Question

Explain the primary functions of commercial bank.

Answer 1

Commercial Bank performs a variety of functions to satisfy the needs of the various sectors of the economy.

The primary functions of commercial banks are as follows:

1. Accepting Deposits

Commercial banks accept deposits from people, businesses, and other entities in the form of:

• Savings deposits – The commercial bank accepts small deposits, from households or persons, in order to encourage savings in the economy.
• Time deposits – The bank accepts deposits for a fixed time and carries a higher rate of interest as compared to savings deposits.
• Current deposits – These accounts do not offer any interest. Further, most current accounts offer overdrafts up to a limit.

2. Lending of Funds

Another important activity is lending funds to customers in the form of loans and advances, cash credit, overdraft and discounting of bills etc.

Loans are advances that a bank extends to his customers with or without security for a specified time and at an agreed rate of interest.

Under the cash credit facility, the bank offers its customers a facility to borrow cash up to a certain limit against the security of goods. Further, an overdraft is an arrangement that a bank offers to customers wherein a temporary facility is offered to overdraw from the current account without any security.