Q. 2. What is commercial bank and explain its functions?
Ans: The bank which operates on commercial principles is called commercial bank. It is governed by Banking Regulation Act, 1949. The functions of commercial bank can be broadly divided into two groups:
(A) Primary functions and
(B) Secondary functions.
A) Primary Functions:
Primary functions are the original functions of bank. They are compulsory in nature. Every bank must perform these functions. They are further divided as accepting deposits and lending loans and advances.
1. Accepting Deposits:
Accepting deposits from public is the most important function of bank. Bank collects money from public by operating following accounts:
a) Saving deposit account: The account opened by an individual to save part of his income is called Saving deposit account. It is suitable to salary earner or wage earner. It is a kind of demand deposit as bank has to return the money whenever demanded by depositor. This account promotes saving habit among the people. There are restrictions on number of withdrawals from this account. The bank generally pays 4% interest on this account.
b) Current deposit account: The account opened by a businessman or trader to help business transactions is called as Current account. It is suitable to businessmen or traders. It is a kind of demand deposit as bank has to return money whenever demanded by depositor. This account promotes trade and commerce in the country. There are no restrictions on number of withdrawals from this account. In case of need the account holder can get overdraft facility from the bank. Bank generally does not pay any interest on this account.
c) Fixed deposit account: The account where fixed sum of money is deposited for a fixed period is called as Fixed deposit account. I t is suitable to a person who has some. surplus money. It is a kind of time deposit as bank has to return the money only after certain period. This account can be opened for one, two, five years and so on. Th9 account holder cannot withdraw money from this account before the expiry of this period. Bank pays higher rate of interest on this account depending upon the period of deposit. If an accountholder withdraws money before the expiry of fixed period, he has to sacrifice the interest. However, in case of need the depositor can take loan against the security of fixed deposit receipt.
d) Recurring deposit account: The account where fixed sum of money is deposited every month for a fixed period is called as recurring deposit account. It is suitable to a person who wants to purchase some costly article by saving every month. It is a kind of time deposit as bank has to return money only after certain period. The bank pays cumulative rate of interest on this account. The account holder cannot withdraw money before the expiry of the fixed period.
2. Lending Loans and Advances:
Second important function of bank is to lend loans and advances to individuals, businessmen and corporate sectors. The various ways of lending loans and advances by bank are as Following:
a) Overdraft facility: Overdraft is a facility where an account holder can withdraw more than his balance in the account. The extra amount Withdrawn is treated as loan. This facility is given to current deposit account holders only. Under this facility, a certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time. Interest is charged on actual amount withdrawn.
b) Cash Credit facility: Cash credit is a facility where the account holder can withdraw cash up to a certain limit. Under this facility, the amount of credit is granted against cash accrual of the account holder. Therefore, it is called as cash credit facility. This facility is given against personal security or security of goods. A separate cash credit account is maintained. Interest is charged on the amount withdrawn or credit given. This facility is given for a longer period and for a larger amount than overdraft facility.
c) Loans: Loan is an amount given by bank in lump sum and recovered in installments together with interest. Rate of interest charged on loan is relatively lower than rate of interest charged on overdraft and cash credit. Loans are granted to meet long term requirements of working capital and for expansion and diversification of business. Loans are generally secured against tangible asset of the company. The rate of interest depends upon the amount and period of loan.
d) Discounting of Bill: When goods are sold on credit, the buyer accepts the bill of exchange drawn by seller. The seller (drawer) can discount the bill with bank. At the time of discounting the bill, bank pays lesser amount to the drawer. On due date of bill, the bank collects full amount of bill from drawee (buyer). The difference between amount given to drawer and the amount collected from drawee is the profit of the bank.
B. Secondary Functions:
Commercial bank pro Vides certain non-banking services to businessmen and general public. They are provided to get more business from public. They are known as agency functions and general utility services. They are explained below:
1) Agency Functions:
The bank acts as an agent of its customers while performing these functions. Therefore, these functions of bank are known as agency functions. Some of them are explained below:
a) Transfer of funds: Commercial bank transfers funds (money) from one place to another place through cheques, drafts pay orders etc.
b) Collection: Commercial bank collects bills, cheques, dividends rent etc. on behalf of its customers.
c) Payments: Commercial bank also makes payment of insurance premium, rent, etc., as per the standing instructions of its customers.
d) Trustee: Commercial bank also acts as trustee of the funds.
e) Income tax consultant: Commercial bank acts as income tax consultant to its customers, gives valuable advice in income tax matters and prepares income tax returns for its customers.
f) Correspondent: Commercial bank acts as the correspondent of its customers and obtains passports, travelers tickets, etc. for its customers.
2) General Utility Services:
Commercial bank provides certain useful services to general public or society. Such services are called general utility services. Some of them are explained below:
a) Travelers cheques: When people travel within the nation or between the nations then traveler’s cheques are useful to carry funds and for making payments. Commercial bank issues such traveler’s cheques to make travel safe and convenient.
b) Issue of drafts and letter of credit: Commercial bank issues drafts for transferring money from one place to another place. It also issues letter of credits which are useful while buying goods from external countries.
c) Underwriting of shares: Commercial bank acts as underwriter for the companies issuing shares and debentures.
d) Safe lockers: Commercial bank provides safe lockers where people can keep their valuables like gold ornaments, share certificates, debentures and bonds and other important documents.
e) External exchange: Commercial bank deals in external exchange by accepting and collecting bills of exchange on behalf of its customers.
f) Status report: Commercial bank issues status report of its customers to show the credit worthiness of its customers. It helps customers to buy goods and services on credit.
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