FUNCTIONS OF

COMMERCIAL BANKS

Sagar M VB.COM S317/01/2014

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WHAT IS A COMMERCIAL BANK?

Commercial banks are banks which accepts money deposits from the public and lend them mainly to commerce for short periods

They are also called ‘DEPOSIT BANKS’

Commercial banks are the oldest banking institutions in the organized sector and are found all over the world.

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FUCNTIONS :

The functions of a commercial bank can be mainly classified under two main headings:-A.Primary functions

i. Accepting Depositii. Lending Moneyiii. Credit Creation

B.Secondary functionsi. Agency Servicesii. General Utility Services

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PRIMARY FUNCTIONS:

PRIMARY FUNCTIONS

CREDIT CREATION

ACCEPTING DEPOSTIS LENDING MONEY

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1. ACCEPTING DEPOSTIS

One of the most important primary function of a commercial bank is accepting deposits. The following are the types of deposits accepted by the bank:

I. Fixed depositsII. Current depositsIII.Recurring depositsIV.Savings depositsV. Endowment depositsVI.Miscellaneous deposits

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1.Fixed Depositsi. Deposits with bank for a fixed period specified at time of making deposits.ii. Also called as Time Depositiii. Fixed Deposit are repayable on the expiry of specified of period.iv. Cheque system not allowed against Fixed Depositsv. Banker issues FDR (Fixed Deposit Receipt) at time of opening of Fixed Deposit Account

2.Current Depositsi. It is an account that can be operated any number of times in a working day.ii. Account is opened with a minimum balance prescribed by the bankiii. No restriction on withdrawaliv. Overdraft Facility Available

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3.Recurring Depositi. Intends to increase the habit of saving on a regular basisii. Higher rate of interest is providediii. Depositor has to deposit the required sum of money chosen by him on his account every month.

4.Savings Depositi. meant for people of middle and lower classes to meet there future needs.ii. Restrictions imposed on opening and operation of savings deposits.iii. Banks restricts amount that can be deposited and withdrawn from savings account.

5.Endowment Deposits:such deposits can be made by customer to meet expenses on children's education or their marriage.

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Sample FDR

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LENDING MONEY

Commercial banks not only accept deposits but also lend money that they have obtained from deposit. The most popular form of lending are :-I. OverdraftII.Cash creditIII.Discounting of bills of exchangeIV.Loans and advances

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1.OVERDRAFT:i. current account holder is permitted to withdraw more than what stands in his creditii. Costumer is permitted to withdraw when he wants.iii. Interest is charged on overdrawn amount.

2.CASH CREDITi. banker specifies a limit called cash credit limit up to which customer can withdraw.ii. It is active account to which deposits and withdrawal are effected.iii. Interest is charged on actual amount withdrawn and period utilized

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3.Discounting of bills:i. Bank give advances to their customers by discounting bill of exchange.ii. Amount will be given after deducting interest from it.

4.Loans and advances:i. The banker advances a lumpsum for a certain period at an agreed rate of interest.ii. The entire amount is either paid in cash or by credit in his current account

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CREDIT CREATION

When bank advances a loan it doesn't pay in cash. It opens account in customers name and allow him to withdraw amount by cheque. In this way bank creates credit or deposit which are regarded as money

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SECONDARY FUNCTIONS

Secondary functions

Agency functions

General utility

fucntions

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1. AGENCY FUNCTIONS

1.Payment and collection: Banker makes payment and receive money on behalf of their customers.

2.Purchase and sale of securities:banks undertake to purchase and sell securities on behalf of customers

3.Acts as Executor, Administrator and trustee.4.Acting as Attoreny:

power of attoreny will be given to banker by a customer.

5.Acting as Correspondents/ Representatives:banker serves as a correspondents and representative to their customers.

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6.Collection of Information: The bank collects information on various stock exchanges and advise the customers on investment.

7.Remittance Of fund:bank arrange for remittance of fund from one place to another on behalf of customers.

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2.GENERAL UTILITY SERVICES

1.Safe Custody Of valuables:Banks are equipped with strong, fireproof and theft proof rooms for safe custody of valuables.

2.Letter Of Credit:It is a sort of guarantee to the exporter that his draft will be honored.

3.Travellers cheque:These are useful to person who travel frequently within the country or abroad.

4.Merchant Banking

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5.Dealings in foreign exchange business:Banks provide varied services in respect to foreign exchange business.

6.Lease Financing:It is a method of financing for purchasing for machine.

7.Factoring:Facility provided to finance on trade debt corporate.

8.Underwriting of Securities9.Tax consultancy10.Gift cheques11.Teller system12.Credit cards13. Consultancy services14.Debit card 15.Bank draft

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