Functions of Commercial Bank

A commercial bank is a financial intermediary which collects credit from lenders in the form of deposits and further lends in the form of loans and advances. A commercial bank holds deposits from individuals and business in the form of savings accounts and term deposits of varying maturities, while it issues loans in the form of personal and business under different portfolios. The term commercial bank came about as a way to distinguish it from an investment bank. The primary difference between a commercial bank and its counterpart is that a commercial bank earns revenue by issuing primary loans from its pool of deposits while an investment bank brings debt and equity offering to market for a fee. Among its assets, include loans; a commercial bank holds a portfolio of other securities to generate proprietary income.

Primarily, commercial banks are profit making organizations. It deals with money as well as short term debt instruments. The main objective of a commercial bank is to earn and maximize its profit by providing loans and advances and rendering ancillary services to its clients.

Commercial bank’s function can be categorized into two types:

1. Principal functions: Principal functions of a commercial bank are of three types:

a)   Acceptance of deposit: An important function of commercial banks is to attract deposit from the public. Those people who have cash account and want their safety, they deposit that amount in the banks. Commercial banks accept deposits every class and source and take responsibilities to repay the deposit in the same currency whenever they are demanded by depositors.

b)   Lending: Another function of commercial bank is to make loans and advances out of the deposit receive in various form. Bank apply the accumulated public deposits to productive uses by way of loans and advances, overdraft and cash credits against approved securities.

c)   Investment: Now a days commercial banks are also involved in investment. Generally investment means long term and medium term investments.

2. Ancillary functions: Ancillary functions of commercial banks are of two types:

a)      Agency Services:

§  To collect and making payment of cheques.

§  Execution of standing instructions relation to payment of installment of other deposit accounts, insurance premium, rent etc.

§  Acting as correspondent or agent of it’s customer or other bank both home and abroad.

§  Collection or payment of bills – electricity, telephone etc.

§  Purchase and sale of stocks or share – act as a banker to issue,

§  Acting as a trustee, executor and administrator of estates or attorneys of it’s customers.

b)      Miscellaneous Services:

§  Money transfer or remittance facilities from one place to another by means of Demand Draft, Mail Transfer, Telegraphic Transfer through expeditious means.

§  Collection of money on behalf of clients from abroad through Western Union Money Transfer, Cash Over the Counter, Xpress Money, Transfast, Moneygram and other instant delivery facilities.

§  Creation of medium of exchange by way of issuing cheques, which may be circulated like money.

§  Discounting of bills, which means buying of a bill at a priceless than the face value, against which actual value is realized on maturity.

§  Dealing in foreign exchange buying and selling under the authority of central bank.

§  Undertakes import and export business by way of handling LCs.

§  Financing export import business.

§  Issuance of Travelers Cheques.

§  Handling Debit card, Credit card, SMS banking, ATM Service, Online banking, Internet banking, Mobile banking etc.

§  Providing credit report at the request of the client containing financial works and business reputations.

§  Providing Safe Custody and Lockers facilities.

Finally, commercial bank plays an important role to encourage and mobilize the savings of the society. It gathers small savings and create a pool large enough to be profitability employees in industrial and business ventures. Thus the ultimate function of a commercial banker is that of a broker and dealer in money. Through this process of inter-mediation, a commercial bank renders very valuable service to the community to exploit the productive capacity of the country, which accelerate the pace of economic development and create employment opportunities.