Commercial banks play a major role in the economic development of a country. They are the backbone of investment activities. They perform many functions. The functions commercial banks are classified as Primary functions and Secondary Functions.
I. Primary Function: The primary functions of commercial banks are as follows:
(a) Accept Deposits: The main function of commercial banks is accepting deposits. They maintain , different types of deposits from the public.
They are as follows:
(i) Current account deposits: These are the deposits payable on demand. Money can be withdrawn any number of times as per the desires of depositors. Usually, no interest is paid. The current account deposits are meant for traders and businessmen. Such deposits are also called as demand deposits.
(ii) Savings account deposits: Savings deposit accounts are generally opened by the people of low income, salary earners and others. The banks impose certain restrictions on the withdrawal of amount. Low rate of interest is paid on these deposits. This type of deposits encourage small savings in the society.
(iii) Fixed deposits: These are the deposits in which money deposited is fixed for a period of time and cannot be withdrawn before stipulated time. Higher rate of interest is paid. Interest rate depends on the duration of deposit. Higher interest is paid for longer duration and vice versa. Such deposits are also called as Time deposits.
(iv) Recurring Deposits: Under these deposits, customer deposits money regularly in monthly installments for period of one year or more. After the stipulated time period, the total amount deposited is paid to the customer along with interest. The rate of interest is higher when compared to savings account deposits.
(b) Provide Loans: Providing loans to customers is another important primary function of commercial banks. They provide several types of loans and advances. They are as follows:
(i) Overdraft: It is a facility provided by a bank to its current account holders to overdraw their accounts upto a certain limit. Interest is charged on the amount actually overdrawn by the customer. This type of loan is provided to businessmen and joint stock companies.
(ii) Cash Credit: This type of loan is given to the customers against the assets like shares, stocks, bonds, etc. Under this scheme, the customer is allowed to withdraw the amount up to a certain limit in accordance with the value of the assets he possessed. Interest is charged only on the amount which is withdrawn.
(iii) Loans: Under this type, commercial banks provide specified sum of money to a person or firm against surety or security of an asset, movable or immovable. Loans are given to a borrower by crediting the loan amount to the new account opened by the banker. The borrower can withdraw money as per his needs. The interest is charged on the whole loan amount which is sanctioned by the banker.
(iv) Discounting of bills of exchange: Discounting of bills of exchange refers,to encashing the commercial bills from the banks before the date of maturity. The banks charge some commission while discounting bills of exchange. Here, the loans are given as advance payment against the bills payable.
II Secondary Functions:
The secondary functions of commercial banks are as follows:
(a) Agency functions: The commercial banks act as agents to their customers in various money transactions. On behalf of their customers they make payments and accept deposits.
(b) General Services: The commercial banks are also providing general utility services like electronic fund transfer, Automated Teller machine, e-banking, merchant banking, mobile banking, etc.
