Primary Functions of Commercial Banks
1. To Receive Deposits Receiving deposits is the most important function of commercial banks.
The deposits can be accepted in the form of the following types:
(i) Saving Deposits: The people of middle and lower classes who wish to save a part of their income can invest in Saving Bank Accounts. Deposit in these accounts also earns interest at the rate announce by the RBI from time to time.
(ii) Demand Deposits: These deposits are also called current deposits. The current accounts are meant for big customers. There is no limit on the number of withdrawals, amount, etc. in the current account deposits. There is no provision of paying interest on such type of deposits. These accounts are generally opened by the businessmen.
(iii) Time Deposits: These deposits are accepted by the banks in the form of fixed deposits. These deposits are accepted for a fixed time period. The minimum time period for accepting a time deposit is 14 days. These deposits earn a higher rate of interest as compared to saving deposits. Time deposits are accepted for the maturity period of 1 year, 2 years, 3 years and so on respectively. Customers can take loan up to 75% of their deposit against the security of Fixed Deposit Receipt (FDR).
2. Sanction of Loans and Advances: The income of the banks is generated by sanctioning loans and advances to the eligible persons. The interest is charged at a higher rate. This rate of interest is generally higher than the saving deposit or fixed deposit rate allowed to the customers.
Types of Facilities under Loans and Advances
(i) Overdraft Facility: Banks allow their genuine customers to withdraw up to a certain limit in excess of the borrower’s deposits.
(ii) Advances: Banks generally provide short term and medium-term advances. Short term advances are sanctioned for a period up to 1 year. Medium-term advances are sanctioned for a period of more than 1 year but not exceeding 3 years.
(iii) Discounting Bill of Exchange: Banks provide advances against the bills of exchange even before the customer receives money from the parties. These bills are discounted by the banks and payment is made to the customer. The bill is realised by the bank when a party sends money to it.