1. 1. Acceptance of deposits: The principal function of any commercial bank is to accept deposits from different individuals and institutions. The commercial banks open an account for this purpose. Generally, commercial banks keep three types of deposits:
(a) Fixed or time deposits: Here the depositors keep their money for specified period of time and earn a given rate of interest (per annum).
(b) Savings deposits: Though the depositors get interest on the deposited amount interest is relatively less as compared to that in fixed deposits.
(c) Current deposits: Here the depositor does not get any interest on their deposits but get the ‘overdraft’ facilities (i.e., withdrawal of deposits in excess of the deposited amount).
2. Providing loans: Commercial banks also give short and medium-term loans against some collateral, securities or by mortgaging of some assets and charge interest on such loans. These loans can be divided into four categories:
(a) Ordinary loans: In these cases, the commercial banks give loans for purchasing consumer durables for building ‘own house’, etc.
(b) Cash credit: This type of loan is given to any business firm. The bank fixes certain ‘credit limit’ determined on the basis of the value of stocks/sales of that firm. The firm is allowed to withdraw money from its account within that credit limit.
(c) Overdraft facility: In this case, the bank allows the depositor to withdraw money in excess of the deposited amount in its account.
(d) Discounting bill of exchange: Commercial Banks also given loans by rediscounting the bill of exchange submitted by the debtors for this purpose.
3. Transfer of funds: Commercial Banks help the customers in transforming funds from one place to another through different credit instruments such as bank drafts, mail transfers etc.
2. Cash Reserve Ratio refers to cash reserves of the commercial banks with RBI, as a percentage of their total deposits. During inflation, the Central Bank increases the cash reserve ratio. As a result, the amount of loanable funds with the commercial banks decline and the process of credit creation by the commercial bank is checked.
