Functions of Commercial Banks in India

Commercial Banks in India

Commercial banks are the most important types of banks that support the whole financial system. These banks serve the banking needs of the general public. The main functions of commercials banks are to accept deposit & provide loans, advances to the public.

These are profit-generating organizations. Commercial banks charge high interest on the advances lend to the general public & provide lower interest on deposits accepted by them.

The differences between these interests provided & charged by the bank are served as their income. Apart from these, there several other functions also provided by these banks i.e. Locker facility, Deals in foreign exchange, collection of income & payment of expenses, etc.

Functions of Commercial Banks in India

Functions of Commercial Banks in India
Functions of Commercial Banks in India
  • Primary functions.
  • Secondary functions.

Primary Functions of Commercial Banks

Acceptance of Deposits

This is one of the important function played by the commercial banks. Commercial banks accept deposits from the general public. These banks provide interest on deposits accepted to the public.

Commercial banks accept deposits through different types of accounts i.e. current account, savings account, fixed deposits, recurring deposit. The Interest rate provided on deposits in these accounts differs from each other.

Providing loans and advances

Commercial banks provide loans to the public as per their needs. The amount accepted as deposits by these banks is used for providing loans. Banks charge high-interest rates on the amount provided as a loan from its customers.

Both short term & long term loans are provided by the bank. Banks generally ask for some collateral security before providing advances to their customers.

Credit Creation

Credit creation is one of the unique & important features played by commercial banks. It is through this function commercial banks manage & control the flow of credit in the economy.

These banks by accepting deposits & providing credit facilities to its customers help in generating more & more credit. Commercial banks are also termed as factories or manufacturers of credit.

Secondary functions of Commercial Banks

These are those functions which are performed in addition to primary functions. Secondary functions are as follows

Acts as an Agent.

The commercial bank acts as an agent of its customers. It performs several functions & duties on behalf of its customers. Banks make several payments & receive different payments for their customers.

It pays rent, insurance premium & income tax of its customers. Banks also facilitates the transfer of funds for its customers. It also buys & sells securities for its customers.

Overdraft facility

Commercial banks provide overdraft facility to its reputed & reliable customers. Under this facility, customers are able to withdraw more than they have as a credit in their current account.

The maximum overdraw limit is set by the bank. This facility is provided to the current account holder. Customers need to pay interest on the overdrawn amount to the bank.

Discounting bill of exchange

This is one of the important secondary functions performed by commercial banks. Banks provide the facility of discounting bills of exchange before the due date to its customers.

Banks charge a commission for providing this service. Banks pay the bill amount after charging their commission to the customers.

Provides Locker facility

Banks provide locker facilities to its customers. Customers get the facility of keeping their valuable items in the locker of their banks. It provides safety to its customers. Banks charge some fees according to time from its customers for locker usage.

Issues Traveller cheque

Banks issue traveller cheque to its customers for convenience. Instead of taking cash with them while travelling, banks issue them traveling cheque.

It provides safety to its customers. This cheque can be easily discounted at different branches of the bank all over India.