What is a commercial bank and what is its function?
What is Commercial Bank
A trading bank is a financial institution that trades in money and credit, which not only accepts money as a deposit from people and lends it to entrepreneurs and associates when needed but even more importantly, in the form of credit creation.
What is the function of the commercial bank? (Functions of Commercial Bank)
The functions of the commercial bank are as follows:
1. To receive deposits:
An important function of modern banks is to get people's excess wealth in the form of deposits. Banks receive deposits in five types of accounts as per the wishes of people:-
(i) Current Account
This account is often opened by industrialists, traders and other businessmen. The depositor in this account can deposit and withdraw money whenever he wants. Often, the bank does not give interest on the amount deposited in this type of account, as it always has to keep a cash fund ready with it to meet the demand of the depositor.
(ii) Saving bank Account
This account is usually opened by low-income individuals. From this account, the depositor can withdraw money only once or twice a week, but how many times can he make the deposit. The facility of cheque is also given to the depositor to withdraw money. A small amount of interest (usually Rs 4.50 a century) is also given annually on the amount deposited in this account. Savings account encourages capital accumulation in the country.
(iii) Fixed Deposit Account
Funds can be deposited in this account for a certain period of time (which can range from three months to 10 years). The rupee cannot be withdrawn before the expiry of the certain period for which the money or the rupee has been deposited. The rate of interest in this account is higher than other accounts. The longer the duration, the higher the rate of interest. In this account, people who have a certain amount of money deposit their money, from which they want a certain income and do not want to put that money at any risk.
(iv) Home Saving Account
In order to encourage savings by some banks, depositors give the customer a saving box to take him home, in which they keep depositing their small savings. The keys to these gullies remain with the bank. After a certain period of time, the gullak is opened by going to the bank and the money received from it is credited to the depositor's account. The rate of interest on this type of account is very low|
(v) Other Deposit Accounts
Currently, depositors are also being deposited in many new types of accounts, such as:
- Indefinite deposit account,
- Recurring Deposit Account,
- daily savings deposit account,
- Monthly Deposit Plans,
- Annuity or retirement plans.
2. Advancing Loans
Banks give most of the money they receive as deposits as loans to needy businessmen, traders, farmers, etc. On these loans, the bank collects so much interest that the bank's expenses and the interest given to the depositors are easily removed.
What type of loan is given by the bank?
The following types of loans are provided by banks:
(i) Simple loan
This loan is given to those persons who keep some of their goods with the bank as security. The money of this loan is credited to the current account of the borrower, which the borrower can withdraw as per requirement. The bank can ask for such a loan back whenever it wants.
(ii) Cash Credit
Under this, the bank gives a loan in lieu of the borrower's fixed security. The loan money is credited to the account opened in the name of the borrower. The borrower keeps withdrawing a little money from the account as per his requirement. But he actually has to give interest on the amount withdrawn.
(iii) Bank Overdraft
Sometimes the bank also offers overdraft facilities to customers with its trusted current account, which is a kind of loan. The bank allows such customers to issue cheques to withdraw more than the amount deposited in multiple accounts. The customer pays interest to the bank for withdrawing more than his deposit.
(iv) discounting of Bills of Exchange
This is another type of loan given by banks. If the bearer of the bills of exchange needs cash immediately, he can go to the bank and encash the bills of exchange by deducting the discount. The bank immediately takes the bills of exchange approved by a good party and gives its carrier the current value of the bills of exchange or deposits it in its account. Once the bills of exchange are matured, the bank receives the full payment of the bill from the party accepting that bill.
3. Agency Function
The bank also carries out agency work for its customers. Some of these works are done free of cost and for some tasks, customers are charged a fixed fee or commission.
The main agency functions of the bank are as follows:
(i) Transfer of money (collection of customer money)
The bank assists its customers in sending money from one place to another by a bank draft and charges a little for this service.
(ii) Collection of customers' money
Banks receive payments for cheques, bills, drafts, hundi and other exchange deeds deposited by their customers from other banks and deposit their money in the customer's account.
(iii) Purchase and sale of shares and securities
The bank buys and sells the shares and government securities of mixed capital companies to its customers.
(iv) Receiving various payments
Banks collect dividends and interest, rent and other receipts paid on their customers' shares and debentures and deposit their accounts.
(v) Making other types of payments
The bank pays the premium, house rent, interest and other bills of their insurance policy as per the orders of its customers.
(vi) Trustee and Executive Functions
Banks take the responsibility of managing, managing, etc., of their property on the orders of their customers. They protect the customer's wills and implement them posthumously.
4. Issue of paper money
The central bank of each country issues paper money. The issue of notes in India is done only by the "Reserve Bank of India".
5. Purchase sale of foreign trade
The bank also buys and sells foreign currencies. Often the act of buying and selling foreign exchange is done by foreign exchange banks. Some commercial banks in India also do business of currencies along with their other functions.
6. Managing the meaning of internal and foreign trade
Banks finance internal and foreign trade by discounting the Bill of Exchange. Sometimes banks also give short-term loans on security of hundis and bills.
Additional functions of the bank:
(i) Lockers facility
Banks often offer lockers to their customers as well. In these, people can keep their valuable jewellery, necessary papers, shares of companies and letters of credit, etc. Banks charge them a simple annual fee for this service.
(ii) Issue of Passenger Cheques
Banks issue passenger cheques or circular letters of credit to passengers, which frees passengers from the risk of carrying cash at the time of travel.
(iii) Credit Related Information
Banks give reliable credit information to their customers, which helps customers more in the business and also eliminates the fear of business risks.
(iv) Compilation of economic data
Nowadays, in every country, the Central Bank compiles the facts and data related to the banking, money trading and industries of the country, etc. and publishes them from time to time. This gives knowledge of the economic situation of the country, on the basis of which banks can formulate their policies.
(v) Subscription of letters of credit
Sometimes banks also write under-writing letters of credit issued by business companies to obtain capital. Industrialists and businessmen benefit a lot from this service of banks. Because this work facilitates them to get capital.
(vi) Acceptance of bill of exchange
Sometimes banks also accept bills of exchange written on their customers. This strengthens the creditor's confidence in the creditworthiness of the borrower.
From the above study, it is clear how important the role modern banks play in the national economy. In fact, in the economic body, banks act like blood vessels and are more and more diligent in making the national economy healthy and simple. In the modern era, economic development of any country cannot be possible without a well-organized banking system.