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Functions and Significance of Commercial Banks

Commercial banks accept deposits from the public and provide loans and advances to earn a profit. Their primary functions are accepting deposits in the form of current, savings, and fixed accounts, and providing loans through cash credits, demand loans, and short-term loans. They also perform secondary functions like discounting bills of exchange, providing overdraft facilities, acting as agents to transfer funds and collect dividends/interest, and offering general utility services.

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476 views16 pages

Functions and Significance of Commercial Banks

Commercial banks accept deposits from the public and provide loans and advances to earn a profit. Their primary functions are accepting deposits in the form of current, savings, and fixed accounts, and providing loans through cash credits, demand loans, and short-term loans. They also perform secondary functions like discounting bills of exchange, providing overdraft facilities, acting as agents to transfer funds and collect dividends/interest, and offering general utility services.

Uploaded by

MahealaniPerez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Commercial Bank

MAHEAL ANI P. SALIGUMBA


4LM3

OVERVIEW
I.

MEANING OF COMMERCIAL BANK

II.

FUNCTIONS OF COMMERCIAL BANKS


Primary Functions
Secondary Functions

III. CREDIT CREATION OF COMMERCIAL BANKS


IV. TYPES OF COMMERCIAL BANKS
V.

DIFFERENCE BETWEEN COMMERCIAL BANKS AND OTHER


TYPES OF BANK

VI. SIGNIFICANCE OF COMMERCIAL BANKS

I. MEANING OF COMMERCIAL BANK


A financial institution which performs the functions of Accepting
deposits from the general public and Giving loans for investments
with the aim of earning profit.

DEPOSITO
R

BORROWIN
G

LESS BORROWING
RATE

BAN
K

LENDIN
G

HIGH LENDING
RATE

(LENDING RATE) ( BORROWING RATE) = PROFIT


aka SPREAD

BORROWE
R

I. FUNCTIONS OF COMMERCIAL BANK


PRIMARY FUNCTIONS

ACCEPTS DEPOSITS

Collection of money or savings of the public


Accepts in form of current, savings and time deposits.

CURRENT ACCOUNT DEPOSITS


Payable on demand
Can be withdrawn anytime depending upon the balance on the

account
Does not earn interest
Cheque Facilities
Commonly used by businessmen and industrialists

FIXED DEPOSITS

AKA TIME DEPOSITS

Have fixed period of maturity


Cannot be withdrawn anytime
High interest rate
Neither payable on demand nor they enjoy cheque Facilities

SAVINGS ACCOUNT DEPOSITS


Main objective is to save
Can be withdrawn anytime
Combined features of fixed and current deposits
payable on demand
can be withdrawn through cheque

Lower interest rate than fixed deposits

I. FUNCTIONS OF COMMERCIAL BANK


PRIMARY FUNCTIONS

GIVES LOANS AND ADVANCES

Particularly for businessmen and entrepreneurs


Main source of income of commercial banks
Lends to borrowers through cash credit, demand loans
and short-term loans

CASH CREDIT
With credit limit
Withdrawing power depends on borrowers current assets
Interest is charged on the drawn or utilized portion of credit

DEMAND LOANS
No stated maturity
Loan amount is paid in lump sum
Commonly used by security brokers

SHORT-TERM LOANS
Given against some securities
Loan amount can be paid by installment

I. FUNCTIONS OF COMMERCIAL BANK


SECONDARY FUNCTIONS

DISCOUNTING BILL OF EXCHANGE OR BUNDLES

Representation of promise to pay a fixed amount of


money at specific point of time
Can be encashed earlier through discounting

I. FUNCTIONS OF COMMERCIAL BANK


SECONDARY FUNCTIONS

OVERDRAFT FACILITIES

Balance of a bank account in which funds withdrawn


have exceeded funds deposited with agreed limit
Demand loan: can be cancelled anytime without notice
if secured with assets, banks can foreclose on the
collateral in case of failure to pay.

I. FUNCTIONS OF COMMERCIAL BANK


SECONDARY FUNCTIONS
AGENCY FUNCTIONS OF BANK
Bank acts as an agent of customers and gets commission.
1.
2.
3.
4.

TRANSFER AND COLLECTION OF FUNDS


PAYMENTS OF VARIOUS ITEMS
PURCHASE AND SALE OF SHARES AND SECURITIES
COLLECTION OF DIVIDENDS, INTERESTS ON SHARES AND DEBENTURES
ON BEHALF OF CUSTOMER
5. ACTS AS TRUSTEE AND EXECUTOR OF PROPERTY
6. LETTERS OF REFFERENCES

I. FUNCTIONS OF COMMERCIAL BANK


SECONDARY FUNCTIONS

PERFORMING GENERAL UTILITY SERVICES


1. Travel Cheques
2. Locker facilities
3. Underwritting securities issued by government, public
and private bodies
4. Purchase and sale of foreign

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