Operational Aspects of Commercial Bank in India

28/04/2020 2 By indiafreenotes

Primary Operational Aspects of Commercial Bank in India

Refer to the basic functions of commercial banks that include the following:

Accepting Deposits

Implies that commercial banks are mainly dependent on public deposits.

There are two types of deposits, which are discussed as follows:

  • Demand Deposits: Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank. In other words, the owners of these deposits are allowed to withdraw money anytime by simply writing a check. These deposits are the part of money supply as they are used as a means for the payment of goods and services as well as debts. Receiving these deposits is the main function of commercial banks.
  • Time Deposits: Refer to deposits that are for certain period of time. Banks pay higher interest on rime deposits. These deposits can be withdrawn only after a specific time period is completed by providing a written notice to the bank.
  • Advancing Loans: Refers to one of the important functions of commercial banks. The public deposits are used by commercial banks for the purpose of granting loans to individuals and businesses. Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of exchange.

Secondary Operational Aspects of Commercial Bank in India

Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions.

These functions are explained as follows:

  1. Agency Functions

Implies that commercial banks act as agents of customers by performing various functions, which are as follows:

(a) Collecting Checks

Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank.

(b) Collecting Income

Constitute another major function of commercial banks. Commercial banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their customers. A credit voucher is sent to customers for information when any income is collected by the bank.

(c) Paying Expenses

Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a debit voucher is sent to customers for information when expenses are paid by the bank.

  1. General Utility Functions

Include the following functions:

(a) Providing Locker Facilities

Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to theft at homes.

(b) Issuing Traveler’s Checks

Implies that banks issue traveler’s checks to individuals for traveling outside the country. Traveler’s checks are the safe and easy way to protect money while traveling.

(c) Dealing in Foreign Exchange

Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports. However, commercial banks need to take the permission of the central bank for dealing in foreign exchange.

(d) Transferring Funds

Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer.

  1. Other Functions

Include the following:

(a) Creating Money

Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual.

Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased.

(ii) Electronic Banking

Include services, such as debit cards, credit cards, and Internet banking.