Functions of Commercial Banks
by Commercial banks are financial institutions that accept deposits from the public and provide loans and other banking services. They play an important role in the economic development of a country by promoting savings, providing credit, facilitating trade, and supporting businesses. Commercial banks act as intermediaries between depositors and borrowers, ensuring the smooth flow of funds in the economy. They also offer various financial services such as fund transfers, payment facilities, foreign exchange, and investment services. Their functions can be broadly classified into primary functions, secondary functions, and modern utility services.
1. Accepting Deposits
Accepting deposits is the primary function of commercial banks. Banks collect surplus money from individuals, businesses, and institutions for safe keeping and provide interest on eligible deposits. The funds collected are used to provide loans and advances to borrowers. Commercial banks offer different types of deposit accounts such as Savings Account, Current Account, Fixed Deposit Account, and Recurring Deposit Account to meet the varying needs of customers. This function encourages the habit of saving among people, ensures the safety of money, provides liquidity, and creates a stable source of funds for banks to support economic development.
2. Granting Loans and Advances
Providing loans and advances is another important function of commercial banks. Banks lend money to individuals, businesses, farmers, and industries for various purposes such as education, housing, agriculture, trade, and business expansion. Loans are granted after evaluating the creditworthiness and repayment capacity of borrowers. Banks earn income through interest charged on these loans. Common types of loans include personal loans, home loans, vehicle loans, cash credit, overdraft, and term loans. By providing financial assistance, commercial banks promote investment, increase production, generate employment opportunities, and contribute to the overall economic growth of the country.
3. Credit Creation
Commercial banks create credit by lending a major portion of the deposits they receive while maintaining only the required reserve. When banks provide loans, the money is deposited again into the banking system, enabling further lending and creating additional credit. This process increases the money supply in the economy without printing new currency. Credit creation supports business activities, industrial growth, trade, and investment by ensuring the availability of funds. However, banks must manage credit carefully to avoid excessive lending, which may lead to inflation, financial instability, or an increase in non performing assets.
4. Agency Functions
Commercial banks perform several agency functions by acting on behalf of their customers. They collect cheques, bills of exchange, dividends, pensions, salaries, and interest payments. Banks also make payments for insurance premiums, utility bills, taxes, loan instalments, and subscription charges as instructed by customers. They buy and sell securities, act as trustees, executors, and attorneys, and provide remittance services. These functions save customers time and effort while ensuring safe and efficient financial transactions. Agency services strengthen customer relationships and make commercial banks an important part of personal and business financial management.
5. General Utility Services
Commercial banks provide several general utility services to meet the financial needs of customers. They offer locker facilities for the safe custody of valuables, jewellery, and important documents. Banks issue demand drafts, banker’s cheques, debit cards, credit cards, and prepaid cards. They facilitate electronic banking services such as internet banking, mobile banking, NEFT, RTGS, IMPS, and UPI payments. Banks also provide foreign exchange services, financial advice, merchant banking, and investment assistance. These services improve customer convenience, promote digital banking, enhance financial inclusion, and support the efficient functioning of the modern banking system.