A commercial bank is a financial institution that provides services such as accepting deposits, giving business loans, mortgage lending, and basic investment products such as savings accounts and certificates of deposit.
Following are the main roles of Commercial Banks:
Roles of Commercial Banks
Primary Roles of Commercial Banks
Accepting deposits from the public is the primary function of a commercial bank. A bank accepts deposits from individuals in society. To attract savings, banks accept three types of deposits—demand deposits, savings deposits, and fixed deposits.
Demand Deposits and Fixed Deposits
- The interest rate on demand deposits is very low, whereas fixed deposits carry a higher interest rate.
- Demand deposits can be withdrawn at any time, whereas fixed deposits can be withdrawn only after the expiry of a specific period.
- Demand deposits are chequable and can be withdrawn through cheques, whereas fixed deposits are not chequable.
A commercial bank advances loans to business people, farmers, and consumers against approved securities. Cash credit, overdraft, short-term loans, discounting of the bill of exchange, and money at call are loans advanced by commercial banks.
Credit facilities provided by a commercial bank
- Cash credit: Banks sanction cash credit according to the requirement of the borrower on the basis of the bank credit limit. Interest will be paid by the borrower only on the actual amount withdrawn from the bank.
- Overdraft facilities: For overdraft facilities, an account holder can withdraw money in excess of the amount deposited with the bank. However, the borrower will pay interest on the excess amount withdrawn from the bank.
Agency Roles of Commercial Banks
- Commercial banks provide services such as collection and making payments on behalf of their customers such as insurance premiums and dividends.
- They also help in transferring funds from one place to another in the form of cheques and drafts.
Utility Roles of Commercial Banks
- To safeguard valuable items, a commercial bank provides a safety locker to its customers.
- Commercial banks are involved in the foreign exchange business. They finance foreign trading by accepting foreign bills of exchange.
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