The functions of a commercial banks are divided into two categories: i) Primary functions, and
ii) Secondary functions including agency functions.
i) Primary functions:
The primary functions of a commercial bank include:
a) accepting deposits; and
b) granting loans and advances;
a) Accepting deposits
The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with
bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
b) Grant of loans and advances
The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to
members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.
A loan is granted for a specific time period. Generally,
commercial banks grant short-term loans. But term loans,
Functions of Commercial Banks :: 23
that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lumpsum
or in instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in
lumpsum or in instalments.
An advance is a credit facility provided by the bank to its
customers. It differs from loan in the sense that loans may...