MEANING OF COMMERCIAL BANKS

MEANING OF COMMERCIAL BANKS

Commercial banks are those banks which perform all kinds of banking business and generally finance trade and commerce are called commercial banks . These banks normally advance short term loans to the businessmen and traders .Lately , the commercial banks have extended their areas of operation to medium term and long term finance . Majority of commercial banks are in the public sector.

FUNCTIONS of commercial banks

a)Accepting deposits : Banks accept deposits from those who can save but cannot profitably utilise these savings themselves. People consider it more deposit their Savings in a bank because of doing so they,on the one hand earns interest and on the other hand avoid the danger of theft .

Different types of accounts 

-Fixed deposit account

-Current deposit account

-Saving deposit account

-Recurring deposit account

-Home safe account

b)Advancing of loans :Banks advances loans to the public. After keeping certain cash reserves,the banks lend their deposits to needy borrowers.

Types of loans 

-Money at call are very short period loans and can be called by bank at very short notice (14days).

-Cash credit is given to borrowers against his current assets such as bonds ,shares etc.Interest is charged only on amount withdrawn.

-Overdraft facilities are provided to its customers though which they are allowed to withdraw more than their deposits.Interest is charged from the customers.

-Discounting of bills of exchange means the debtor accepts the bill drawn upon him by the creditor and agrees to pay amount mentioned on maturity. When these matures,the Bank gets its payment.

-Term loans starts advancing medium term and long term loans . Maturity period is more than one year.

c)Credit creation : Credit creation is natural outcome of process of advancing loan as adopted by the banks. Whenever a bank grants a loan ,it creates an equal amount of Bank deposit .This is called credit creation which results in net increase in money stock .

d)Cheque system : Bank also renders useful medium of exchange in the form of cheques. Through cheque ,depositor directs the bankers to make payment to payee. It is most developed credit instrument in money market. 

e)  Agency functions : The following are the agency functions performed by the commercial banks behalf of their customers :-

- Banks help their customers in transferring funds from one place to another through cheques,drafts etc.

-Banks collect and pay various credit instrument like cheques ,bills of exchange etc.

- Banks execute standing instruction of their customers for making various periodic payments by paying subscription,rents,insurances etc.

- Banks undertake purchase and sale of various securities like shares,stocks,bonds etc 

- Banks collect dividends,interest on shares and debentures.

- Bank may employ income tax experts to prepare income tax returns and help to get refund of income tax.

- Banks preserve wills of customers and execute them after their death.

- Banks acts as representative and get passports, traveller's tickets ,book vehicles etc.

f) General utility functions : The general utility functions of commercial banks are given as follows :-

-Banks provide locker facility to their customers where they can keep their valuables.

- Bank issues traveller's cheques to help customers to travel without feal of theft.

-Banks issues letters of credit certifying their creditworthiness which is important in foreign trade .

-Banks collect statistics giving important information relating to industry,trade and commerce ,money and banking.

-Banks underwrite the securities issued by government,public or private bodies. 

-Some banks issue cheques of various denominations to be used on auspicious occasion.

-Banks may be referred for seeking information regarding financial position,business reputation.

-Banks also deal in business of foreign currencies.They nay finance foreign trade by discounting foreign exchange bills.