Function Of Commercial Banks ( Primary )

The function of commercial banks are now wide and diverse. In order to understand better, the function of commercial banks should be studied under the following two categories: 

a) Primary function of commercial banks

b) Secondary functions of commercial banks   

Now we discuss primary functions: The primary functions of commercial banks are:- 

1. Acceptance of deposits

2. Advancing loans

3. Creation of credit

4. Clearing of cheques

5. Financing foreign trade

6. Remittance of funds

1) Acceptance of Deposits: Deposits are a very important supply of a bank’s funds. they'll broadly be classified into 3 classes.

(a) Current Deposits: These deposits are referred to as demand deposits. These deposits will be withdrawn at any time. Generally, no interest is allowed on current deposits, and in case, the client is needed to go away a minimum balance undrawn with the bank. Cheques are used to withdraw the number. These deposits are kept by businessmen and industrialists who receive and build industrial Banking five massive payments through banks. The bank levies sure incidental charges on the client for the services rendered by it.

(b) Savings Deposits: this can be meant mainly for skilled men and middle category folks to assist them deposit their little savings. It will be opened with none introduction. cash will be deposited at any time however the most cannot transcend an exact limit. this method greatly encourages the habit of thrift or savings.

(c) Mounted Deposits: These deposits are referred to as time deposits. These deposits can not be withdrawn before the expiry of the amount that they're deposited or while not giving a previous notice for withdrawal. If the depositor is in would like of cash, he has got to borrow on the protection of this account and pay a rather higher rate of interest to the bank. 

2) Advancing Loans: The second primary perform of an ad bank is to create loans and advances to any or all varieties of persons, notably to businessmen and entrepreneurs. Loans are created against personal security, gold and silver, stocks of products and alternative assets

(a) Overdraft Facilities: during this case, the depositor in a very current account is allowed to draw over and on top of his account up to a previously agreed limit. function of commercial banks

(b) money Credit: underneath this account, the bank provides loans to the borrowers against sure security. however the complete loan isn't given at one specific time, instead the number is credited into his account within the bank; however underneath emergency money are given. The borrower is needed to pay interest solely on the number of credit availed to him. He are allowed to withdraw little sums of cash per his necessities through cheques, however he cannot exceed the credit limit allowed to him.

(c) Discounting Bills of Exchange: this can be another style of lending that is incredibly standard with the trendy banks. The holder of a bill will get it discounted by the bank, when he's in would like of cash. when deducting its commission, the bank half-dozen Banking pays the current worth of the bill to the holder. Such bills kind smart investment for a bank. function of commercial banks

(d) cash at Call: Bank conjointly grant loans for a awfully short amount, typically not exceeding seven days to the borrowers, sometimes dealers or brokers in stock exchange markets against collateral securities like stock or equity shares, debentures, etc.

(e) Term Loans: Banks offer term loans to traders, industrialists and currently to agriculturists conjointly against some collateral securities. Term loans are so-called as a result of their maturity amount varies between one to ten years. Term loans, as such offer intermediate or operating capital funds to the borrowers

 (f) client Credit: Banks conjointly grant credit to households in a very restricted quantity to shop for some sturdy client merchandise like tv sets, refrigerators, etc., or to satisfy some personal desires like payment of hospital bills etc. Such client credit is created in a very lump add and is repayable in installments in a very short time. underneath the 20-point programme, the scope of client credit has been extended to hide expenses on wedding, funeral etc., as well.

(g) Miscellaneous Advances: Among alternative kinds of bank advances there are packing credits given to exporters for a brief length, export bills purchased/discounted, import finance-advances against import bills, finance to the self used, credit to the general public sector, credit to the cooperative sector and in particular, credit to the weaker sections of the community at concessional rates.

3) Creation of Credit: a novel perform of the bank is to form credit. Banks provide cash to traders and makers. They conjointly produce or manufacture cash. Bank deposits are thought to be cash. they're nearly as good as money. the rationale is that they will be used for the acquisition of products and services and conjointly in payment of debts. function of commercial banks

4)  Clearing of cheques : The industrial banks render a very important service by providing to their customers an inexpensive medium of exchange like cheques. it's found far more convenient to settle debts through cheques instead of through the utilization of money. The cheque is that the most developed style of credit instrument within the cash market. 

5)  Financing foreign trade : The bank finances internal and foreign trade through discounting of exchange bills. Sometimes, the bank provides short-term loans to traders on the protection of economic papers. This discounting business greatly facilitates the movement of internal and external trade.

6)  Remittance of funds : industrial banks, on account of their network of branches throughout the country, conjointly offer facilities to remit funds from one place to a different for his or her customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges. Ok, dear learner we will discuss on secondary function of commercial banks.