Functions of Commercial Banks

A commercial bank is a financial institution licensed to accept deposits from the public and lend money to individuals, businesses, and government, earning its main income from the spread between the interest it pays depositors and the interest it charges borrowers.

Primary functions:

• Accepting deposits — current deposits (withdrawable at any time, mainly used by businesses, usually interest-free), savings deposits (for individuals, a limited number of withdrawals allowed, interest-bearing), and fixed/time deposits (locked in for a stated period at a comparatively higher rate of interest).
• Advancing loans and credit — cash credit, overdraft facilities against a current account, term loans for fixed periods, and discounting of bills of exchange (advancing money against a bill before its due date, for a fee).

Secondary functions:

• Agency functions performed on behalf of customers — collecting cheques and bills, paying insurance premiums and utility bills on standing instruction, and acting as a trustee or executor.
• General utility functions — issuing demand drafts and letters of credit, providing safe-deposit locker facilities, dealing in foreign exchange, and underwriting share and debenture issues. …