Q.Explain the primary functions of a commercial bank.

The primary functions are the core banking activities that define a bank — as opposed to the agency and utility services it also offers.

A bank accepts deposits in current, savings, fixed and recurring accounts; advances loans through cash credit, overdraft, term loans and the discounting of bills; and, in the act of lending, creates credit.

The primary functions are those that define banking itself. There are three.

(i) Accepting deposits — mobilising the idle savings of the community. The main kinds are:

• Current (demand) deposits — for traders and businesses; withdrawable any number of times by cheque, little or no interest paid.
• Savings deposits — for households and small savers; withdrawals allowed with some restrictions, a modest rate of interest, encouraging thrift.
• Fixed (term) deposits — a sum placed for a fixed period at a higher rate; the bank can lend such money freely because it knows the repayment date.
• Recurring deposits — a fixed sum paid in each month for an agreed period at a higher rate.

(ii) Advancing loans — lending the deposits collected, the bank's main source of income. Chief forms: cash credit (drawing up to a limit against security), overdraft (overdrawing a current account up to a limit), term/demand loans (a fixed sum for a stated purpose), and discounting of bills (paying a bill's value, less discount, before maturity).

(iii) Creating credit — when a bank grants a loan it opens a deposit in the borrower's name rather than paying cash, so every loan creates a new deposit; the banking system thereby multiplies deposits far beyond the cash originally paid in.

A frequent error is listing agency services (collecting cheques, paying bills) among the primary functions — these are secondary/agency functions. Keep the three primary functions (deposits, loans, credit creation) clearly separate from the agency and general-utility functions.