Functions of Commercial Banks

The functions of a commercial bank fall into three groups.

(A) Primary Functions.

• Accepting deposits. The bank mobilises public savings through various deposit accounts:
  • Current (demand) deposits — withdrawable at any time, used mainly by businesses; usually earn little or no interest.
  • Savings deposits — for households; withdrawals are somewhat restricted and modest interest is paid.
  • Fixed (term) deposits — kept for a fixed period; they earn the highest rate of interest.
  • Recurring deposits — a fixed sum deposited every month for a set period.
• Advancing loans. The bank lends its deposits (keeping a reserve) through cash credit, overdrafts, demand loans, term loans and by discounting bills of exchange. Interest on loans is the bank's main source of income.

(B) Secondary (Agency) Functions — services performed as an agent of the customer: collecting cheques and bills, making periodic payments (rent, insurance premia), buying and selling securities, acting as trustee or executor, and remitting funds.

(C) General Utility Functions — services of general use: issuing drafts and letters of credit, providing locker (safe-deposit) facilities, dealing in foreign exchange, and issuing traveller's cheques and, today, debit/credit cards.