Q.Explain the primary functions of a commercial bank.
The primary functions of a commercial bank are the core activities that make it a bank — a financial intermediary that borrows in order to lend.
(i) Accepting deposits. The bank mobilises the public's savings through different deposit accounts:
- Current (demand) deposits — withdrawable any time, mainly for businesses; little or no interest.
- Savings deposits — for households, with some restrictions and modest interest.
- Fixed (term) deposits — kept for a fixed period, earning the highest interest.
- Recurring deposits — a fixed monthly deposit for a set period.
(ii) Advancing loans. The bank lends its deposits (after keeping a reserve) through:
- Cash credit and overdraft facilities,
- Demand and term loans, and
- Discounting of bills of exchange. Interest earned on these advances is the bank's principal source of income.
These two functions are 'primary' because together they define the essential intermediary role of a bank — accepting deposits (its liabilities) and creating loans (its assets).
The primary functions are: (i) accepting deposits through current, savings, fixed and recurring accounts, and (ii) advancing loans via cash credit, overdrafts, demand and term loans, and discounting bills — the core intermediary role of a bank.
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