Primary Functions of Commercial Banks

A commercial bank's functions are traditionally divided into primary functions — the core activities without which it would not be a bank at all — and secondary functions, which are additional services it offers to customers on top of that core activity. This section covers the primary side: accepting deposits and advancing loans.

Accepting deposits

A bank offers several types of deposit accounts, each suited to a different saving or transaction need:

• Current account — meant mainly for businesses and firms that need to make frequent deposits and withdrawals. There is usually no restriction on the number of withdrawals, but the bank ordinarily pays little or no interest on the balance, since the funds are highly liquid and available to the account holder on demand.
• Savings account — designed for individuals who wish to save a part of their income while keeping it reasonably accessible. Withdrawals may be subject to some restriction, and the bank pays a modest rate of interest on the balance.
• Fixed deposit account — a lump sum is deposited for a fixed period ranging from a few months to several years, and cannot ordinarily be withdrawn before that period ends without a penalty. Because the bank can rely on the funds staying with it for a known period, it pays the highest rate of interest among the common deposit types.
• Recurring deposit account — a fixed, smaller sum is deposited at regular intervals (commonly every month) for an agreed period, and the accumulated amount together with interest is paid out at maturity. It suits people who want to build up savings in small, disciplined instalments rather than depositing one large sum.

Advancing loans

The deposits collected above are of little use to the bank, or to the economy, unless they are lent out again. A bank advances credit mainly in these forms:

• Cash credit — the bank sanctions a certain credit limit against security (such as stock or receivables), and the borrower may withdraw funds up to that limit as and when needed, paying interest only on the amount actually drawn rather than on the full sanctioned limit.
• Overdraft — allowed mainly on current accounts, this permits an account holder to withdraw more than the balance actually standing in the account, up to an agreed limit, for a short period. It is a convenient short-term facility for businesses facing a temporary cash shortfall. …