Functions of Commercial Banks

Banks perform many functions — some are primary (basic) functions and others are agency or general-utility services. The important ones are:

• Acceptance of deposits — Deposits are the basis of a bank's lending, since a bank is both a borrower (paying interest on deposits) and a lender (earning interest on loans). Deposits are taken through three main accounts:
  • Current account — withdrawable up to the balance at any time without prior notice.
  • Savings account — meant to encourage saving; interest is paid at rates decided by the RBI; withdrawals have some restrictions on amount and number of times in a period.
  • Fixed (time) deposit — carries a higher rate of interest than a savings account; premature withdrawal is allowed but a portion of the interest is forfeited.
• Lending of funds — The bank lends out the money received as deposits in the form of overdrafts, cash credits, discounting of trade bills, term loans, consumer credit and other miscellaneous advances. These funds greatly support trade, industry, transport and other business activities.
• Cheque facility — Banks collect their customers' cheques drawn on other banks. The cheque is the most developed credit instrument and a convenient, inexpensive medium of exchange for withdrawing deposits. There are two main kinds:
  • Bearer cheque — encashable immediately at the bank counter.
  • Crossed cheque — can only be deposited into the payee's account. …