By Harshvardhan, the Subject Matter Expert at Edumarz
Solution: Commercial banks are institutions dealing with money. These are governed by the Indian Banking Regulation Act 1949 and according to it, banking means accepting deposits of money from the public for the purpose of lending or investment. There are two types of commercial banks, public sector and private sector banks. Public sectors banks are those in which the government has a major stake and they usually need to emphasise social objectives than profitability. Private sector banks are owned, managed and controlled by private promoters and they are free to operate as per market forces. There are a number of public sector banks like SBI, PNB, IOB etc., and other private sector banks represented by HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Jammu and Kashmir Bank.
Banks perform a variety of functions. Some of them are the basic or primary
functions of a bank while others are agency or general utility services in nature. The important functions of commercial banks are briefly discussed below:
- Acceptance of deposits: Deposits are the basis of the loan operations since banks are both borrowers and lenders of money. As borrowers they pay interest and as lenders, they grant loans and get interest. These deposits are generally taken through current account, savings account and fixed deposits. Current account deposits can be withdrawn to the extent of the balance at any time without any prior notice. Savings accounts are for encouraging savings by individuals. Banks pay the rate of interest as decided by RBI on these deposits. Withdrawal from these accounts has some restrictions in relation to the amount as well as the number of times in a given period. Fixed accounts are time deposits with higher rates of interest as compared to savings accounts. A premature withdrawal is permissible with a percentage of interest being forfeited.
- The lending of funds: Second major activity of commercial banks is to provide loans and advances out of the money received through deposits. These advances can be made in the form of overdrafts, cash credits, discounting trade bills, term loans, consumer credits and other miscellaneous advances. The funds lent out by banks contribute a great deal to trade, industry, transport and other business activities.
- Cheque facility: Banks render a very important service to their customers by collecting their cheques drawn from other banks. The cheque is the most developed credit instrument, a unique feature and function of banks for the withdrawal of deposits. It is the most convenient and inexpensive medium of exchange. There are two types of cheques mainly
(a) bearer cheques, which are encashable immediately at bank counters and
(b) crossed cheques which are to be deposited only in the payee’s account.
4.Remittance of funds: Another salient function of commercial banks is of providing the facility of fund transfer from one place to another, on account of the interconnectivity of branches. The transfer of funds is administered by using bank drafts, pay orders or mail transfers, on nominal commission charges. The bank issues a draft for the amount on its own branches at other places or other banks at those places. The payee can present the draft to the drawee bank at his place and collect the amount.
5.Allied services: In addition to the above functions, banks also provide allied services such as bill payments, locker facilities, underwriting services. They also perform other services like buying and selling of shares and debentures on instructions and other personal services like payment of insurance premium, collection of dividend etc.