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Meaning of commercial banks

A banking company is one which transacts the business of banking
which means the accepting for the purpose of lending all
investments, of deposits of money form the public, repayuable on
demand or otherwise and withdrawable by cheque, draft or
There are two essential functions that a financial institution must
perform to become a bank. These are
a) Accepting of the chequable deposit form the public
b) Lending
Main features:
1. It accepts deposits from the public. These deposits can be
withdrawn by cheque and are repayable on demand.
2. A commercial bank uses the deposited money for lending
and for investment in securities.
3. It is a commercial institution , whose aim is to earn profit
4. It is a unique financial institution, that creates demand
deposits which serves as the medium of exchange.
5. Money created by commercial banks is known as deposit

Functions of commercial Banks

Various functions of commercial banks can be divided into three
main groups;
i. Primary functions
ii. Agency functions
iii. General utility functions
PRIMARY FUNCTIONS - There are two main primary functions
of the commercial banks which are discussed below :
1. Accepting deposits – The primary function of commercial
bank is to accept deposits form every class and from every
source. To attract savings the bank accepts mainly three
types of deposits. They are namely demand deposits, saving
deposits, fixed deposit.
Demand deposit ( also known as current deposit) are those
deposits which can be withdrawn by the depositor at any time
by means of cheque. No interest is paid on such deposits.
Rather, the depositor have to pay something to the bank for
the services rendered by the businessmen and industrialists.
It is also called current account.
Saving deposits – These are those deposits on the withdrawal
of which bank places certain restrictions. Cheque facility is
provided tosd the depositors. Saving deposits accounts are
generally held by households who have idle or surplus money
for shor period.
Fixed deposit – These are those deposit which can be
withdrawn onlyh after the expiry of the certain fixed time
iperiod. These deposits carry high rate of interest. The longer
the period, higher will be the rate of interest.
Distingusish between demand deposit and fixed deposit

Demand deposit Fixed deposit

1. Demand deposit can be These deposit can be

withdrawn by the depositor at withdrawn only afgter the
anytime without notice. expiry of the certain fixed
time period.
2.They are chequable i.e., They are not chequable.
demand deposits are
withdrawable through cheques
3.No interest is paid on these These deposits carry high rate
deposits. Rather depositors of ihterest.
have to pay something to the
bank for its services.
4. These deposits constitute They fall under sthe categoryu
of a part of money supply of near money assests.

Advancing of loans

Commercial banks give loans and advances to businessmen,

farmers, consumers and employers against approved securities.
Approved secutities refer to gold, silver, vullion, govt.
securities, easily savable stock and shares and marketable
goods. The bank advances following types of loans-
a. Cash credit – Under this the borrower is allowed to
withdraw upto a certain amount on a given security
which comprise mainly stocks of goods and B/R from
others., But interest is charged on the amount actually
b. Overdraft – It is a most common way of lending. Under
it, the borrower is allowed to overdraw hios current
a/c balance.Overdraft is a temporary facility.
c. Short term loans – Under it loans of a fixed amount
are sanctioned. The sancgtioned amount is credited in
the debtors a/c. Bank charges ihterest on the whole
amount form the day it was sanctiuoned.
The difference between a loan and an overdraft is that, while in
case of loan, the borrower payus interest on the amount
outstanding against his a/c. But is the case of an overdraft, the
customerpays interest on the deal balance standing against his
a/c further. Loans are given against security, while overdrafgts
are made without securities. From the borrowers point of view,
overdraft is preferable thorough a loan because, in case of loan,
he will have to pay interest on the full amount of loan sanctioned
whether he uses it fully or not. But in the case of overdraft, he
has the facility of borrowing only as much as he requires.
d. Discounting of trhe bill of exchange
This is another popular type of lending by the
conmmdercial banks. Through this method, the holder of
the bills of exchange ( written durning trade
transactions) can get it discounted by the banks. The
banks after demanding the comm. Pays the value of the
bills to the holder. When the bills of exchange matures,
the bank gets its payment from the party which had
accepted the bill.
e. Money at call
Such loans are very short period loans and can be called
back by the bank at a very short notice of say one day to
14 days. These loans are generally made by one bank to
another bank or financial institutions.