Functions of Modern Commercial Banks

Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving. Major functions of a commercial bank are:

1. Primary or Banking functions
2. Secondary or Non-Banking functions.
3. Subsidiary Activities

Primary / Banking Functions: Commercial banks have two important banking functions. One is accepting deposits and other is advancing loans.

Deposits

One of the main functions of a bank is to accept deposits from the public. Deposits are accepted by the banks in various forms:

Current Account Deposits: Current Accounts are usually opened by businessmen who have a number of regular transactions with the bank , both deposits and withdrawals. No interest is paid on current deposits .Banks may even charge interest for providing this facility.

Saving Account Deposits: Saving Accounts are opened by salaried and other less income people. There is no restriction on number and amount of deposits. Withdrawals are subject to certain restrictions. It earns Interest but less than fixed deposits.

Fixed Account Deposits: Deposits in fixed account are time deposits Money under this account is deposited for a certain fixed period of time varying from 15 days to several years. A high rate of interest is paid on such deposits.

Recurring Account Deposits: In Recurring deposit, a specified amount is regularly deposited by account holder, at an internal of usually a month. This is to form the habit of small savings among the people. At the end of maturity period, the account holder gets a substantial amount. Interest on this type of deposit is almost equal to fixed deposits.

Loans and Advances

Banks not only mobilize money but also lend to its credit worthy customers for minimizing profits. Loans arid Advances are granted to:

Business and Trade: Commercial banks grant short term loans to business and trade activities In following forms:

• Overdraft
• Cash Credit
• Discounting of Bills
• Money At Call
• Direct Loans

Loans to Agriculture Banks giant short-term credit to agriculture at a lower rate of interest. Loans are granted for irrigation, purchase of equipments, inputs, cattle etc.

Loans To Industries: Banks grant secured loans to small and medium scale industries to meet their working capital needs. The time period may be from one to five years. It may be in the form of Overdraft, cash credit .

Loans To Foreign Trade: Loans are granted to export and 1m port in the form of direct loans, discounting of bills, guarantee for deferred payment etc. Here the rate of interest is low.

Consumer Credit / Personal bars: grant credit to household in a limited amount to buy some durable consumer goods like television sets, refrigerators, washing machine etc. Such consumer credit is repayable in installments. Under 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well.

Miscellaneous Advances: Banks also gives advances like packing credits to exporters, export bill purchased or discounted, import finance, finance to self-employed, credit to weaker sections of society at concessional rates etc.

Secondary / Non-banking Functions

Banks gives various forms of services to public. Such services are termed as non- banking or secondary functions:

Agency Services: Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are:

1. Collection: Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount.
2. Payment: Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged.
3. Income — Tax Consultant: Commercial banks act as income tax consultants. They prepare and finalise the income tax returns of their clients.
4. Sale And Purchase Of Financial Assets: As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank.
5. Trustee, Executor And Attorney: As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of customer.
6. E- Banking: Through Electronic Banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another.