What is Bank? Explain primary functions of commercial banks.

Answer: A bank is a financial institution which accepts deposits from the public and lends money. The primary functions of commercial banks are accepting deposits and granting loans and advances.

Meaning: A bank is a financial institution that accepts deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque or other means, and lends money to those who need it. The Banking Regulation Act, 1949 defines banking as accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.

Primary functions of commercial banks

A. Accepting deposits

1. Savings deposit account: Meant to encourage savings of individuals; limited withdrawals are allowed and a moderate rate of interest is paid.
2. Current deposit account: Mainly for businessmen; any number of deposits and withdrawals are allowed, usually no interest is paid, and overdraft facility may be given.
3. Fixed deposit account: Money is deposited for a fixed period at a higher rate of interest; it cannot normally be withdrawn before maturity without penalty.
4. Recurring deposit account: A fixed amount is deposited every month for a fixed period and the total with interest is repaid on maturity.

B. Granting loans and advances

1. Loans: A fixed amount is given for a specific period against security; interest is charged on the whole amount.
2. Cash credit: The customer is allowed to borrow up to a limit against security of goods or other assets; interest is charged only on the amount actually used.
3. Overdraft: Current account holders are allowed to withdraw more than their balance up to an agreed limit; interest is charged on the overdrawn amount.
4. Discounting of bills of exchange: The bank pays the holder the amount of a bill before its due date after deducting a discount, and collects the full amount on maturity.