What is Bank? Explain in detail primary functions of commercial banks.

Answer: A bank is a financial institution that accepts deposits of money from the public, repayable on demand or otherwise, and lends money to those who need it.

According to the Banking Regulation Act, 1949, banking means “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.” Commercial banks perform primary, secondary (agency and utility) functions. Their primary functions are accepting deposits and lending money.

A. Accepting deposits

1. Savings deposits: Meant to encourage savings by individuals. Withdrawals are allowed with some limits and a moderate rate of interest is paid.
2. Current deposits: Meant for businessmen and traders. Any number of deposits and withdrawals are allowed, generally no interest is paid, and overdraft facility may be given.
3. Fixed (term) deposits: Money is deposited for a fixed period. It cannot normally be withdrawn before maturity and a higher rate of interest is paid.
4. Recurring deposits: A fixed amount is deposited every month for a fixed period. The total with interest is repaid on maturity; it develops regular saving habits.

B. Lending money (granting advances)

1. Loans: A fixed amount is sanctioned for a fixed period against security; interest is charged on the whole amount and it is repaid in instalments or lump sum.
2. Cash credit: The customer can borrow up to a limit against security of stock or other assets; interest is charged only on the amount actually used.
3. Overdraft: A current account holder is allowed to withdraw more than his balance up to a limit for a short period; 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.

Thus, by accepting deposits and lending money, commercial banks mobilise savings and supply funds for trade, industry and individuals.