Explain the functions of Commercial Banks.

Answer: Commercial banks perform primary functions (accepting deposits, giving loans and advances) and secondary functions (agency, general utility and modern services).

A. Primary functions

1. Accepting deposits: Banks accept deposits from the public in current account, savings account, fixed (term) deposits and recurring deposits.
2. Granting loans and advances: Banks lend money through term loans, cash credit, overdraft facility and discounting of bills of exchange.
3. Credit creation: By lending out of deposits, banks create derivative deposits and thus multiply credit in the economy.

B. Secondary functions

1. Agency functions: Collecting cheques, dividends and interest; paying insurance premium, rent, bills; buying and selling securities; acting as trustee or executor for customers.
2. General utility functions: Safe deposit lockers, issuing demand drafts, traveller’s cheques and letters of credit, dealing in foreign exchange.
3. Modern services: ATM, debit and credit cards, internet and mobile banking, NEFT/RTGS, merchant banking and mutual fund services.