question_answer 12)

Explain the functions of Commercial Banks with an example of each.

Answer:

Banks perform a variety of functions including the basic or primary functions and the agency or general utility functions as discussed below (i) Accepting Deposits Banks accept deposits and pay interest on them as these deposits form the basis of loans given by banks. These deposits are generally taken through current account, savings account and fixed deposits. Current account and savings accounts deposits can be withdrawn at any time without any prior notice while Fixed deposits are time deposits of fixed maturity. Higher rate of interest is paid on fixed deposits as compared to the savings accounts. (ii) Lending of Funds Second major function of commercial banks is to provide loans and advances to individuals and businesses out of the money received through deposits. These advances can be made in the form of overdrafts, cash credits, discounting trade bills, term loans, consumer credits and other miscellaneous advances. (iii) Cheque Facility Banks collect the cheques of their customers drawn on other banks. The cheque is a developed credit instrument for the withdrawal of deposits which serves as a convenient and inexpensive medium of exchange. There are two types of cheques mainly (a) bearer cheques, which are encashable immediately at bank counters and (b) crossed cheques which are to be deposited only in the payees account. (iv) Remittance of Funds Commercial banks provide the facility of fund transfer from one place to another, on account of the interconnectivity of branches. The transfer of funds is administered by using bank drafts, pay orders or mail transfers on which the bank charges a nominal commission. The bank issues a draft for the amount on its own branches at other places or other banks at those places. The payee can present the draft on the drawee bank at his place and collect the amount. (v) Allied Services In addition to above functions, banks also provide allied services such as bill payments, locker facilities, underwriting services. Banks also perform other services like opening demat and trading accounts of customers for buying and selling of shares and debentures on instructions and other personal services like payment of insurance premium, collection of dividend etc.