The following points will highlight the five main functions of commercial bank.
They are: 1. Mobilisation of Savings 2. Supply of Finance 3. Creation of ‘Money’ 4. Development and Growth of the Economy 5. Subsidiary Functions.
Function # 1. Mobilisation of Savings:
Banks gather the savings of individuals through deposits. Deposits may be of various kinds—current, savings or fixed. Moneys in the current account can be withdrawn on demand, those in the other two are withdrawable subject to specified restrictions. A deposit is a loan to the bank and is a liability of the bank. Moneys in the current account are called Demand Deposits or Demand Liabilities. Those in fixed deposit accounts or savings accounts are called Time Deposits or Time Liabilities.
Function # 2. Supply of Finance:
Banks lend money for industrial, commercial and other purposes. Loans may be given in a variety of ways, viz., cash credit, overdraft facilities and the discounting of commercial papers like bills of exchange, hundis, etc. Commercial banks generally confine themselves to short-term lending against readily realisable securities like gold, government promissory notes, bills of exchange and hundis. Other types of banks (e.g., Mortgage Banks, Industrial Banks) lend money for long periods against the security of immovable property and industrial assets.
ADVERTISEMENTS:
“The primary economic function of commercial banks is to hold demand deposits and to honour checks drawn upon them—in short, to provide us, the economy, with the most important component of our money supply.” — Samuelson.
Function # 3. Creation of ‘Money’:
Banks supply a part of the medium of exchange. Formerly private banks could issue notes which circulated as money. This power has now been withdrawn in most countries. But private banks still supply a part of the medium of exchange through their power of creating deposits. When a loan is given a bank may credit the amount to the deposit account of the debtor and empower the debtor to draw cheques on it.
Such a deposit is called a “created deposit” to distinguish it from an actual deposit of cash by the customer. A bank can, within certain limits, create deposits without making any specific appropriation of cash for the loan. The ability of a bank to create claims against itself in the form of deposit accounts is regarded by some authorities as the fundamental characteristic of banking institutions.
Function # 4. Development and Growth of the Economy:
In an underdeveloped economy, the commercial banks play a constructive role. In a socialistic pattern of society, there is social control of banks.
ADVERTISEMENTS:
With this object the banks;
(1) finance agriculturists and industrialists liberally,
(2) attract deposits from public by giving higher interests with tempting schemes, and
(3) open branches in rural areas and in the suburbs of the towns.
Function # 5. Subsidiary Functions:
ADVERTISEMENTS:
Banks perform a variety of miscellaneous functions on behalf of their customers:
(i) They act as agents for the purchase of shares and securities,
(ii) They collect and pay bills,
(iii) They can be appointed trustees, executors and administrators of estates.
(iv) They keep valuables in safe custody.
(v) They issue letters of credit and traveller’s cheques,
(vi) They arrange for transfer of money from one place to another by banker’s draft or otherwise,
(vii) Some banks deal in foreign exchange and foreign moneys can be obtained through them, subject to the foreign exchange regulations of the countries concerned.