The following points highlight the top six functions of commercial banks. The functions are: 1. Mobilization of Savings 2. Granting Loans 3. Agents of Payment 4. Credit Creation 5. Developmental Function 6. Miscellaneous Functions.
Commercial Bank: Function # 1. Mobilization of Savings:
Commercial banks accept deposits from the public who have surplus funds. Individuals and companies can deposit money with a bank by opening an account. Banks mobilize people’s savings by offering interest on the deposits. In this way, banks help depositors to come to banks and help in mobilizing savings and develop a habit of thrift among people.
Bank deposits are usually of three types— demand deposits, time or fixed deposits and savings deposits. Demand deposits or current deposits are with drawable at any time on demand. No interest is paid on these deposits. However, banks, in return, provide some services (e.g., cheque facility) at a very modest fee or without fee.
Term or time or fixed deposits are with drawable only after the expiry of the stipulated time, but not on demand. However, premature withdrawal of fixed deposits is permissible, provided the depositor is willing to lose some interest income on those deposits. Cheque facilities are not provided to these depositors.
Savings deposits combine features of both current deposits and term deposits. These deposits are withdrawable on demand by cheque but with certain restrictions. Though no interest is paid on deposits on current account, saving deposits do earn some interest.
Commercial Bank: Function # 2. Granting Loans:
Commercial banks are not only borrowers of money from the public but also are providers of credit. Banks lend money in several ways but all they cost the customers who borrow from banks. They must pay back loan with interest and it is in this manner that banks make a profit.
The name commercial bank is derived from the fact that such banks, in the past, were used to provide the bulk of their credit for purposes of commerce only. Nowadays, they grant credit to all the sectors of the economy. Usually, they finance all types of economic activities for a short period against readily realizable assets.
At present, commercial banks are also giving medium and long term credit, particularly in agriculture and industry.
Such loans are given in various forms such as cash credit, discounting of bills, overdraft facilities and investment in company shares and long term government securities. Of late, commercial banks are financing construction of houses. They are also offering consumer credit for the purpose of buying cars, computers, washing machines, etc. They also provide educational loan.
Commercial Bank: Function # 3. Agents of Payment:
The transmission of money through various means is another vital function of the bankers. For customers with current accounts, banks will pay those people or companies to whom the customer owes money. This is done by transferring money from one account to another on the instruction of the customer using a cheque, standing order, direct debit instruction, credit card, traveller’s cheque, etc.
Commercial Bank: Function # 4. Credit Creation:
The most important function of commercial banks is the creation of credit. By credit creation, we mean the potentiality of bank to expand or contract demand deposits via more or less loans and advances. This explains the saying ‘every loan creates a deposit’. An increase in bank credit is equivalent to the multiplication of bank deposits. This important characteristic of banking institutions will be discussed in detail below.
Commercial Bank: Function # 5. Developmental Function:
Economic development of a country is largely conditioned by the availability of banking facilities in a country concerned. In other words, modern commercial banks perform certain functions that help in the process of economic development. The aforesaid functions are merely traditional functions. In addition to these, their constructive functions are of vital significance.
India’s commercial banks help the government in various ways to implement five year plans. For instance, they give loans to certain priority sectors, open branches in unbanked and under-banked areas to help them develop economically. These are the developmental functions of commercial banks. Thus, banks are the instruments of social and economic progress.
Commercial Bank: Function # 6. Miscellaneous Functions:
Commercial banks also perform a variety of other functions:
i. Provision of safety vaults or lockers to keep valuables;
ii. Rendering agency services like payment of insurance premium, electric bills, etc.; sale of National Savings Certificates, units of UTI, etc.;
iii. Provision of transfer of funds from one place to another within and outside the country;
iv. Dealings in foreign exchange;
v. Issue of travellers cheque, gift cheque, etc.
In view of these multifarious functions, Walter Leaf comments. “The banker is a universal arbiter of the world’s economy.” Its role in any economy cannot be denied. It plays a great role in channelling funds to borrowers with productive investment opportunities. Banks are important in ensuring that both the country’s financial system and the economy run efficiently and smoothly.
However, in recent years there has been a decline of traditional banking, both in size and profitability. As a source of funds to borrowers, we find an enormous growth of various institutions. Financial innovations and deregulation have created attractive alternatives to depositors and borrowers.