Question

Explain the important functions of commercial banks.

Hint:

Remember the primary functions as the "bread and butter" of banking: taking money in (deposits) and giving money out (loans). Secondary functions are the additional services that make a bank useful.

Answer 1

Step 1: Understanding the Concept:
Commercial banks are financial institutions that accept deposits from the public and provide loans for the purposes of consumption and investment. Their functions can be broadly classified into primary and secondary functions.

Step 2: Detailed Explanation of Functions:
A. Primary Functions: These are the core functions of any commercial bank. \begin{enumerate} \item Accepting Deposits: Banks accept deposits from the public, which form the main source of their funds. These include: \begin{itemize} \item Current Account Deposits: Repayable on demand, usually for businesses, offering cheque facilities but no interest. \item Savings Account Deposits: Encourage savings, offer cheque facilities, and pay a small amount of interest. \item Fixed/Time Deposits: Deposits for a fixed period, offering a higher rate of interest but no cheque facilities. \end{itemize} \item Advancing Loans: Banks lend money to individuals and businesses and earn interest, which is their main source of income. This includes: \begin{itemize} \item Cash Credit: Credit given against the security of goods or other assets. \item Overdraft: Allows current account holders to withdraw more than their account balance up to a certain limit. \item Loans and Advances: Loans given for a specific purpose and period against some collateral. \item Discounting Bills of Exchange: Providing funds to a business before the maturity date of a bill of exchange. \end{itemize} \end{enumerate} B. Secondary Functions: These are non-banking functions performed by banks. \begin{enumerate} \item Agency Functions: The bank acts as an agent for its customers. \begin{itemize} \item Transfer of funds. \item Collection of cheques, dividends, and interest warrants. \item Making periodic payments like insurance premiums or rent. \end{itemize} \item General Utility Functions: \begin{itemize} \item Providing locker facilities for the safe custody of valuables. \item Issuing letters of credit and traveller's cheques. \item Dealing in foreign exchange transactions. \end{itemize} \end{enumerate} An important overarching function is Credit Creation, where banks lend out multiples of their initial deposits, thus expanding the money supply in the economy.

Step 3: Final Answer:
The important functions of commercial banks include the primary functions of accepting deposits and advancing loans, and secondary functions like agency services and general utility services.