Functions of commercial banks:

The functions of commercial banks can be divided into

(A) Primary functions 

(B) Secondary functions.

Let us understand each in brief.

(A) Primary functions:

Accepting deposits:

A bank acts as a custodian by accepting people s’ savings in the form of deposits and gives interest in return.

Different types of deposits:

There are four different ways in which a bank accepts deposits.
They are:

1. Current Account Deposits,
2. Savings Account Deposits,
3. Recurring Deposit Account and
4. Fixed Deposits.

A customer may deposit money in banks by opening any of these accounts.

1. Current account deposits:

A business, firm or an individual can open a current account with the bank. The main objective of this account is to conduct business related transactions.

2. Savings account deposits:

• A savings account is an account provided by a bank for individuals to save money and earn interest on the cash held in the account.
• The account holder can withdraw money using cheque, withdrawal slip, debit card and credit card.

3. Recurring deposits:

• This type of deposit accounts allows people to deposit small amount of money every month.
• The deposit gradually increases and the bank provides interest on the accumulated amount.

4. Fixed/ Long term deposits:

• People who want to deposit their money for long duration opt for fixed deposits.
• These deposits are fixed in nature and thus, money cannot be withdrawn as and when required by the depositor.
• Banks pay highest rate of interest as compared to other deposit accounts.

2. Providing credit facilities:

• Banks provide credit facilities to different individuals such as farmers, different professionals, etc. who are in need of money.
• Under this system, the needy ones borrow from the bank and the bank charges interest for the credit facility that it provides. The interest charges depends on the purpose of credit i.e. whether the credit is used for personal use, agricultural activity or business activity.

3. Payment and withdrawal facilities:

A bank provides easy payment and withdrawal facility to its customers. The various facilities are cheque, withdrawal slips and drafts, pay order, ATM Facilities (Automatic Teller Machine), internet banking, debit card and credit card.

4. Credit creation:

Credit creation is the power of commercial banks to expand deposits, through loans, advances and investments. In other words, on the basis of cash deposits of the customers in the bank, the bank makes loans and advancement and thus increases the money supply in the market.

5. Inter-banking transactions:

• A bank can provide short or long-term credit in the form of loans or advance to the other bank as and when required.
• Short term credit is provided by one bank to another through central bank and is called ‘call money’ and the interest rate of call money is called ‘call money rate’

(B) Secondary functions:

1. Agency and utility services:

Under this a bank provides various facilities to its customers as follows:

1. Letter of credit – Bank acts as a mediating agent for payment between exporter (in India) and Importer (in foreign country) especially when the parties are unknown to each other.
2. Underwriting services
3. To pay tax challans
4. Safe deposit vaults (lockers) – to store precious jewelry and documents safely”
5. Micro finance facilities – providing finance to small business for overall development of the community and economy as a whole

2. Provide various facilities with changing time:

• In today’s scenario, banks have shifted from physical presence to digitalization i.e. services in electronic form.
• The transfer of money from one customer of a bank to the other customer of the same or different bank is made easy by using electronic medium (done through facilities like NEFT and RTGS) without using cheques.