Home Finance What is commercial bank-Important functions of commercial bank

What is commercial bank-Important functions of commercial bank

The commercial banking involves in making a profit by investing others money and not by investing commercial bank’s own money Commercial banking system was originated from the financial activities Goldsmiths of early age.

 Modem commercial bank plays a vital role in shaping the economic destiny of a country. They collect the scattered savings of people and make them available for socially desirable and economically beneficial purposes.

They are a middle party between those people who have extra money and those who are in need of money. The difference between the terms he borrows and the terms he lends make the source of his profit. They also contribute to the growth and stability of the economy as well as to the welfare of the population.

Commercial banking is the most famous and common banking in all humanize countries of the world. The majority of banks are running in the commercial banking system. In Pakistan, commercial bank are invented in the form of “partnership” and joint-stock “company”. These banks have two kinds:

Explain following terms:

  1. Definitions
  2. Functions
  3. Primary functions
  4. Secondary functions
  5. Types of loans according to term
  6. Types of loans according to issue
  7. Conclusion
  8. FAQ’s

(1) Scheduled banks                                                  

(2) Non-scheduled banks

commercial bank

DEFINITIONS:

(Banking Company’s Ordinance 1962)

“ It accepts the deposits of people and loan to the needy”.

(Crowther)

“A bank is a place which receives money from those people who have it surplus. It gives money as a loan to those who require it.”

(G. W. Gilbert)

FUNCTIONS OF A COMMERCIAL BANK

In modern time, the functions of a modern commercial centre and manifold. The function of a bank may broadly be divided into two parts.

  1. Primary Functions
  2. Secondary Functions
Functions of commercial bank

Source: Wikipedia

PRIMARY FUNCTIONS

1. RECEIVING OF DEPOSITS:

It is the first primary function of the Commercial Bank. Banks accept deposits from the public and pay interest/profit. In which discuss about mobile banking, Now a day mobile banking is growing very fast all the transactions are clear remotely through mobile banking.

Mobile banking is a system in which receive deposits and transferred money easily in different accounts.

Different kinds of deposits are given below:

receiving deposit through mobile banking

(i) Current Account:

It is the most popular form of bank accounts. Majority of customers specifically business class, government departments, public bodies living their money in current accounts of a commercial bank. In this account, money can be deposited and withdraw from the bank at any time during banking hours.

Generally, interest/profit is not paid on this account and bank deducts its service charges from the account. Now a day, many banks are suggesting interest/profit on a precise amount kept in these accounts.

(ii) Saving Account:

Persons personal finance with little savings (low income or salaried persons), deposit their money in the saving account. Saving deposits can be withdrawn on demand up to a certain limit. Banks also pay interest on these accounts.

(iii) Fixed Deposit Account:

In this account, money is deposited for a fixed period of time. costly rate of interest / financial gain is paid on this deposit. The period is fixed at the time of opening a bank account. Within this period, the account holders are not entitled to withdraw money from the accounts.

(iv) Foreign Currency Account:

This account is opened in foreign currency replacement of local currency. In Pakistan, this account can only be opened in appointed branches of commercial banks. Foreign currency account can be opened in the form of economizing, Fixed and Current accounts. This account is exempt from Zakat & Tax.

2.ADVANCING LOANS:

The second primary function of a commercial bank is to lend money. The banks do not keep the deposited money of the people useless in their safes. They advance it to those who need it for trade and industry. In short, banks borrow money in order to lend.

They provide important role in economic development.

TYPES OF LOANS ACCORDING TO TERM

Loans are provided by the customers according to a term like six months, one year that are the different terms of the loan according to there demand.

(i) Demand Loans:

These are the loans, which can be demanded by the bank at any time. Generally, these loans are issued to rich and trustworthy people. These loans can be recovered on a lump sum or installments basis according to the desire of borrowers.

(ii) Short Term Loans:

micro loans

These loans are issued to meet the day-to-day requirements of the business for the period up to 1 year.

(iii) Medium Term Loans:

These loans are given to purchase raw material and to meet the administrative expenses for the period of 1 to 5 years.

(iv) Long Term Loans:

These loans are issued for the purpose of investment and to purchases fixed assets like building, plant & machinery etc. for the period of 6 to 10 years.

(v) Project Loans:

These are the loans, which are issued by the banks to complete the projects of big industries.

NOTE: The concept of medium-term loan has been vanishing gradually in modern banking.

TYPES OF LOANS ACCORDING TO ISSUE

Many types of loan according to issue these are discussed

(i) Cash Credit / Finance:

Banks also give cash credit against current assets such as shares and bonds etc. The cash flow sanctioned amount of loan is transferred to the account of the customer. The bank charges interest on the utilized or withdrawn amount only.

(ii) By Opening Loan A/C:

In this method, the bank opens a loan account in the name of its customer instead of giving cash as a loan. The customer can draw money according to the requirements from the loan account. In this method, the bank charges interest on the total amount of loan whether withdrawn or not.

(iii) By Overdraft:

Banks allow their trustful customers to draw more than the deposit they have in their bank accounts. Banks charge interest on overdraft on a daily basis. In modern banking, overdraft facility is known as running finance.

(iv) By Mortgage / Pledge:

Banks grant loan against the security of different immovable or movable assets like land, property and gold etc. Generally, loans are granted for a long period of time under mortgage or pledge.

(v) By Discounting of B/E:

Discounting of bills of exchange means that the bank accepts the bill security for granting a loan. It is also a  source of income for the bank, because it always deducts a nominal amount as discounting charges. But, it is notable that the bank accepts only reputed and clear bills of exchange.

SECONDARY FUNCTIONS

   1. AGENCY SERVICES:

Commercial banks provide the facility of agency services to our customers these are follow:

Agency services

(i) Collection & Payment of Cheques:

Commercial banks collect and make payment of cheques on the behalf of their customers.

(ii) Collection of dividends:

Commercial Banks collect dividend and interest on shares on behalf of their customers. For this purpose, the customer financially free informs the issuer of the security to pay interest or dividend in his account of the bank.

(iii) Purchase & Sale of Security:

If the customer directs his bank to purchase and sale securities on his behalf, the bank will do this by charging a nominal commission.

(iv) Execution of Standing Instructions:

Bank also executes instructions of his customers by charging nominal charges. For instance, if a person has to pay Rs. 600 to the insurance company and Rs. 200 as rent every month. Bank will make monthly payments on the written order of the customer.

(v) Trustee:

Bank also acts as a trustee on behalf of the customer. In this capacity, the bank takes care of the affairs of its client.

(vi) Transfer of Fund:

Bank also performs the function of transferring fund from one place to another by charging a nominal commission.

(vii) Agent:

Banks also act as an agent or representative of customer at home and abroad.

2. UTILITY SERVICES:

These banks are also provide the facility of utility services for our clients.

Utility Services of commercial bank

(i) Foreign Exchange:

Banks deal in foreign exchange with the permission of central banks to facilitate both foreign trade and foreign travel.

(ii) Easy Medium of Exchange:

Issued cheques of banks are considered as an easy medium of exchange because their presence minimizes the use of cash in business transactions.

(iii) Arbitrator:

Banks act as arbitrator and provide information relating to the creditworthiness and transactions of their customers to settle any dispute.

(iv) Acceptance of B/E:

Banks accept bills of exchange on the behalf of customers to meet their financial needs.

(v) Credit Instruments:

Banks issue various credit instruments, which are of considerable benefit to the business community; (e.g.) Cheques, draft and L.C. etc.

(vi) Trade Information:

Banks collect useful financial and trade information for their customers.

(vii) Precious Articles:

Banks accept valuables like ornaments, documents, securities, insurance policy, etc., from their customers for safe custody.

(viii) Special Services:

In particular circumstances, banks also provide the following services to their customers and govt.

(i) Receipt of Zakat and Usher.

(ii) Receipt of Haj Applications.

(iii) Issuance of Qarz-e-Hasna.

(iv) Receipt and payment of bills.

(v) Fee receipt of educational institutions.

(vi) Receipt of donation.

(ix) Issuance of Credit Cards:

It is a modern facility of banking. The commercial banks issue credit cards for different limits, which prove helpful in making payments to various institutions.

(x) Automated Teller Machines (ATM):

Nowadays, modern commercial banks use the computerized counter to provide twenty-four hours cash service through automated teller machines (ATM) to their valuable customers.

(xi) Cash Deposit Machines (CDM):

It is another facility of 24 hours banking services in which the customers/account holders can deposit the money in their bank accounts at any time through cash deposit machines (CDM).

(xii) Underwriting:

Banks underwrite shares, bonds, etc., issued by Government, public bodies or trading corporations in order to raise capital or fund or loan.

Conclusion:

Commercial bank perform the different functions of the bank. So conclusion is where they provide the facilities of transactions and financial matters to customers and clients.

All the detail is discussed in above section.

FAQ’s

1.What is commercial bank?

Commercial banking is the most famous and common banking in all humanize countries of the world. The majority of banks are running in the commercial banking system. In Pakistan, commercial bank are invented in the form of “partnership” and joint-stock “company“.
“A bank is a place which receives money from those people who have it surplus. It gives money as a loan to those who require it.”

2.How many functions of commercial bank?

In modern time, the functions of a modern commercial bank and manifold. These banks provide many functions but these functions are divided into the main two parts.
All the functions are unique for every user and client.
The function of a bank may broadly be divided into two parts.
1. Primary functions
2. Secondary functions

3.How many types of loans offered by commercial bank?

The second primary function of a commercial bank is to lend money. The banks do not keep the deposited money of the people useless in their safes.
They advance it to those who need it for trade and industry. In short, banks borrow money in order to lend.
Commercial bank provides different types of loans. Like short-term loans, Long-term loan, medium-term loan, demand loan and many other loans. These loans are divided into two major parts.
1. According to term
2. According to issue

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