A bank (German word) means a joint stock fund. A bank denotes a financial institution dealing in money. A bank is an institution that is prepared to accept deposits of money and repay the same on demand. The system of banking is very old and the same was prevalent in Greece, India and Rome.
A banker (i.e., person or a corporation) deals in credit and money i.e. it accepts deposits from those who want to commit their wealth to safety and earn interest thereon, and lends money to the needy through cheques and advances and loans of various sorts.
Functions of Banks
The primary functions of a bank are also known as banking functions. They are the main functions of a bank.
These primary functions of banks are explained below.
General Functions
1. Receiving Deposits:
The first and foremost function of commercial bank is to receive or collect deposits from the public in different forms of accounts e.g. current, savings, term deposits. No interest is charged in the current account, lower rate of interest is charged in the savings account and comparatively higher interest rates charged in fixed deposits. Thus, commercial bank builds up customer network.
2. Accommodation of loans and advances:
Commercial Bank attaches much importance to providing loans and advances at a higher rates than the deposit rates and thus earns profits on it. Working capital is accommodated to the borrower for expansion and smooth running of business. In the and industry. Credit accommodation is provided to the entrepreneurs for reviving sick and old industries as per Govt. directives. Thus, commercial bank also extends welfare services to the people at large.
3. Creation of Loan Deposits:
Commercial Bank not only receives deposits from public and accommodates loans to public but also creates loan deposits. For example: while disbursing loans as per sanction stipulation, the amount of loan is credited to the borrower‟s account. The borrower may not withdraw the full amount at a time. The residual amount i.e. balance left in the account creates loan deposits.
4. Creation of medium of exchange:
Central Bank has got exclusive right to issue notes. On the other hand, Commercial Bank creates medium of exchange by issuing cheques. Like notes, cheque is transferrable being popularly used in the banking transactions.
5. Contribution in foreign trade:
Commercial Bank plays a vital role in expediting foreign exchange and foreign trade business e.g. import, export etc. It contributes greatly in the economy through import finance and export finance and thus, earn foreign exchange for the country.
6. Formation of capital:
Commercial Bank extends financial assistance for the formation of capital in the trade, commerce and industry in the country which expedites its economic development.
7. Creation of Investment Environment:
Commercial Bank plays a significant role in creating investment environments in the country.
Public Utility Functions
In modern banking ,commercial bank executes public utility services:
1. Remittance of Money:
Remittance of money to the public from one place to another is one of the functions of commercial bank. Remittance is effected in the form of demand draft ,telegraphic transfer etc. through different branches and correspondents home and abroad.
2. Help in trade and commerce:
Commercial Bank helps expand trade and commerce. In inland and foreign trade customers are allowed credit accommodation in the form of letter of credit , bill purchased and discounted etc.
3. Safe custody of valuables:
Commercial Bank introduces „locker‟ services to the customers for safe custody of valuables e.g. documents, shares, securities etc.
4. Help in Foreign Exchange business:
While opening letter of credit , commercial bank obtains credit report of the suppliers and thus help expedite import and export business.
5. Act as a Referee:
Commercial Bank acts as a referee for and on behalf of the customers.
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