Functions of Commercial Banks: meaning, functions, types, example (2024)

FAQs

Functions of Commercial Banks: meaning, functions, types, example? ›

Commercial banks have the primary functions of accepting customer deposits in the current account, savings, and fixed deposits, lending money as credit to borrowers who then pay with interest, and disbursing payments in the form of transactions and customer payments.

Answer: The primary functions of a commercial bank are accepting deposits and also lending funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends funds to its customers in the form of loans and advances, cash credit, overdraft and discounting of bills, etc.

Providing Loans: Banks lend money to individuals and businesses for various purposes, such as home mortgages, business expansion, or personal loans. Payments and Settlements: Banks enable transactions through various payment methods, like checks, debit/credit cards, and electronic transfers.

It defines commercial banks as financial institutions that accept deposits and provide loans. It describes their key functions like accepting deposits, providing loans, credit creation, fund transfers, and overdraft facilities.

One of the main functions of commercial banks is to provide loans to individuals and businesses. This is often done using the money that other customers have deposited in the bank.

Safety, liquidity, purpose, profitability are some of the principles that must be followed to mitigate risks like loss and fraudulency.

All banks have to perform two major primary functions namely: Accepting of deposits. Granting of loans and advances.

Issuing currency is not a function of a commercial bank. The issuance of currency is the responsibility of a country's central bank, which is the monetary authority that controls the money supply and regulates the banking system.

What do commercial banks do? ›

Commercial banks serve consumers and small and medium-sized businesses, providing loans, bank accounts, and credit cards. They can also offer online banking, real estate loans, and limited investment opportunities. Investment banks cater to investors, governments, and corporations.

Commercial banks perform the function of credit creation in an economy. Therefore, the money that is created by commercial banks is known as credit money. This is achieved by the commercial banks in the form of purchasing securities and providing loans.

Primary reserves are cash, deposits due from other banks, and the reserves required by the Federal Reserve System. Secondary reserves are securities banks purchase, which may be sold to meet short-term cash needs. These securities are usually government bonds.

The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy. Therefore, we can say that credit creation is the most important purpose of commercial banks.

Born during the Great Depression, these cooperative-like financial institutions specialized in offering mortgages for residential properties. While nowhere near as commonplace today, S&Ls still exist, primarily to extend financing to homebuyers.

Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural.

Commerce is important because it helps satisfy the wants and needs of people. It does this by simply making more goods available to more people, or by creating jobs in order for those goods to be transported, advertised and sold. Through this, the nation that these people live in can enjoy a higher standard of living.

Central banks carry out a nation's monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth. On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.

Central bank can be called the apex bank, which is responsible for formulating the monetary policy of an economy. Commercial banks, on the other hand, are those banks that help in the flow of money in an economy by providing deposit and credit facilities.

CBE provides credit for working capital and expansion and facilitation of local and international trading activities. It also provides short, medium and long term loans. The following are the major loan types provided by CBE.