Commercial Banks – Types, Functions, Role in Economic development

Commercial Banks comprise of public sector banks, private sectors banks and foreign banks which represent the most important financial intermediaries in the financial system of a country.

Commercial Banks play a crucial role in the banking industry of a country.

A commercial bank is an institution whose debts are widely accepted in settlement of other people`s debt to each other. It accepts public deposits and provides short-medium-long term loans to its customers for consumption purposes. It offers a variety of deposit schemes and loans to its customers and also provides related advisory services.

Commercial banks are formed under the schedule II of the RBI Act, 1934 which satisfies the following criteria:

  1. Minimum paid-up capital of 5 lakhs

  2. Must be a corporation or society

  3. No activities must adversely affect the depositors interest

Types of Commercial banks

  1. Public Banks: Banks in which 50% of the capital is provided by central govt., 15% by the state govt. and 35% by the sponsoring commercial bank.

  2. Private Banks: Banks in which the major share capital is subscribed by private investors.

  3. Foreign banks: Banks which are incorporated outside India.

  4. Regional Rural Banks: Banks formed with an objective of developing the rural economy by providing credit and deposit facilities for agriculture and other productive activities in rural areas. The emphasis is on providing such facilities to small and marginal farmers, agricultural labourers, rural artisans and other small entrepreneurs in rural areas.

Functions of a Commercial Bank

(1) Primary Functions of Commercial banks

  1. Accepting Deposits – It offers a variety of deposit schemes to its customers like : sales deposits, recurring deposits, current deposit, Savings deposit and fixed deposits

  2. Making Advancements – In form of loans, cash credit, credit against securities, overdraft, term loans, consumer credit, Money at Call, Discounting Trade Bills

  3. Investment of Funds – Banks invest their surplus funds in government securities like treasury bills, national savings certificate etc. and other securities like securities of state bodies like electricity board, housing board, development banks, shares of RRB`s etc.

  4. Financing Foreign Trade – Buying and selling foreign currency, Accepting Foreign Bills of Exchange

(2) Secondary Functions of Commercial Banks

(a) Agency Services –

  1. To collect and clear cheque, dividends etc.

  2. To deal in foreign exchange

  3. To purchase and sell securities

  4. To act as a trustee, attorney, executor

  5. To accept tax proceeds and tax returns

(b) General Utility Services:

  1. To provide Safety Locker Facility

  2. To provide money Transfer Facility

  3. To issue Traveler`s cheque

  4. To accept various bills for payment

  5. To provide merchant banking facility

  6. To provide credit, debit and smart cards

Role of Commercial Banks in Economic Development

  1. Commercial Banks helps in mobilizing savings for capital formation through deposit schemes, branch banking etc. and channelizing them into productive investments.

  2. They help the finance industry through underwriting services and developing capital markets.

  3. They play a vital role in financing agriculture in a country.

  4. They aid in increasing standard of living of people by providing cash credits and offering flexible repayment schemes to buyers of consumer durable products.

  5. They ensure smooth running of financial trade by facilitating movement of goods by discounting and accepting bills of exchange. It also provides advances to retailers and wholesalers to stock goods.

  6. They help in financing employment generation and development activities like providing educations loads, providing funds to small and medium enterprises, providing funds to young entrepreneurs and start-ups.

  7. They help the government to fulfill its objectives of monetary policy.

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