Commercial bank undertakes all kinds of ordinary banking business principles of liquidity and adequacy of reserves. The functions of commercial bank may be discussed in the following groups.
FUNCTIONS OF COMMERCIAL BANK
- (2)
Primary Functions Secondary Functions
- Receiving of Deposits |
- Fixed Deposit Account
- Current Account Agency Services Utility Services
- Saving Account (i) Collection of (i) Credit Instruments
- Foreign Currency A/c cheques (ii) Foreign Exchange
- Advancing Loans (ii) Collection of (iii) Precious Articles
- By Overdraft Dividends (iv) Underwriting
- Cash Credit (iii) Purchase & Sale of (V) Arbitrator
- Discounting of B/E Security (vj) information
- By Mortgage (iv) A9ent (vii) Acceptance of B/E
- By Opening Loan A/c M Standing Orders (vjij) Medium of exchange
- Transfer of Funds (jx) Special services
- Trustee Automated teller
machine
- Credit cards
- Cash deposit machines
PRIMARY FUNCTIONS
- RECEIVING OF DEPOSITS:
It is the first primary function of Commercial Banks. Banks receive deposits from the public and pay interest I profit. Different kinds of deposits are given below:
(i) Current Account:
It is the most popular form of bank accounts. Majority of customers particularly business class, government departments, public bodies keep their money in current accounts. In this account money can be
deposited and withdrawn from bank at any time during banking hours.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, some banks are offering interest I profit on a particular amount kept in these accounts.
- Saving Account:
Persons with little savings (low incc ne or salaried persons), deposit their money in the saving accour. Saving deposits can be withdrawn on demand up to a certain limit. Banks also pay interest on these accounts.
- Fixed Deposit Account:
In this account, money is deposited for a fixed period of time. High rate of interest I profit is paid on this deposit. The period is fixed at the time of opening a bank account. Within the fixed period, the account holders are not entitled to withdraw money from the accounts.
- Foreign Currency Account:
This account is opened in foreign currency instead of local currency. In Pakistan, this account can only be opened in nominated branches of commercial banks. Foreign currency account can be opened in form of Saving, Fixed and Current accounts. This account is exempt from Zakat & Tax.
Note: The detail of more bank accounts like BBA and ESA is available in Chapter No. 11 of this book.
- ADVANCING LOANS:
The second primary function of commercial banks 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.
TYPES QF LOANS ACCORDING TO TERM
- Demand Loans:
These are the loans, which can be demanded by the bank at any time. Generally, these loans are issued to rich and trust worthy people. These loans can be recovered on lump sum or installments basis according to the desire of borrowers.
- Short Term Loans:
These loans are issued to meet the day-to-day requirements of the business for the period up to 1 year.
- 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.
- Long Term Loans:
These loans are issued for the purpose of investment and to purchase fixed assets like building, plant & machinery etc. for the period of 6 to 10 years.
- 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 modem banking. •
TYPES OF LOANS ACCORDING TO ISSUE
- Cash Credit I Finance:
Banks also give cash credit against current assets such as shares and bonds etc. The sanctioned amount of loan is transferred to the account of customer. The bank charges interest on the utilized or withdrawn amount only.
- By Opening Loan A/C:
In this method bank opens loan account in the name of its customer instead of giving cash as loan. The customer can draw money according to the requirements from loan account. In this method, the bank Charges interest on the total amount of loan whether withdrawn or not.
- By Overdraft:
Banks allow their trustful customers to draw more than the deposit they have in their bank accounts. Banks charge interest on over draft on daily basis. In modem banking overdraft facility is known as running finance.
- By Mortgage I 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.
- By Discounting of B/E:
Discounting of bills of exchange means that bank accepts the bill as security for granting 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 bank accepts only reputed and clear bills of exchange
SECONDARY FUNCTIONS
- AGENCY SERVICES:
- Collection & Payment of Cheques:
Commercial banks collect and make payment of cheques on the behalf of their customers.
- Collection of dividends:
Commercial Banks collect dividend and interest on shares on the behalf of their customers. For this purpose, customer informs the issuer of security to pay interest or dividend in his account of bank.
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- Purchase & Sale of Security:
If the customer directs his bank to purchase and sale securities on his behalf, bank will do this by charging nominal commission.
(iv)X 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 insurance company and Rs. 200 as rent every month, Bank will make monthly payments on the written order of customer.
- Trustee:
Bank also acts as a trustee on the behalf of customer. In this capacity, the bank takes care of the affairs of its client.
- Transfer of Fund:
Bank also performs the function of transferring fund from one place to another by charging nominal commission.
- Agent:
Banks also act as an agent or representative of customer at home and abroad.
- UTILITY SERVICES:
- Foreign Exchange:
Banks deal in foreign exchange with the permission of central bank to facilitate both foreign trade and foreign travel.
- 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.
- Arbitrator:
Banks act as arbitrator and provide information relating to the Credit worthiness and transactions of their customers to settle any dispute.
- Acceptance of B/E:
Banks accept bills of exchange on the behalf of customers to meet their financial needs. \
- Credit Instruments:
Banks issue various credit instruments, which are of considerable benefit to the business community; (e.g.) Cheques, draft and L.C. etc.
- ‘ 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.
- Special Services:
In particular circumstances, banks also provide following services to their customers and govt.
- Receipt of Zakat and Ushr.
- Receipt of Haj Applications.
- Issuance of Qarz-e-Hasna.
- Receipt and payment of bills.
- Fee receipt of educational institutions.
- Receipt of donation.
- Issuance of Credit Cards:
It is a modem facility of banking. The commercial banks issue credit cards for different limits, which prove helpful in making payments to various institutions.
- Automated Teller Machines (ATM):.
Now a days, modem commercial banks use computerized counters to provide twenty-four hours cash service through automated teller machines (ATM) to their valuable customers.
- Cash Deposit Machines (CDM):
It is another facility of 24 hours banking services in which the customers I account holders can deposit the money in their bank accounts at any time through cash deposit machines (CDM).
- Underwriting:
Banks underwrite shares, bonds, etc., issued by Government, public bodies or trading corporations in order to raise capital or fund or loan.