Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 3. Money And Banking

Subject: Social Science - Class 12th

Q. No. 10 of Exercises

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Explain the functions of a commercial bank.

The functions of commercial banks are being discussed below –

1. Accepting Deposits – The banks accepts deposits from public, which may be of following types –

a. Saving Deposits - This type of account is for those who need to save a part of their income and earn interest on them. The withdrawals from these accounts are limited. These accounts offer interest on the amount saved.

b. Fixed Deposits – In this account the amount is deposited for a fixed period of time decided in advance. If offers a higher rate of interest than saving account but the depositors do not have withdrawal facility in between. If the deposit is liquidated before maturity period the rate of interest is reduced.

c. Current Deposits – This type of account is for businesses. There is no restriction on number of deposits and withdrawal and the account holder enjoys overdraft facility too i.e, the withdrawals can be more than the account balance, but such account does not offer any interest.

2. Granting of Loans and Advances – The banks grant loan and advances for various purposes. The loans are given for long period and advances are granted for short term. Interest is charged on these loans and advances. The interest charged here is more than the interest given on deposits.

3. Agency Functions – The banks perform certain agency functions for their customers, these are –

a. Transfer of Funds - The banks provides easy mobility of funds through internet or other bank instruments.

b. Collection of Funds - The bank collects the money for its customers through cheque or bill.

c. Periodic Payments - On standing instructions of the customer, banks make payment of loan, credit cards, bills, etc

d. Periodic Collections - The bank collects salary, pension, dividend, premium etc. on behalf of the customer.

e. Other Agency Functions – The banks perform various agency functions like trustee, executor, etc.

4. Discounting Bills of Exchange – The Banks performs this function for the businesses. It discounts the B/R and provides immediate finance to the businessman.

5. Credit Creation – The Banks create credit by using the demand deposits and play a big role in economic development of the country.

6. Other Functions – The Banks performs following functions also –

a. Issue of Drafts and Letter of Credit

b. Locker Facility

c. Underwriting of Shares

d. Dealing in Foreign Exchange

e. Social Welfare Programmes


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