IndianTechnoEra: Commercial Banks, Types and Functions | IndianTechnoEra

What are commercial bakes?

A type of financial institution also called corporate banks and provide specific service to the companies.

Commercial Banks, Types and Functions | IndianTechnoEra

Commercial banks offer cash management, trade finance, real estate, and employer service to their corporate clients.

It provides services such as accepting deposits, making business loans, and offering basic investment products. 

Commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business 

Ex: SBI, HDFC, ICICI, Dena , Corporation, central bank

Regulations of Commercial bank

• In most countries central banks are responsible for the oversight of the commercial banking system of their respective countries. 
• They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements.

What are the types of commercial banks?

There are the following types of commercial banks-

1. Private bank
2. Public bank
3. Foreign bank

What is private bank?

Private banks recorded as companies with limited liability with RBI

Here private individuals and businesses own a majority of the share capital.

Ex: HDFC - Housing Development Finance Corporation Bank,Yes Bank, 

ICICI - Industrial Credit and Investment Corporation of India Bank, etc. 

What is public bank?

In India, public sector banks operate under the guidelines of Reserve Bank of India (RBI). 

Nationalized bank and the government hold a significant stake.

Ex: Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.

What is foreign bank?

These banks are established in foreign countries and have branches in other countries.

Banks whose headquarters are in a foreign country. Eg:- HSBC, Citibank, etc.

For instance;

• American Express Bank,
• Hong Kong and Shanghai Banking Corporation (HSBC),
• Standard & Chartered Bank,
• Citibank etc.

Functions of Commercial Banks

• A. Primary Functions
• Accepts Deposit
• Advancing Loan
• B. Secondary Functions
• Agency Functions
• General Functions

A. Primary Functions

Receiving Deposit/ Accept Deposit

• Bank takes deposits in the form of saving, current, and fixed deposits
• Provides loan and advances and loan and advances to the entrepreneurs and business people and collect interest
• In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.
• Commercial banks receive deposits from the people who have surplus money and willing to deposit with banks for the purpose of safety and interest etc. 
• To meet the needs of people the banks offer following deposit schemes:
• Current Account 
• Saving Account 
• Fixed Deposit (Term Deposits) 
• Profit and Loss Sharing (PLS) accounts 
• Foreign Currency Accounts

Advancing Loan/ Credit cash:

• A customer get loan as credit amount after open an account in the bank. This process allows the bank to create money.
• Commercial bank lend the money collected from the people under different accounts, to the borrowers. 
• The bank provide loans in the following shapes. 
• Cash credit 
• Overdraft :It allows you to withdraw from even though the balance is zero. It is an advance given to a customer by keeping the current account to overdraw up to the given limit. 
• Call loans 
• Discounting of bills 
• Investment loans 
• Short-term loans 
• Medium-term loans 
• Long-term loans

B. Secondary Functions

Agency Functions:

• Collection & Payment Services 
• Execution of Standing Instructions 
• Collection of Dividends and Interest on Securities 
• Transfer of Funds 
• Bank as Guarantor 
• Income Tax Facility 
• Purchase & Sale Service :The bank offers you with the facility of selling and buying the securities.

General Utility Functions:

• Issuance of Letter of Credit 
• Issuance of Traveler’s Cheques
• Foreign Exchange Transactions
•  Act as an underwriter 
• Compile Statistics
• Lockers Facility: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.
• Discounting of Bills : A method of short-term financing provided by banks.It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank. 

The role of Commercial Banks in the Economic Growth & development of a country 

• Capital formation 
• Generation of savings 
• Mobilization of savings 
• Credit creation 
• Agricultural development 
• Industrial development 
• Employment 
• Trade expansion 
• Help to government 
• Help the central bank
• Promotion of savings

Here is more great role of Commercial Banks in the Economics Growth

•  Mobility of savings :The banks by initiation a dynamic campaign both in the villages and cities can mobilize the idle savings and can increase the investment rate in all sectors which leads to economic growth of a country. 
• Income distribution :Commercial banks borrow from the people of the higher-income group and lend it to the people of the lower income group.
• Poverty alleviation :Commercial bank help the poor people by lending money so as to improve their standard of life
• Creation and distributors of money: They purchases securities and allow money to play an active role in the economy. 
• Influencing economic activity: Commercial banks influence economic activity in two ways. First by lowering the interest rate. Secondly , by making the capital available to the investors. 
• Export promotion cell: To boost up exports, banks have established export promotion cells to provide information and guidance to exporters. Through this, export volume increases, which fetches more foreign exchange. The role of Commercial Banks in the Economic Growth & development of a country

What are the Bank Sources of Funds 

• Deposit Accounts 
• Demand deposits 
• Savings deposits 
• Time (Fixed) deposits 
• Borrowed Funds 
• Federal funds purchased (borrowed) 
• Borrowing from the central bank 
• Repurchase agreements
• Long term sources of funds 
• Bonds issued by the bank 
• Bank capital 

What are the uses of Funds by Banks 

• Cash- for many reason 
• Bank loans 
• Investment in securities 
• Repurchase agreements 
• Fixed assets 

What are the reasons of holding cash: 

• Speculative Motive: To make the best use of any investment opportunity that arises later on.
• Transaction Motive: The requirement of cash by the business for its day-to-day operations.
• Precautions Motive: Unexpected events that require cash outlay.

Top ranking Commercial Bank in India:

• State Bank of India 
• ICICI Bank Limited 
• Punjab National Bank 
• Canara Bank 
• Bank of Baroda 
• Bank of India 
• Union Bank of India 
• Central Bank of India 
• Indian Overseas Bank 
• Oriental Bank of Commerce 
• HDFC Bank Limited