COMMERCIAL BANKS

Bank A bank is a commercial or state institution that provides financial services , including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.

Commercial Bank A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank.

Functions of Commercial banks Primary functions Accepting deposits Granting loans and advances Credit creation Secondary functions Agency services General utility services

Primary Function a) Accepting Deposits: It is the most important function of commercial banks. They accept deposits in several forms according to requirements of different sections of the society. Current deposits Saving deposits Fixed deposits Reccurring deposits

Loans Advances Cash credit Over draft Discounting of bills b) Granting Loans and Advances: The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks. Loans Advances Cash credit Over draft Discounting of bills

c) Credit Creation: Credit creation is a natural outcome of the banking function of advancing loans. When a bank advances a loan to its customers it does not give money but opens an account in favour of the borrower and credits the amount of loan to its account. Thus, when a bank grants a loan it creates an equal amount of bank deposits. Creation of such credit is called credit creation.

Secondary Functions Agency Services : Agency services are those services which are rendered by commercial banks as agent of their customers. collection and payments of bills and cheques collection of dividends, interest and rents Purchase and sale of shares and securities Acting as agents on behalf of customers for other banks

b) General Utility Services : General Utility Services are the services rendered not only to the customers but also to the general public. issuing letters of credit and travellers cheques underwriting of shares and debentures Safe keeping of valuables in safe deposit lockers Undertaking foreign exchange business

Role of Commercial banks in Economic Development Accelerating the Rate of Capital Formation: Capital formation is the most important determinant of economic development. The basic problem of a developing economy is slow rate of capital formation. Banks promote capital formation. They encourage the habit of saving among people. Provision of Finance and Credit: Commercial banks are a very important source of finance and credit for industry and trade. Credit is a pillar of development. Credit lubricates all commerce and trade. Innovations : Innovations are an essential part for economic development. These innovations are mostly financed by bank credit in the developed countries. Development of Agriculture: Underdeveloped economies are primarily agricultural economies. Majority of the population in these economies live in rural areas.

e) Regional Development: Banks can also play an important role in achieving balanced development in different regions of the country. They transfer surplus capital from the developed regions to the less developed regions, where it is scarce and most needed. f) Promote Commercial Virtues: The businessmen are more afraid of a banker than a preacher. The businessmen should have certain business qualities like industry, forethought, honesty and punctuality. g) Promote Industrial Development: Industrial development needs finance. In some countries, commercial banks encouraged industrial development by granting long-term loans also. Loan or credit is a pillar to development. h) Implementation of Monetary Policy: Economic development need an appropriate monetary policy. But a well-developed banking is a necessary pre-condition for the effective implementation of the monetary policy.