1. Commercial Banks

2. 2. Lending or advancing loans
The two ACID TEST functions of commercial banks are :
1. Accepting deposits
2. Lending or advancing loans

3. Functions of
Commercial Banks

4. PRIMARY OR BASIC FUNCTIONS
AGENCY FUNCTIONS OR SERVICES
GENERAL UTILITY SERVICES OR FUNCTIONS

5. Primary or basic functions
Accepting Deposits
Lending or Advancing loans
Credit Creation
Cheque System of payment
of funds.

6. Accepting deposits
The first major function of commercial bank is acceptance of deposits from the public. Although a bank accepts non-chequable deposits also , it must accept the chequable deposits from the public. It is these deposits i.e. deposits withdrawable by cheque.

7. Lending or advancing loans
Money at call
Overdraft
Cash credit
Discounting of bills
Term loans
Credit to government(s).

8. Credit creation
This function is automatically performed while advancing loans or credit or deposits. Banks are able to create credit because the demand deposits i.e. a claim against the bank is accepted by public in settlement of their debts

9. Cheque system of payment of funds
A negotiable instrument which in fact is a bill of exchange drawn upon a banker, is the most popular credit instrument used by client to make payments

10. Agency functions
or services:

11. Collection and payment of credit
Sale and purchase of stock exchange securities
Administration of wills and trusteeship
Remittance of funds
Bullion trading

12. General utility services or functions

13. Receiving of valuables for
safe custody
Acting as a referee
Issuing letters of credit
Acting as underwriters and brokers
Acting as information banks
Issuing of traveler’s cheques and
credit cards
Issuing of gift cheques
Dealing in foreign exchanges
Merchant banking services

14. Resultative functions:
Mobilisation of savings of the people
Channelising savings into productive channels
Extension of financial services to rural areas
Making credit to weaker sections of society
Resultative functions:

15. Commercial Banks and Economic Development
Helpful in mobilisation of saving.
Assists in Innovation.
Role in implementation of monetory policy.
Bank influence the interest rate.
Helpful in the development of Priority sectors.
Directing funds into desired channels.
Helpful in productive activities and exports.
Implementation of the policies of the government.

16. CREDIT CREATION Meaning of Credit Creation ?
Credit creation refers to the power of commercial banks to expand secondary deposits either through the process of making loans or through investment in securities. This is one of the important function of commercial banks.
Credit creation in two forms :- 1. Primary Deposits
2. Derivative Deposits
Derivative Deposits banks play an active role in the creation of money.

17. Advantages of Credit Creation
Price Stability.
Economic Stability.
Maximisation of Employment.
Economic Growth.
Stabilisation of Money Market.
Exchange Rate Stability.

18. Process of Credit Creation
Money is supplied in the form of Demand Deposits and DD of commmercial Banks are many times more than there Cash Reserve.
Example:- Cash Reserve = Rs.1,000 and Demand Deposit = Rs.10,000
The question arises how CRR of 1,000 is converted into DD of Rs.10,000.
It can be explained as follows:-
By way of their historical experience that all the depositiers would not show up in the bank all the withdrawls.
If bank experiences show that withdrawal are normally 10% of the deposits then bank only keeps 10% of deposits as cash reserve.
Cash reserve of Rs.1,000 is converted into DD of Rs.10,000 by following way :-
Demand Deposit = 1/CRR * Cash Reserve
= 1/10% * 1000
= 10,000
Maximum Loan = Rs. 10,000
4. Commercial Bank gives loan in form of Demand Deposits only.

19. Limitations of Credit Creation
Amount of cash.
Banking habits.
Cash reserve ratio.
Policy of other bank.
External cash drain.
Market situation.
Availability of good securities.
Monetary policy of central bank.
Availability of good borrowers.