Functions of a Commercial Bank
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Functions of a Commercial Bank

Functions of a Commercial bank Besides accepting deposit the other primary functions of a commercial bank is advancing loans. Granting Credit : Commercial banks lend money in the following ways. (a) Loans and Advances : A specified amount is granted for a specified time period. The borrower may withdraw the entire amount in lump sum or in installments. However, interest is levied on the full amount of loan. Loans are generally granted against the security of certain assets or on personal guarantee.

Functions of a Commercial bank

Besides accepting deposit the other primary functions of a commercial bank is advancing loans.

Granting Credit : Commercial banks lend money in the following ways.

(a) Loans and Advances : A specified amount is granted for a specified time period. The borrower may withdraw the entire amount in lump sum or in installments. However, interest is levied on the full amount of loan. Loans are generally granted against the security of certain assets or on personal guarantee. Banks also grant term loans for a longer period. A loan may be repayable in lump sum or in installments.

(b) Cash Credit : Under this arrangement, the bank allows the borrower to borrow up to a specified limit. The amount is accredited to the bank account of the customer. The customer can withdraw this amount as and when he requires. Interest is levied on the amount actually withdrawn. Cash credit is usually granted on a bond or some other security.

(c) Overdraft: A customer who has a current account with the bank can withdraw more than the amount standing to his credit up to a specified limit. This is a temporary arrangement on which interest is charged by the bank. It may be allowed on the security of assets or on personal guarantee.

(d) Discounting of Bills : Banks make payment against the bills before the date of maturity. In case the bill is dishonored on the due date, the bank can recover the amount from the customer Banks charge some commission for this service.

Secondary Functions of a Commercial Bank

3. Agency Functions : A commercial bank serves as an agent for its customers in the following ways ;

(a) Collects cheques, bills, dividends, interest, rent, etc., on behalf of customers.

(b) Pays cheques, bills, rent, taxes, interest, insurance premium, fees, subscriptions, etc., on behalf of customers.

(c) Purchases and sells securities on behalf of customers as per their instructions.

(d) Acts as trustee, executor, guarantor etc., in financial matters for their customers.

(e) Carries out correspondence for and on behalf of customers.

(f) Acts as agent or correspondent for other banks at home and abroad.

4. General Utility Services:

(a) Transfer of funds from one branch to another.

(b) Issuing letter of credit and standing as surety for customers.

(c) Accepting valuables, jewellery and securities for safe custody.

(d) Underwriting capital issues.

(e) Providing foreign exchange to persons going abroad and to importers.

(f) Issuing travelers’ cheques, drafts, circular notes, etc.

(g) Providing trade information to customers.

(h) Providing reports on the creditworthiness of customers.

(i) Accepting and discounting bills of exchange of exporters

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Comments (1)
Jerome makelele

Thanks

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