Commercial banking is basically the parent of all types of banking available in the present banking structure. In order to understand the role of commercial banking, let us discuss some of its major functions. The following are the major functions of commercial banks −
The most important task of commercial banks is to accept deposits from the public. Banks maintain and keep records of all the demand deposit accounts of their customers and transform the deposit money into cash, vice versa is also possible as per the requirements of the customers. Technically, demand deposits are accepted in current accounts. The depositor can withdraw deposited money anytime by means of checks.
In fixed deposit accounts, the depositor can withdraw the money deposited only after a certain period. We can say, fixed deposits are time liabilities of the banks. Deposits in the saving bank accounts are subjected to certain limitations regarding the amount one can receive and withdraw. In this way, banks collect savings from people and maintain a reserve of these savings.
One of the most important functions of commercial banks is to extend loans and advances out of the money through deposits of businessmen and entrepreneurs against permitted securities and safety like gold or silver bullion, government securities, easily saleable stocks and shares and marketable goods.
Banks give advances to customers or depositors through overdrafts, discounting bills, money-at-call and short notice, loans and advances, different forms of direct loans to traders and producers.
Banks facilitate services through some medium of exchange like checks. Using checks for settling debts in business transaction is always preferred over cash. Check is also referred as the most developed credit instrument.
There are some other major functions of commercial banking. They perform a multitude of other non-banking operations. These non-banking operations are further classified as agency services and general utility services.
The services banks ensure for and on behalf of their customers are agency services. The banks play the role of an executor, trustee and attorney for the customer’s will. They accumulate as well as make payments for bills, checks, promissory notes, interests, dividends, rents, subscriptions, insurance premium, policy etc.
As mentioned above, they provide services for and on behalf of customers and also issue drafts, mail, telegraphic transfers on behalf of clients to remit funds. They also help their customers by arranging income-tax professionals to facilitate the process of income tax returns. Basically the bankers work as correspondents, agents or representatives of their clients.
The services ensured for the entire society are known as general utility services. The bankers issue bank drafts and traveler’s checks to facilitate transfer of funds from one part of the country to another. They give the customers letters of credit which help them when they go abroad.
They handle foreign exchange or finance foreign trade by accepting or assembling foreign bills of exchange. Banks arrange for safe deposit vaults where the customers can secure their valuables. Banks also assemble statistics and business information relevant to trade, commerce and industry.