Sunday, April 26, 2015

Commercial Banks: Role and Funtions

In modern economy commercial Banks plays an important role in the financial sector. A Bank is an institution dealing in money and credit. Credit money is the major component of money supply in a modern economy. Commercial banks are the creators of credit. The strength of economy of any country basically depends on a sound and solvent banking system.
A Commercial bank is a profit seeking business firms dealing in money or rather claims to money. It safeguards the savings of the public and give loans and advances. The Banking Companies Act of 1949 defines banking company as “accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, and order or otherwise”.
Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving. Major functions of a commercial bank are:
                    I.      Primary or Banking functions
                  II.      Secondary or Non-Banking functions.
                III.      Subsidiary Activities

I. Primary / Banking Functions: Commercial banks have two important banking functions. One is accepting deposits and other is advancing loans.
1)    Deposits: One of the main functions of a bank is to accept deposits from the public. Deposits are accepted by the banks in various forms.
a)    Current Account Deposits: Current Accounts are usually opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals. No interest is paid on current deposits. Banks may even charge interest for providing this facility.
b)    Saving Account Deposits: Saving Accounts are opened by salaried and other less income people. There is no restriction on number and amount of deposits. Withdrawals are subject to certain restrictions. It earns Interest but less than fixed deposits.
c)    Fixed Account Deposits: Deposits in fixed account are time deposits. Money under this account is deposited for a certain fixed period of time varying from 15 days to several years. A high rate of interest is paid on such deposits.
d)    Recurring Account Deposits: In Recurring deposit, a specified amount is regularly deposited by account holder, at an internal of usually a month. This is to form the habit of small savings among the people. At the end of maturity period, the account holder gets a substantial amount. Interest on this type of deposit is almost equal to fixed deposits.
2) Loans and Advances: Banks not only mobilize money but also lend to its credit worthy customers for maximizing profits. Loans and Advances are granted to:
a) Business and Trade:  Commercial banks grant short-term loans to business and trade activities in following forms: i) Overdraft ii) Cash Credit iii) Discounting of Bills iv) Money At Call v) Direct Loans
b) Loans to Agriculture: Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for irrigation, purchase of equipments, inputs, cattle etc.
c) Loans To Industries: Banks grant secured loans to small and medium scale industries to meet their working capital needs. The time period may be from one to five years. It may be in the form of Overdraft, cash credit or direct loan.
d) Loans To Foreign Trade: Loans are granted to export and import in the form of direct loans, discounting of bills, guarantee for deferred payments etc. Here the rate of interest is low.
e) Consumer Credit / Personal loans: grant credit to household in a limited amount to buy some durable consumer goods like television sets, refrigerators, washing machine etc. Such consumer credit is repayable in installments. Under 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well.
f) Miscellaneous Advances: Banks also gives advances like packing credits to exporters, export bill purchased or discounted, import finance, finance to self-employed, credit to weaker sections of society at concessional rates etc.
II. Secondary / Non-banking Functions: Banks gives various forms of services to public. Such services are termed as non- banking or secondary functions:
1. Agency Services: Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are:
a) Collection: Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount.
b) Payment:  Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged.
c) Income – Tax Consultant: Commercial banks act as income-tax consultants. They prepare and finalise the income tax returns of their clients.
d) Sale And Purchase Of Financial Assets: As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank.
e) Trustee, Executor And Attorney: As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign the documents on behalf of customer.
f) E- Banking: Through Electronic Banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another.
2. Utility Services: Modern Commercial banks also performs certain general utility services for the community, such as:
a) Letter Of Credit: Banks also deal in foreign trade. They issue letter of credit and provide guarantee to foreign traders for the soundness of their customers.
b) Transfer Of Funds: Banks arrange transfer of funds cheaply and safely from one place to another. Transfer can be in the form of Demand draft, Mail transfer Travelers cheques etc.
c) Guarantor: Banks offer a guarantee of payment on behalf of importer to facilitate imports with deferred payments.
d) Underwriting: This facility is provided to Joint Stock Companies and to government to enable them to raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the market.
e) Locker Facility: Safe Lockers are provided to the customers. So that they can deposit their valuables like Jewellery, Securities, Shares and other documents.
f) Referee: Banks may act as referee with respect to financial standing, business reputation and respectability of customers.
g) Credit Cards: Credit card facility has been introduced by commercial banks. It enables the holder to minimize the use of hard cash. Credit card is a convenient medium of exchange which enables its holder to buy goods and services from member – establishment without using money.
III. Subsidiary Activities: Many commercial banks also undertake subsidiary activities such as:-
a.       Housing Finance
b.      Mutual Funds intermediary
c.       Merchant Banking
d.      Venture Capital Fund

e.      Factoring