What are the main functions of a commercial bank?
The main functions of a commercial bank are:
Accepting Deposits:
Commercial banks accept various types of deposits, such as current deposits, savings deposits, fixed deposits, and recurring deposits. These deposits provide customers with a safe place to hold their money and earn interest.
Granting Loans and Advances:
Commercial banks provide loans and advances to individuals, businesses, and government entities. This includes personal loans, home loans, business loans, and working capital loans, among others. By granting credit, banks support economic activities and help meet financial needs.
Credit Creation:
One of the unique functions of commercial banks is their ability to create credit. When a bank grants a loan, it creates a new deposit in the borrower's account. This deposit can then be used by the borrower for making payments, effectively creating new money in circulation.
Clearing and Remittance:
Commercial banks facilitate the process of clearing checks and remitting funds on behalf of their customers. They act as intermediaries between different banks and help transfer funds smoothly, ensuring the timely settlement of transactions.
Issuing Letters of Credit:
Banks issue letters of credit, which serve as a guarantee for payment to suppliers in international trade transactions. This allows importers and exporters to conduct trade with confidence, as the bank assures the payment to the beneficiary.
Providing Overdraft Facility:
Commercial banks offer overdraft facilities to their customers, allowing them to withdraw more money from their current account than their actual balance. Overdrafts are typically provided for a short period and are subject to interest charges.
Currency Exchange:
Banks provide foreign exchange services, enabling customers to convert one currency into another. This service is beneficial for individuals and businesses involved in international trade or travel.
Investment Banking:
Some commercial banks also offer investment banking services, including underwriting securities issuance, facilitating mergers and acquisitions, and providing advisory services for corporate clients.
Safekeeping of Valuables:
Many commercial banks offer safe deposit lockers for customers to store their valuables, such as important documents, jewelry, or other items that require secure storage.
Electronic Banking Services:
To adapt to the digital age, commercial banks provide electronic banking services, such as online banking, mobile banking, and electronic fund transfers. These services enable customers to perform banking transactions conveniently and securely from anywhere.