BANKING — Commercial Studies STD 10 — Question

A commercial bank may be defined as a financial institution which collects money from the public in the form of deposits and lends the same to borrowers. It is an institution that provides facilities for safe keeping, lending and transfer of money. According to the Banking Regulations Act, 1949, "banking means the accepting, for the ptirpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise."
Commercial banks perform a range of functions that can be categorized into two main divisions.
 (a) Primary Functions:
1. Deposit Mobilization: Commercial banks accept deposits from individuals and businesses, including savings, current, and fixed deposits. These deposited funds are then used to provide loans and advances to meet the temporary financial needs of commercial transactions.
2. Lending and Advances: Another pivotal role of commercial banks is extending loans and advances to entrepreneurs and businesspeople, generating interest income. This constitutes a primary source of profit for banks. After retaining a small portion of deposits as reserves, banks lend out the remaining funds to borrowers through various credit mechanisms like demand loans, overdrafts, cash credits, and short-term loans. This lending process also allows banks to effectively create money.
3. Credit Creation: When a bank provides a customer with credit or a loan, it doesn't necessarily provide physical cash. Instead, the bank opens an account for the customer and transfers the loan amount to that account. This practice enables the bank to create new money in the economy.
(b) Secondary Functions:
1. Discounting Bills of Exchange: Commercial banks engage in the practice of discounting bills of exchange, which are written agreements specifying the future payment for goods purchased. The bank can provide the payment earlier than the stipulated time through the discounting process.
2. Overdraft Facility: Banks offer an overdraft facility, allowing customers to withdraw more than the available balance in their current accounts, up to a predetermined limit.
3. Securities Trading: Commercial banks facilitate the buying and selling of securities, enabling customers to invest and trade in financial instruments.
4. Safekeeping Services: Banks provide locker facilities where customers can securely store their valuable items or documents for a nominal annual fee. 5. Payment and Collection Services: Banks facilitate financial transactions by employing instruments such as promissory notes, cheques, and bills of exchange for making payments and collecting dues.