QS Study

Primary Functions of Commercial Banks

A commercial bank is a financial bank which takes money from the people as a deposit and gives money to the other people as a loan. This bank gives minimum interest to depositors and demand maximum interest from the borrower.

Primary Function:

(1) Accepting Deposits: It is the most important function of commercial banks. They accept deposits in several forms according to requirements of different sections of the society.

There are two types of deposits, which are discussed as follows:

  • Demand Deposits: Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank.
  • Time Deposits: Refer to deposits that are for a certain period of time. Banks pay higher interest on time deposits.

(2) Advancing of Loans: The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks. The deposits received by banks are not allowed to remain idle. Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of exchange. The rate charged is higher than what it pays on deposits. The difference in interest rates is its profit.

(3) Credit creation: It is another important role of commercial banks. While sanctioning a loan to a client, a bank does not grant cash to the borrower Instead it opens a deposit account from where the borrower can withdraw.

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