QS Study

Secondary 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.

Secondary Functions:

(1) Overdraft Facility: It refers to a facility in which a customer is allowed to overdraw his current account up to an agreed limit. This facility is generally given to respectable and reliable customers for a short period. Customers have to pay interest to the bank on the amount overdrawn by them.

(2) Discounting Bills of Exchange: It refers to a facility in which holder of a bill of exchange can get the bill discounted with the bank before the maturity. After deducting the commission, the bank pays the balance to the holder. On maturity, the bank gets its payment from the party which had accepted the bill.

(3) Agency Functions: Commercial banks also perform certain agency functions for their customers. For these services, banks charge some commission from their clients. Various agency functions of commercial banks are

  • To collect and clear cheque,
  • To make payment of rent, insurance premium, etc.
  • To deal in foreign exchange transactions.
  • To purchase and sell securities.
  • To accept tax proceeds and tax returns.

(4) General Utility Functions: Commercial banks render some general utility services like;

  • Locker Facility: Commercial banks provide the facility of safety vaults or lockers to keep valuable articles of .customers in safe custody.
  • Traveler’s Cheques: Commercial banks issue traveler’s cheques to their customers to avoid a risk of taking cash during their journey.
  • Letter of Credit: They also issue letters of credit to their customers to certify their creditworthiness.
  • Underwriting Securities: Commercial banks also undertake the task of underwriting securities. As the public has full faith in the creditworthiness of hanks, the public does not hesitate in buying the securities underwritten by banks.
  • Collection of Statistics: Banks collect and publish statistics relating to trade, commerce, and industry. Hence, they advise customers on financial matters. Commercial banks receive deposits from the public and use these deposits to give loans. However, loans offered are many times more than the deposits received by banks. This function of banks is known as ‘Money Creation’.
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