Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in many ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and the issue of letter of credit. The rate of interest charged by banks depends on various factors such as the characteristics of the firm and the level of interest rates in the economy. The loan is repaid either in a lump sum or in instalments.
Bank credit is not a permanent source of funds. Though banks have started extending loans for longer periods, generally such loans are used for medium to short periods. The borrower is required to provide some security or create a charge on the assets of the firm before a loan is sanctioned by a commercial bank.
A commercial bank is certified to provide the following functions:
- Receive deposits – take money in from individuals and businesses (called depositors)
- Disburse payments – make payments upon the direction of its depositors, such as honouring a check
- Collections – a bank will act as your agent to collect funds from another bank payable to you, such as when someone pays you by check drawn on an account from a different bank
- Safeguard money – banks are considered a safe place to store your wealth
- Maintain custodial accounts – accounts controlled by one person but for the benefit of another person, such as a trust account