Commercial banks are the financial institutions which provide financial services like accepting deposits, lending money, and creating credit, etc. But today, apart from its basic and traditional activities, commercial banks stretched its operation towards various financial and advisory services for its clients. But there are also some other financial institutions which also provide some of the banking services to the customers. These institutions are known as the Non-Banking Financial Companies (NBFCs).
A banking system refers to the functions or financial services provided by the banks to the customers. These functions can be classified into (I) Primary functions and (II) Secondary functions.
I. The Primary functions are associated with the basic banking activities and include the following:
i. Accepting deposits from the customers
This function is one of the basic functions of the commercial banks. There are four types of deposits available for the customers, namely (a) Savings deposit, (b) Current deposit, (c) Fixed deposit, and (d) Recurring deposit. These deposits are also mentioned as Accounts.
(a) Savings Deposit: The Savings deposit can be opened by any person to deposit or to preserve their small savings. The numbers of transactions are restricted in this type of account. Interest on deposit is available for the customers in this type of deposit. The cheque facility and debit card facility are available in the Savings deposit. The savings deposit helps to improve the habit of savings of the people.
(b) Current Deposit: The Current deposit is generally opened for the purpose of business transactions. The maximum number of transactions in this type of account is not restricted. That is why this deposit is also known as a demand deposit. Generally, there is no interest on deposit available for the customers in the current deposit. A cheque facility is required for making payments under this type of deposit.
(c) Fixed Deposit: The Fixed deposit is a kind of deposit where money is kept for a specific time period. Because of this, a fixed deposit is also known as the term deposit. To open a fixed deposit account, the customer must have a basic savings bank account. Money cannot be withdrawn before the maturity of the time period. The customer has to pay certain charges if the fixed deposit is encashed before maturity. The rate of interest is higher than the savings deposit. No checkbook or debit card is available for this kind of deposit.
(d) Recurring Deposit: In the Recurring deposit, money is deposited by way of equal installments for a certain time period. At the end of the specific time period, the depositor would get the money deposited along with the interest, calculated on the money deposited periodically. The rate of interest is higher than the savings deposit but may not be so higher like the fixed deposit. This deposit also doesn’t have a debit card or checkbook facilities.
ii. Provide loans to the customers
Lending is the other basic function of commercial banks. Loans provided by banks can be classified into Personal loan, which is provided to individuals for meeting personal requirements, and Business loan to meet the business requirements. The natures of the loans are as follows:
(a) Overdraft: When the customer is permitted to withdraw more than the balance existed in the bank, it is known as an overdraft. This facility is a short-term arrangement and is provided to the current account holders. The customer has to repay it within a short, specified period. Sometimes it is provided under security from the customers. Bank charges relatively higher interest on this type of arrangement.
(b) Cash Credit: This is a short-term cash arrangement for the customer in which banks permit to withdraw cash up to a certain limit. But the entire cash cannot be credited to the customer’s account. Only under emergency, cash is provided to the customer. Normally this facility is extended for one year and the credit limit can be renewed or restructured under the satisfactory performance of the customer. Interest will be charged on customers for this facility.
(c) Term Loan: Term Loan is provided to the borrower usually for the tenure between one to ten years. It has a specific repayment schedule with a floating rate of interest. This loan may be provided against some securities. Sometimes, a large-term loan against common security can be provided by two or more banks jointly. This kind of arrangement is known as consortium arrangement or participation loan.
(d) Bill Discounting: Discounting of bills is a very common feature in the business scenario for the short-term cash arrangement of the holders. Holders come to the banks with the bill of exchange to meet up liquid cash requirements before the date of maturity. Banks discount the bill of exchange charging some commission popularly known as the Discount on Bills. Banks hold the bill of exchange till the date of maturity and proceed to the appropriate party i.e., the acceptor thereafter. During the holding period before maturity if banks have cash requirements they can rediscount these bills with the central bank.
(e) Money at call and at Short notice: Money at call or “call money” is a very short-term loan repayable on demand from the banks. And money at short notice or “notice money” is repayable within 14 days from the notice issued by the bank. These two are the most liquid assets for banks after the Cash.
(f) Consumer Loan: Consumer credit or loan has been provided to the customers to meet their financial need for some consumer durable goods like TV, Refrigerator, and Air Conditioners etc. This type of credit is also provided to meet some personal needs like meeting hospital bills, expenses for marriage, etc.
iii. Credit Creation
The most important function of credit creation derived from the previous two basic functions accepting and lending money. Banks accept money from customers and lend the surplus money to the other customers. That is the simple and continuous process what bank follows. The borrower will deposit the surplus to his bank account. The bank again provides a loan from the surplus deposit of that account. In such a way banks can create a number of accounts from initial deposits.
The fixed sum of money is utilized in different accounts. This is called credit creation or money creation.
II. The secondary functions are related with the activities that are associated with the basic activities. These functions can be sub-classified into
i. Working as Agent: Banks can also work as an agent of its customers. Banks levy charges on its customers’ accounts for which they work as agents. Some agency activities of banks are as follows:
(a) Collection of Cheques, Bills of Exchange, etc: Commercial banks collect cheques, both local and outstation, bill of exchange, etc on behalf of its customer through the clearing house facility.
(b) Collection of Incomes: Banks collect various types of incomes like dividends of shares, interest on bonds and debentures, pensions, etc. on behalf of its customer.
(c) Making Payments: Under the standing instruction from the customers’ banks make periodic payments towards the fees, insurance premiums, telephone and electricity bills, etc.
(d) Tax consultancy: Commercial banks provide tax consultancy services to help the customers to fill up the return, calculate and pay the tax liability, and also getting tax refunds.
(e) Trustee: Banks often work as the trustee of the customers preserving the property of its client as per instructions.
(f) Fund Transfer: Banks provide funds transfer facilities within and outside of the country to its customers.
ii. Providing General Utility Services
(a) Locker Facility: Locker facilities are provided by the commercial banks to its customers to keep safe custody of the valuables of the customers. Banks charge locker rent from the user of this facility.
(b) Cheque Facility: Commercial banks provide cheque facilities on-demand to its customers. These cheques include Travellers’ cheques and Gift cheques also.
(c) Letter of Credit: Letter of Credit (LOC) is issued by banks to the third party certifying its customer regarding the credit worthiness as well as a guarantee of payment on behalf of the customer.
(d) Underwriting: Underwriting is a process in which commercial banks sell securities like shares, bonds, etc. to potential investors on behalf of its clients helping to raise capital.
(e) Dealing in Foreign Exchange: Banks also deal in foreign currency. These services are mainly provided by the comparatively major branches of the commercial banks.
(f) Merchant Banking Services: Now a day, banks are providing merchant banking services which include both capitals as well as advisory services to its clients.
For citing this article use:
- Saswata, C. (2018). Performance measurement of domestic commercial banks in India with respect to exposure to capital market.