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 Banking : Commercial Banks And The Central Bank of India

Meaning
A Commercial bank is a financial institution which deals with money and credit. It accept deposits from public, makes the fund available to those who need them and helps in remittance of money from one place to another.

Definition
"A commercial bank collects money from those who have it to spare or who are saving it out of their income and lends this money to those who require it"

~ Crowther

A commercial Bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to such individual entrust money when not required by them for use. These banks deal in money and credit for the purpose of earning profit.

Example:
Punjab National Bank

Bank of India

Canara Bank

Bank of Baroda

State Bank of India

Characteristics of a Commercial Bank
The following are the characteristics of a Commercial Bank:

1.Financial Institution Commercial Bank is a financial Institution which accepts and deposits from public and Lending.

2.Commercial Institution :Bank is a commercial Institution. It creates demand deposit and aims at earning profit.

3.Credit dealing : Banks deal with credit. They creates credit for public, government and industries

4 . Money dealing : Banks deals with money. They accept deposits and advance loans.

5.Logo and Motive : Every Bank has a logo or an emblem.

Development Functions
All these Functions are explained briefly as follows.


 * 1)  Primary Functions 



A. Accepting Deposits : These are various types of which are as follows.

Fixed Deposits Account : Money in these accounts id deposited for fixed period of time e.g. one,two or five years. The depositor gets receipts for the amount deposited and it called Fixed deposit receipt. The receiptindicates the name of the depositor amount,amount of deposit,rate of interest,and period of deposits.


 * 1) Current or Demand Deposits account: A depositor can deposits his funds any number of times he wishes. Generally businessmen deposit their funds in this account. No intrest is paid by the bank on the current account. Rather the bank charges incidental charges from the depositors,if amount lying in the account falls below the minimum limit.
 * 2) Saving Deposit Account: The aim of this account is to encourage and mobilise saving of public. Certain restrictions regarding number of withdrawals and amount to be withdraw in a given period are imposed on depositors . Rate of interest is comparatively low on such deposits as compared to fixed deposits.
 * 3) Recurring Deposit Account : The purpose of these deposits is to encourage regular savings by the people. A specified amount is deposited every month for a specific period say 12,24,36,60 months . This amount cannot be withdraw before the expiry of given period except under unusual circumstances. Interest paid on this account is higher than the savings.
 * 4) Home safe account : This account hs been introduced recently by the banks. A small portable safe is provided to the depositor at his place. Key of the safe is kept by bank. Depositor puts his small savings in it. After some time,the safe is taken to bank and amount present in safe is credited to his account.

B. Advancing of Loans : The second important primary functions of commercial banks is advancing of loans. A certain part of the cash received by the banks as deposit is kept in the reserve and rest is given as loan. Banks advance loans for productive purposes on approved security. The amount of loan is generally less than tha value of the security.

Types of Advance Of Loans
A. Cash Credit: The debtor is allowed to withdraw a certain amount on a given security. The debtor withdraws the amount within this limit.

B. Overdraft : Customers who have current account with the bank are granted the facility of withdrawing more money than actually lying in their accounts. It is called Overdraft.This facility is available for short term to reliable persons.

C. Discounting Bills of Exchange : This is another types of lending by modern banks. In this method the holder of a bill of exchange can get it discounted by the banks. In a bill of exchange the debtor accepts the bill drawn upon him by the creditor and agrees to pay the amount mentioned on maturity.

 D.  Demand Loans : Loans are given for some fixed amount but without any specified maturity. The interest is chargeable on the whole amount from the day the loan is sanctioned irrespective of the fact that the debtor withdraws the whole amount or part thereof. These loans are offered against the security of financial assets or some durable goods.

C. Credit creation

Commercial banks have an important function of credit creation. Banks advance a loan to its customers oit of its primary deposit, keeping a small amount of cash in reserve with them. While advancing loans, banks opens an account on borrower's name and credits the amount of loan to this account. The process of credit creation makes a multiple amount of advance to the public against their deposits.

2. Secondary Functions

A. Agency Functions : Banks perform some agency functions which are as follows.


 * Remittance Of Funds : Banks helps their customers in transfering funds from one place to another through cheque and bank draft etc.
 * Collection and payments of credit Instrument: Banks collect and pay various credit instruments like cheques, bills of exchange and promissory notes etc. on behalf of their customers.
 * Trustee and Executor : Banks also act as trustees and executor of the property of their customers. commercial banks keep safe their property as per agreement.

Underwriting : Banks underwrite the sale of new shares. Underwriting means that banks purchase themselves fully or partly the whole or unsold portion of new shares. They undertake private placement of new shares. It implies that new shares are sold privately to selected persons.


 * Letter of Reference : Banks give information about economic position of their customers to domestic and foreign traders.
 * Representatives and Correspondent: Sometimes banks act as representative and correspondence for their customers. They get passports, Travellers' tickets, book vehicles,plots for their customers and receive letters on their behalf.

B. General Utility Functions: Banks perform following general utility functions.


 * 1) Locker facility: Banks provide locker facility to their customers and charges annual rent. The customer can keep their valuables and important documents in their lockers for safe custody.
 * 2) Travellers' Cheques : Banks issue traveller's cheque to help their customers to travel without the fear of theft or loss of Money.
 * 3) Letter of Credit: Letters of credit are issued by banks to their customers certifying their credit worthiness. Letters of credit are very useful in foreign trade.

4. ATM services : Some banks are providing ATM (Automated Teller Machine)services any time by which 24 hours withdrawal of money can be made. 3. Development Functions : A well developed banking system is a necessary requirements for economic development in a modern economy. Banks provide financial resources for the growth of industries.

Banks performs following development functions

1.Rural Development Programme: Banks provide cheaper finance to backward rural areas for their increased development and for the removal of unemployment in these regions.

2. Cheaper Loans to weaker section: Banks provide adequate loans to weaker sections at low rate of interest so that they may start their own business.

Participation in Capital market: Banks provide long term loans to industry, agriculture amd small scale industry.

Wide Coverage : Banks open their branches in villages and towns to serve large sections of society.

Other Financial Functions: Modern banks performs several financial functions e.g Mutual funds, Merchant banking housing,finance and stock investment etc.