Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.
Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.
(i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.
(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.
(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.
Functions of Commercial Banks
The functions of commercial banks are of two types.
(A) Primary functions; and
(B) Secondary functions.
(I) Primary Functions
The primary functions of a commercial bank include:
a) Accepting deposits; and
b) Granting loans and advances.
a) Accepting deposits
The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
b) Grant of loans and advances
The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment.
i) Loans
A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.
ii) Advances
An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Ii) Secondary Functions
Ø Issuing letters of credit, travellers cheque, etc.
Ø Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers.
Ø Providing customers with facilities of foreign exchange dealings.
Ø Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.
Ø Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc.
Ø Collecting and supplying business information.
Ø Providing reports on the credit worthiness of customers.
Ø Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc.
Ø Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.
Activities of Commercial Banks
The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise:
The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise:
Ø Transfer of funds
Ø Acceptance of deposits
Ø Offering those deposits as loans for the establishment of industries
Ø Purchase of houses, equipments, capital investment purposes etc.
Ø The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture.
Ø The Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc.
List of Commercial Banks in India
Nationalised Banks: Bank of Baroda , Bank of India, Canara Bank , Central Bank of India , Indian Bank , Indian Overseas Bank
Foreign Banks: Bank of America , Bank of Ceylon , Citibank
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