Download 06 Commercial Bank and its functions

Lecture: 2
Banking & Financial Institutions
By
Dr. Nabonita Debnath, Assistant Professor,Deptt of
Economics, Radhamadhab College, Silchar- 06
Commercial Bank and its functions
Commercial bank is a bank or an institution which
takes money from people and also gives money to the
people whenever required. In other words, it is an
institution which serves as medium of exchange for
the people and whose main aim is profit maximization
Functions of Commercial Banks
•Accepting deposits- The most important function of commercial
bank is to accept deposits from those people who want to save in
banks with a particular rate of interest.
•Advancing loan-The second important function of commercial
bank is to advance loan to the people. The commercial bank lends
money to the needy borrowers after keeping a certain percentage of
cash reserves at a low interest rate.
•Credit creation-An unique function of commercial bank is
to create credit. Credit creation is a natural outcome of the
process of advancing loan as adopted by the bank.
•Locker system-Commercial bank provides locker facilities
where the customers of commercial banks can keep their
valuable things and documents.
•Cheque facility-Commercial bank can provide money to
its customers through cheques and drafts in place of cash
which can be easily transferred from one place to another.
Purchase and sale of securities-Commercial bank can
undertake the purchase and sale of various securities like
shares, bonds etc. on behalf of its customers with the help
of brokers who help in this purchase and sale of securities.
Differences between central bank and commercial
bank
•Central bank is the topmost monetary authority of a
country and commercial bank is a constituent unit of the
banking system of a country.
•The primary aim of central bank is to achieve the
objectives of economic policy of government and
maximize the public welfare but commercial bank has
profit earning as their primary objective.
•The central bank is generally a state-owned
institution while commercial bank is normally
privately owned institution.
•The central bank does not deal directly with public
but commercial bank deals directly with the public.