What is a Commercial Bank?

A commercial bank is a financial institution that provides loans, accepts deposits, and provides basic financial products to individuals and businesses such as savings accounts and certificates of deposit. It makes money by giving customers various forms of loans and charging interest on them.

Customers invest money in investment accounts, checking accounts, money market accounts, and certificates of deposit to finance the bank (CDs). In their bank deposits, depositors receive interest. The interest paid to depositors, on the other hand, is lower than the interest rate charged to borrowers. Motor vehicle loans, leases, corporate loans, and personal loans are only a few of the loans available from a commercial bank.

Functions of Commercial Banks

A commercial bank's primary function is to offer financial services to the general public, enterprises, and corporations. Banks also ensure that a country's economy remains stable and grows steadily. The following are the duties of a commercial bank:

1. Accepting Deposits

Accepting deposits is one of a commercial bank's oldest features. For holding money on behalf of the public, banks used to charge a fee. Banks now pay a small amount of interest to depositors who carry money with them due to developments in the banking sector over time and the sustainability of the company. Depositors, on the other hand, must pay administrative fees to keep their accounts open.

There are three types of deposits that banks accept. The first is a savings account where small savers can earn interest on their money. They can write a check to withdraw money up to a certain amount. The second form of deposit is a current account, which allows business owners to withdraw funds at any time without warning. In most cases, banks do not pay interest on deposits kept in current accounts. Instead, account holders pay a small fee for the services they get.

The word or fixed deposit is the final form of deposit. Customers who have money they won't use for at least the next six months should put it in a fixed account. With the duration of the fixed deposit, the amount of interest charged rises. Customers can only withdraw money by writing to the bank at the end of the agreed-upon time.

2. Advancing Credit Facilities

Since it accounts for the largest percentage of annual income, advancing loans is a critical feature for banks. Banks typically offer high-interest short- to medium-term loans based on a percentage of cash deposits. Owing to the need to keep assets liquid, they do not have long-term funding. Banks consider the borrower's financial situation, company performance, quality and scale of the business, and willingness to repay the loan without default before advancing loans to customers.

3. Credit Creation

Banks do not offer cash loans to their customers when they make loans to them. Instead, the bank opens a savings account for the creditor, from which he or she can withdraw funds. This enables the borrower to withdraw funds via check as required. The bank raises the amount of money in circulation by making a demand deposit in the borrower's account without printing more money.

4. Agency Functions

Customers' cheques, dividends, interest warrants, and bills of exchange are collected and paid by commercial banks on their behalf. They also pay their clients' insurance premiums, utility costs, leases, and other expenses.

Banks also exchange stocks, bonds, and debentures, as well as offering advisory services to customers looking to purchase or sell these investments. Commercial banks serve as guardians and executors of estates on behalf of their customers in property administration. For the agency services done on behalf of their customers, banks charge a small fee.

5. Other Functions

Apart from the above primary duties, banks also perform a variety of other tasks. By buying and selling foreign currency, they provide foreign exchange to clients in the import and export market. Before dealing with foreign exchange, banks must obtain approval from a regulatory body, primarily the central bank.

A commercial bank may also serve as a custodian for valuables such as precious stones. Customers may store their jewelry, precious metals, and important documents in lockers provided by them. Holding such things at the bank is safer than keeping them at home, where they may be stolen or destroyed.