Commercial Bank

Historically, commercial bank came into being for its commercial purpose. The inception of modern banking is the outcome of commercial bank. 

In the words of Professor Roger, “ the bank which deals with money and money‟s worth with a view to earning profit is known as ``Commercial bank.”

Professor Hart says, “ A banker is one who, in the ordinary course of business, honours cheques drawn upon him by persons for and for whom he receives money on current account.”

 Objectives of a commercial bank

1. To establish as an institution for maximizing profits and to conduct overall economic activities. 

2. To collect savings or idle money from the public at a lower rate of interests and lend these public money at a higher rate of interests. 

3. To create propensity of savings amongst the people. 

4. To motivate people for investing money with a view to bringing solvency in them . 

5. To create money against money as an alternative for enhancing supply of money. 

6. To build up capital through savings. 

7. To expedite investments. 

8. To extend services to the customers. 

9. To maintain economic stability by means of controlling money market. 

10. To extend co-operation and advices to the Govt. on economic issues.

Functions of commercial bank 

A: General Functions:

 1. Receiving Deposits: The first and foremost function of commercial bank is to receive or collect deposits from the public in different forms of accounts e.g. current, savings, term deposits. No interest is charged in the current account, lower rate of interest is charged in the savings account and comparatively higher interest rates charged in fixed deposits. Thus, commercial bank builds up customer network. 

2. Accommodation of loans and advances: Commercial Bank attaches much importance to providing loans and advances at a higher rates than the deposit rates and thus earns profits on it. Working capital is accommodated to the borrower for expansion and smooth running of business. In the similar manner, commercial bank extends financial accommodation for the development of agriculture 6 and industry. Credit accommodation is provided to the entrepreneurs for reviving sick and old industries as per Govt. directives. Thus, commercial bank also extends welfare services to the people at large. 

3. Creation of Loan Deposits: Commercial Bank not only receives deposits from public and accommodates loans to public but also creates loan deposits. For example: while disbursing loans as per sanction stipulation, the amount of loan is credited to the borrower‟s account. The borrower may not withdraw the full amount at a time. The residual amount i.e. balance left in the account creates loan deposits. 

4. Creation of medium of exchange: Central Bank has got exclusive right to issue notes. On the other hand, Commercial Bank creates medium of exchange by issuing cheques. Like notes, cheque is transferrable being popularly used in the banking transactions.

 5. Contribution in foreign trade: Commercial Bank plays a vital role in expediting foreign exchange and foreign trade business e.g. import, export etc. It contributes greatly in the economy through import finance and export finance and thus, earn foreign exchange for the country. 

6. Formation of capital: Commercial Bank extends financial assistance for the formation of capital in the trade, commerce and industry in the country which expedites its economic development. 

7. Creation of Investment Environment: Commercial Bank plays a significant role in creating investment environments in the country.

B. Public Utility Functions: 

In modern banking ,commercial bank executes public utility services:

 1. Remittance of Money: Remittance of money to the public from one place to another is one of the functions of commercial bank. Remittance is effected in the form of demand draft ,telegraphic transfer etc. through different branches and correspondents home and abroad. 

2. Help in trade and commerce: Commercial Bank helps expand trade and commerce. In inland and foreign trade customers are allowed credit accommodation in the form of letter of credit , bill purchased and discounted etc. 

3. Safe custody of valuables: Commercial Bank introduces „locker‟ services to the customers for safe custody of valuables e.g. documents, shares, securities etc. 

4. Help in Foreign Exchange business: While opening letter of credit , commercial bank obtains credit report of the suppliers and thus help expedite import and export business. 

C. Agency Functions: 

Besides above stated functions, commercial bank acts as a representative of the customers. 

1. Collection and payment: Commercial Bank is engaged in collection and payment of cheque, bill of exchange, promissory notes, pension, dividends, subscription, insurance premium, interest etc. on behalf of the clients. 

2. Purchase and sale of shares and securities: Commercial Bank is entrusted with the responsibility of purchase and sale of shares and securities on behalf of the customers. 

3. Maintenance of secrecy: Maintenance of secrecy is one of the most important functions of commercial bank.

 4. Act as a trustee: Commercial Bank acts as a trustee on behalf of the customer.

 5. Economic Development and Welfare activities: Commercial Bank contributes much for the welfare and economic development of the country.