What is meant by the term commercial bank? Explain the functions of a commercial bank.

Commercial Bank — A commercial bank is an institution which accepts deposits of money from the public and provides loans and advances to businessmen and others. It also performs other related functions. In India, commercial banks are organised as joint stock companies. State Bank of India is the largest commercial bank of India.

Functions of a Commercial Bank — Commercial banks perform two types of functions: Primary Functions and Secondary Functions.

A. Primary Functions:

1. Accepting Deposits — Commercial banks accept deposits from the public to make investments and grant loans. The main forms of deposits are:

• Fixed Deposits — for a fixed time period; higher rate of interest.
• Savings Deposits — to develop habit of saving; restriction on withdrawals.
• Recurring Deposits — fixed amount deposited monthly for a fixed period.
• Current Deposits — for business firms; no interest paid; overdraft available.

2. Lending Money — Commercial banks lend money to businessmen, farmers, artisans and others through:

• Overdraft — allowing account holders to withdraw more than the balance up to a specified limit.
• Cash Credit — advancing cash loans up to a fixed limit against tangible security.
• Discounting of Bills — paying the amount of a bill of exchange before maturity after deducting discount.
• Loans and Advances — lump sum lending for short-term and medium-term needs.

B. Secondary Functions:

3. Agency Functions — Acting as an agent of customers, banks:

• Collect cheques, bills, interest, dividend, rent on behalf of customers.
• Make payments of loan instalments, interest, rent, insurance premium, taxes, etc.
• Buy and sell shares, debentures and securities.
• Act as trustees and executors and transfer funds.

4. General Utility Functions — Banks also perform:

• Issuing letters of credit, drafts and travellers' cheques.
• Underwriting shares and debentures issued by companies.
• Safe custody of valuables (lockers).
• Providing advice and credit information.