Functions Of Commercial Banks Banking

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Functions Of Commercial Banks Banking 

Today there are many commercial banks in the United States. However, understanding the functions of commercial banks will allow you to see whether the banks are as per what you need and require. The functions of commercial banks are primarily divided into two categories, namely primary functions and secondary functions including agency functions.

 

Primary functions of a commercial bank include accepting deposits and granting loans and advances. The most important function of a commercial bank is to mobilize deposits. People who have surplus money tend to deposit their money in banks and depending on the type of deposit, the people earn interest on it. Besides letting the deposits grow in the bank, there is also a safety aspect. The deposited funds are considered to be safely stored in the bank.

The second important function of a commercial bank is to grant loans and advances. These are given to members of the public and business community at a higher interest rate than what the bank pays for deposits to its customers. The rate of interest varies depending on the loan amount, purpose for borrowing, mode of repayment and period of repayment. The bank’s main source of income comes from the different between the rate of interest on deposits and the rate of interest on loans and advances.

Secondary functions of a commercial bank refer to the following:

  • Issuing letters of credit, travelers checks, credit notes etc
  • Undertaking safekeeping of valuables, important documents by providing safe deposit facilities in the bank
  • Foreign exchange facilities
  • Transferring money from one place to another or from one bank to another
  • Standing guarantee on behalf of customers for making payments for goods, machinery and vehicles purchased by the customer
  • Issuing demand drafts and pay orders
  • Providing reports to credit bureaus on the credit worthiness of customers

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Functions Of Commercial Banks Banking

 

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