Professional Documents
Culture Documents
33.1 Introduction
You have studied in the earlier lesson about different types of banks
and their nature. It may be of interest to you now to know about the
various services/functions performed by commercial banks. In this lesson,
you will study about the various services provided by commercial banks
to the business community in particular and the public in general.
33.2 Objectives
After studying this lesson, you will be able to -
a) Accepting deposits
i) Loans
that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lumpsum
or in instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in
lumpsum or in instalments.
ii) Advances
a) Cash Credit
b) Overdraft
c) Discounting of Bills
2. These are the main sources These are not the main sou-
of income of the bank. rces of income of the banks.
Functions of Commercial Banks :: 25
i) Current deposit
ii) Saving deposit
iii) Fixed deposit
26 :: Business Studies
Fixed deposit
The term ‘Fixed deposit’ means deposit repayable after the expiry of
a specified period. Since it is repayable only after a fixed period of
time, which is to be determined at the time of opening of the account,
it is also known as time deposit. Fixed deposits are most useful for a
commercial bank. Since they are repayable only after a fixed period,
the bank may invest these funds more profitably by lending at higher
rates of interest and for relatively longer periods. The rate of interest
on fixed deposits depends upon the period of deposits. The longer the
period, the higher is the rate of interest offered. The rate of interest to
Functions of Commercial Banks :: 27
Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under this
type of deposit, the depositor is required to deposit a fixed amount of
money every month for a specific period of time. Each instalment may
vary from Rs.5/- to Rs.500/- or more per month and the period of
account may vary from 12 months to 10 years. After the completion of
the specified period, the customer gets back all his deposits alongwith
the cumulative interest accrued on the deposits.
Miscellaneous Deposits
i) Cash credit
ii) Loans
i) Cash Credit :
ii) Loans :
a) Demand loan, or
b) Term loan
a) Demand loan
b) Term loans
Medium and long term loans are called ‘Term loans’. Term loans
are granted for more than one year and repayment of such loans
is spread over a longer period. The repayment is generally made
in suitable instalments of fixed amount. These loans are repayable
over a period of 5 years and maximum upto 15 years.
Functions of Commercial Banks :: 29
Apart from granting cash credit, loans and overdraft, banks also grant
financial assistance to customers by discounting bills of exchange. Banks
purchase the bills at face value minus interest at current rate of interest
for the period of the bill. This is known as ‘discounting of bills’. Bills
of exchange are negotiable instruments and enable the debtors to
discharge their obligations towards their creditors. Such bills of exchange
arise out of commercial transactions both in internal trade and external
trade. By discounting these bills before they are due for a nominal
amount, the banks help the business community. Of course, the banks
recover the full amount of these bills from the persons liable to make
payment.
30 :: Business Studies
(a) There are four important ways of lending money by banks. They
are :
(b) Bank loans can be divided into two categories viz _______ and
__________.
i) Agency Services
The functions of banks are divided into two categories : (i) Primary
functions, (ii) Secondary functions. Primary functions include accepting
deposits and lending money. Loans given by banks are : Short-term
loan and long-term loans. Banks grant short-term loan to its customers
by way of cash credit, overdraft, discounting of bills.
Banks accepts deposits from the public and their customers in the form
of Current deposit, Saving, deposit, fixed deposit, and under other
deposit schemes. Banks grant loans to customers as demand loan and
term loan.
The ancilliary services of banks are agency services and general utility
services. Agency services are rendered as agent of customers, whereas
general utility services are rendered to the general public.
False b) e) f) h)
33.2 a) i) loans
iii) Overdraft
b) Short-term, Long-term
c) Short-term
d) Term loan
e) Cash credit
f) Overdraft
g) Discount
h) Maturity