5.6. Functions of Commercial Banks

1. Accepting Deposits ○ Savings, current, and fixed deposits.

Commercial banks play a crucial role in the financial system by accepting deposits from individuals and businesses. These deposits can be classified into several types: savings accounts, where people store money for future use while earning interest; current accounts, which are typically used by businesses for frequent transactions; and fixed deposits, where money is kept for a longer term at a higher interest rate. By accepting deposits, banks provide a safe place for people to store their money.

Think of a commercial bank like a safe where people store their valuables. Just as individuals would keep their jewelry in a safe to protect it, they deposit their money in banks to ensure it is secure. Additionally, just as a safe can charge a fee for rent, banks might provide interest on the deposits.

2. Providing Loans and Advances ○ Personal loans, business loans, overdrafts.

Another essential function of commercial banks is to provide loans and advances to individuals and businesses. These can include personal loans for individual needs such as buying a car or financing education, and business loans that support the growth and expansion of companies. Banks also offer overdraft facilities so that account holders can withdraw more money than they have in their accounts, up to a certain limit. This service is useful for managing short-term cash flow problems.

Imagine a friend lending you $50 to buy a book you need for school. In return, you agree to pay them back$55 in a week. Similarly, banks lend money to individuals or businesses and expect repayment with interest. Just like your friend, banks assess the borrower's ability to repay before granting a loan.

3. Facilitating Payments ○ Through cheques, drafts, credit/debit cards.

Commercial banks help facilitate payments, making transactions easier for their customers. They provide various payment methods such as cheques, which are written orders to pay a specific amount from one bank account to another; drafts, which are similar to cheques but guaranteed by the bank; and credit/debit cards, which allow customers to make purchases directly from their accounts or borrow money, respectively. These services streamline the payment process and increase convenience for consumers and businesses.

Using a credit card is like having a special key that allows you to access funds at any store without physically carrying cash. Just like a key fits into a lock to open a door, a credit card allows you to make purchases easily, providing access to your money in various places.

4. Agency Functions ○ Paying bills, collecting payments, buying/selling securities.

Commercial banks also perform agency functions, acting on behalf of their clients. This includes aiding in tasks such as paying utility bills, collecting payments, and buying or selling securities like stocks and bonds. By performing these functions, banks simplify financial management for their customers and allow them to focus on other priorities.

Consider a personal assistant who helps manage tasks for a busy executive. Just as the assistant handles scheduling appointments and organizing meetings, banks manage financial tasks for their clients, ensuring that everything runs smoothly and efficiently.

5. Other Services ○ Safe deposit lockers, online banking, mobile banking.

In addition to the primary functions, commercial banks offer a variety of additional services that enhance customer convenience and security. Safe deposit lockers are rented by customers to securely store valuables like jewelry and important documents. Online banking and mobile banking applications allow customers to manage their accounts, transfer money, and pay bills from the comfort of their homes or on the go. These services contribute to a comprehensive banking experience.

Think of safe deposit lockers as a personal vault within the bank, where treasures are kept securely. Likewise, online and mobile banking are like having the bank right in your pocket or on your computer – you can access your money and manage your finances whenever you wish, without needing to visit a physical branch.

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