What is Commercial Bank – Definition, Types, Functions
Commercial Bank Definition, Types, Primary and Secondary Functions of Commercial Banks – Commercial Banks are banking institutions that are engaged in financial services like – accepting deposits, granting short term loans and advances to the customers. Along with this, commercial banks also offer medium and long term loans to corporate and business enterprises. These banks are profit-making institutions and doing the business only to make a profit.
The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which banks lends the money is called the lending rate.
Commercial Banks – Definition
Definition I :
According to Banking Regulation Act of 1949, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.
Definition II :
Prof Syers defined bank as “institutions whose debt (referred to bank deposit), are commonly accepted in final settlement of other people’s debt.”
Commercial banks earn profit through interest income from loans. They charge high interest rate to the borrowers but pay less interest on deposits from public. The difference between these two is known as Net Interest Income which determines the profit for commercial banks.
Types of Commercial Bank
Commercial Banks may be categorized into two
- Scheduled Commercial Banks – Private Bank, Public Bank, Foreign Bank
- Non – scheduled Commercial Banks
First, we will discuss about what is the meaning of Scheduled Commercial Bank?
Those banks which are included in 2nd schedule of Reserve Bank of India Act 1934 and carry out normal business of banking are known as Scheduled Commercial Banks. RBI include only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of Act.
Types of Scheduled Commercial Banks
Scheduled commercial banks can be classified into three types –
Private Bank –
When private individuals own the majority (more than 52 percent) of the share capital of a banking company, then it is known as Private Sector Bank. Example of Private Banks is – HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Federal Bank etc.
Public Bank –
When Government own the majority of share capital of a banking company, then it is known as Public Sector Bank. Example of Public Sector Banks is – SBI, PNB, Canara Bank, Bank of Baroda, Allahabad Bank etc.
Foreign Bank –
Foreign Banks are international bank which are setup or registered in foreign countries and are obligated to follow regulations of both its home and host country.
Non Scheduled commercial banks:
Non Scheduled commercial banks are those banks which are not included 2nd schedule of RBI act 1934.
Functions of Commercial Banks – Primary Functions and Secondary Functions
The basic functions of commercial banks are accepting deposit from the public and lending them to borrowers to earn profit. But according to the time and changing economic scenario, banks have diversified their functions.
Function of commercial banks may be classified in two categories :
- Primary Functions
- Secondary Functions
Accepting Deposits –
It is the primary function of a commercial bank to accept deposit from general public, who possess surplus held with them. Banks accept deposit in form of saving bank account, current account, recurring deposit (RD) and fixed deposit (FD). Deposit is lifeline of bank as it provides banks with capital to perform lending operation to earn profit. These deposits are payable on demand or on maturity either by cheque, draft, order or otherwise.
Loans & Advances –
Loans & Advances is the main income source for commercial banks. Commercial banks mobilize the deposits from public in form of loans & advances. Banks lend money to individuals, companies or business and earn interest. Extends loans to the consumers in form of term loan, demand loan, overdraft, cash credit, bill discounting etc. Loan for vehicles, housing, consumer durables etc.
Secondary Functions –
Along with above two primary functions, bank also perform some secondary functions which are as follow –
Agency Services –
Bank provides some agency services to its customers in which it act as an agent on behalf of the them. Some services are : Collection of Cheque, Bills, Demand Draft, dividends, interest warrant etc. Make payment of rent, taxes, premium, bills etc. Purchase, sale of shares and securities. Act as trustee, attorney, correspondent and executor. Issuing guarantee on behalf of its customer for making payment for purchase of goods, machinery, vehicles etc.
General Utility Services –
Banks also offer some general utility services and charges some fees or commission for same. Such services are : Safe Deposit Locker Facility for safekeeping of valuables, documents etc. Issue of demand, draft, pay order, traveller’s cheque etc. Purchase, sale of foreign exchange. Debit card, credit card, mobile banking, internet banking facilities etc.
Fund Transfer –
Commercial Banks also assist its customers to transfer funds from one account to another account, from one place to another through cheque or other modes. Bank provides various fund transfer options like NEFT, RTGS, IMPS etc.
Credit Creation –
Banks accept deposit from public and advance loans by keeping small cash in reserve for day to day transactions. RBI produce money while commercial banks increase the supply, creating credit which is known as credit creation. When a bank advances a loan, it opens an account in the name of the customer and does not pay him in cash but allows him to draw the money by cheque according to his needs. By granting a loan, the bank creates credit or deposit.