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The Commercial Bank And Their Functions

The Commercial Bank and their Functions:
The commercial bank (or business bank) is a type of bank that provides services, such as accepting deposits, giving business loans and basic investment products.
Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to individual members of the public (retail banking).
In the US the term commercial bank was often used to distinguish it from an investment bank due to differences in bank regulation. After the great depression, through the Glass–Steagall Act, the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation was mostly repealed in the 1990s.


Commercial banks perform many functions. They satisfy the financial needs of the sectors such as agriculture, industry, trade, communication, so they play very significant role in a process of economic social needs. The functions performed by banks, since recently, are becoming customer-centered and are widening their functions. Generally, the functions of commercial banks are divided into two categories: primary functions and the secondary functions. The following chart simplifies the functions of commercial banks.
Commercial banks perform various primary functions, some of them are given below:

Commercial Bank

Commercial Bank

Deposit-Commercial banks accept various types of deposits from public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits. These deposits are payable after a certain time period
• Loan-Commercial banks provide loans and advances of various forms, including an overdraft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.
• Credit creation-Credit creation is most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits, known as a credit creation from commercial banks.
Along with primary functions, commercial banks perform several secondary functions, including many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.

The agency functions are the following:

  • To collect and clear cheque, dividends and interest warrant.
  • To make payments of rent, insurance premium, etc.
  • To deal in foreign exchange transactions.
  • To purchase and sell securities.
  • To act as trusty, attorney, correspondent and executor.
  • To accept tax proceeds and tax returns.

The utility functions are the following:

  • To provide safety locker facility to customers.
  • To provide money transfer facility.
  • To issue traveler’s cheque.
  • To act as referees.
  • To accept various bills for payment: phone bills, gas bills, water bills, etc.
  • To provide merchant banking facility.
  • To provide various cards: credit cards, debit cards, smart cards, etc.