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    Functions of Commercial Banks: Primary and Secondary Functions

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    Pavan Kumar Surala
    Commercial banks have primary functions of accepting deposits and providing loans and advances. As the major source of profits, banks retain some deposits as reserves and lend out the rest. Their secondary functions include discounting bills of exchange, providing overdraft facilities, purchasing and selling securities, and offering locker facilities. There are three main types of commercial banks: private banks that are majority owned by private individuals and businesses, public banks where the government holds a significant stake, and foreign banks established in other countries but having branches elsewhere.

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    Functions of Commercial Banks: Primary and Secondary Functions

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    Pavan Kumar Surala
    65 views3 pages
    Commercial banks have primary functions of accepting deposits and providing loans and advances. As the major source of profits, banks retain some deposits as reserves and lend out the rest. Their secondary functions include discounting bills of exchange, providing overdraft facilities, purchasing and selling securities, and offering locker facilities. There are three main types of commercial banks: private banks that are majority owned by private individuals and businesses, public banks where the government holds a significant stake, and foreign banks established in other countries but having branches elsewhere.

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    Commercial banks have primary functions of accepting deposits and providing loans and advances. As the major source of profits, banks retain some deposits as reserves and lend out the rest. Their secondary functions include discounting bills of exchange, providing overdraft facilities, purchasing and selling securities, and offering locker facilities. There are three main types of commercial banks: private banks that are majority owned by private individuals and businesses, public banks where the government holds a significant stake, and foreign banks established in other countries but having branches elsewhere.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    65 views3 pages

    Functions of Commercial Banks: Primary and Secondary Functions

    Uploaded by

    Pavan Kumar Surala
    Commercial banks have primary functions of accepting deposits and providing loans and advances. As the major source of profits, banks retain some deposits as reserves and lend out the rest. Their secondary functions include discounting bills of exchange, providing overdraft facilities, purchasing and selling securities, and offering locker facilities. There are three main types of commercial banks: private banks that are majority owned by private individuals and businesses, public banks where the government holds a significant stake, and foreign banks established in other countries but having branches elsewhere.

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    © All Rights Reserved
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    Functions of Commercial Banks: Primary and Secondary

    Functions
    What is Commercial Bank?
    A commercial bank is a kind of financial institution that carries all the operations related to
    deposit and withdrawal of money for the general public, providing loans for investment, and
    other such activities. These banks are profit-making institutions and do 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 a bank lends money is known as the lending rate.
    Related link: Banking and its Type

    Function of Commercial Bank:


    The functions of commercial banks are classified into two main divisions.
    (a) Primary functions 
     Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits.
    The surplus balances collected from the firm and individuals are lent to the temporary
    requirements of the commercial transactions.
    Provides loan and advances : Another critical function of this bank is to offer loans and
    advances to the entrepreneurs and business people, and collect interest. For every bank, it is
    the primary source of making profits. In this process, a bank retains a small number of
    deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand
    loans, overdraft, cash credit, short-run loans, and more such banks.
    Credit cash: When a customer is provided with credit or loan, they are not provided with
    liquid cash. First, a bank account is opened for the customer and then the money is
    transferred to the account. This process allows the bank to create money.
    (b) Secondary functions 
     Discounting bills of exchange: It is a written agreement acknowledging the amount of
    money to be paid against the goods purchased at a given point of time in the future. The
    amount can also be cleared before the quoted time through a discounting method of a
    commercial bank.
    Overdraft facility: It is an advance given to a customer by keeping the current account to
    overdraw up to the given limit.
     Purchasing and selling of the securities: The bank offers you with the facility of selling
    and buying the securities.
    Locker facilities: A bank provides locker facilities to the customers to keep their valuables
    or documents safely. The banks charge a minimum of an annual fee for this service.
    Paying and gathering the credit : It uses different instruments like a promissory note,
    cheques, and bill of exchange.
    Types of Commercial Banks:
    There are three different types of commercial banks.
     Private bank –: It is a type of commercial banks where private individuals and businesses
    own a majority of the share capital. All private banks are recorded as companies with limited
    liability. Such as  Housing Development Finance Corporation (HDFC) Bank, Industrial
    Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.
     Public bank –: It is a type of bank that is nationalised, and the government holds a
    significant stake.  For example, Bank of Baroda, State Bank of India (SBI), Dena Bank,
    Corporation Bank, and Punjab National Bank.
    Foreign bank –: These banks are established in foreign countries and have branches in other
    countries. For instance, American Express Bank, Hong Kong and Shanghai Banking
    Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.
    You might also want to know: What are the 4Ps of Marketing?

    Examples of Commercial Banks


    Few examples of commercial banks in India are as follows:
        1. State Bank of India (SBI)
        2. Housing Development Finance Corporation (HDFC) Bank
        3. Industrial Credit and Investment Corporation of India (ICICI) Bank
        4. Dena Bank
        5. Corporation Bank
    This was all about the ‘Functions of Commercial Banks’ that is elucidated in detail for
    commerce students. To know about more such concepts, stay tuned to BYJU’S.

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     Money Creation by Banking System
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    Frequently Asked Questions on Function of Commercial Banks

    What is the most important function of a Bank?


    The most important function of a bank is to collect deposits from the public and lend those
    deposits for the development of business, agriculture, trade and commerce.

    What is the first commercial bank of India?


    Bank of Calcutta is the oldest commercial bank in India. It was established in the year 1806.
    It was later renamed the Bank of Bengal. Currently it is known as State Bank of India.
    What is the main purpose of commercial banks?
    The main purpose of commercial banks is to provide financial services to the general public
    and also provide loan facilities to the business which helps in ensuring economic stability and
    growth of the economy. Therefore, we can say that credit creation is the most important
    purpose of commercial banks.

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