A. Primary Functions
Accepting Deposits and Advancing of Loans are the two primary functions performed by commercial banks.
1. Accepting Deposits
One of the most essential functions of commercial banks is accepting deposits. Commercial banks accept deposits from their customers in different forms based on the requirements of different sections of society. The main types of deposits include:
- Demand Deposits or Current Account Deposits: The deposits which are repayable on demand by the banks are known as demand deposits or current account deposits. In general, these kinds of deposits are maintained by businessmen to make transactions with these deposits. One can get the amount deposited as demand deposits by a cheque without any restriction. Besides, commercial banks do not pay any interest to the depositors on these accounts; instead, they charge some amount as a service charge for running these accounts.
- Fixed Deposits or Time Deposits: The deposits in which the depositor, deposits money with the bank for a fixed time period are known as fixed deposits or time deposits. These deposits do not enjoy a cheque facility and carry a high interest rate.
- Saving Deposits: The deposits, which include combined features of demand deposits and fixed deposits are known as saving deposits. The depositors have the cheque facility to withdraw money from their accounts, but there are some restrictions on the number and amount of withdrawals. The restrictions are imposed to discourage the frequent use of saving deposits. Besides, the interest rate on saving deposits is less than the interest rate on fixed deposits.
2. Advancing of Loans
The banks are not allowed to keep the amount deposited with them, idle. Therefore, commercial banks have to keep some amount of the total deposits as cash reserves and lend the rest of the balance to needy borrowers and charge interest from them. The interest received by commercial banks from advancing loans is the main source of their income. Some of the different types of loans and advances made by commercial banks are:
- Cash Credit: The loan given to the borrowers against their current assets like stocks, bonds, shares, etc., is known as cash credit. For this, a credit limit is sanctioned to the borrower, and money is credited to this account. The borrower can now withdraw any amount at any time within his credit limit. Interest is charged from the borrower on the amount actually withdrawn by him.
- Demand Loans: The loans given by the banks which they can recall at any time on demand are known as demand loans. The entire amount of the demand loan is credited to the borrower’s account, and interest is charged on that amount.
- Short-term Loans: Personal loans given to borrowers against some collateral security are known as short-term loans. The amount taken as a loan is credited to the account of the borrower, and he can withdraw that money from his account. Interest is charged on the entire sum of the loan granted.
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