Bank's Main Functions

Functions of Commercial Banks :

The functions of a commercial banks are divided into two categories: 

i) Primary functions, and 

ii) Secondary functions including agency functions. 

i) Primary functions: 

The primary functions of a commercial bank include: 

a) accepting deposits; and 

b) granting loans and advances; 

a) Accepting deposits 

The most important activity of a commercial bank is to mobilise 

deposits from the public. People who have surplus income and 

savings find it convenient to deposit the amounts with banks. 

Depending upon the nature of deposits, funds deposited with 

bank also earn interest. Thus, deposits with the bank grow along 

with the interest earned. If the rate of interest is higher, public 

are motivated to deposit more funds with the bank. There is also 

safety of funds deposited with the bank. 

b) Grant of loans and advances 

The second important function of a commercial bank is to grant 

loans and advances. Such loans and advances are given to 

members of the public and to the business community at a higher 

rate of interest than allowed by banks on various deposit accounts. 

The rate of interest charged on loans and advances varies 

depending upon the purpose, period and the mode of repayment. 

The difference between the rate of interest allowed on deposits 

and the rate charged on the Loans is the main source of a bank’s 

income. 

i) Loans 

A loan is granted for a specific time period. Generally, 

commercial banks grant short-term loans. But term loans, 

Functions of Commercial Banks :: 23 

that is, loan for more than a year, may also be granted. 

The borrower may withdraw the entire amount in lumpsum 

or in instalments. However, interest is charged on the full 

amount of loan. Loans are generally granted against the 

security of certain assets. A loan may be repaid either in 

lumpsum or in instalments. 

ii) Advances 

An advance is a credit facility provided by the bank to its 

customers. It differs from loan in the sense that loans may 

be granted for longer period, but advances are normally 

granted for a short period of time. Further the purpose of 

granting advances is to meet the day to day requirements 

of business. The rate of interest charged on advances varies 

from bank to bank. Interest is charged only on the amount 

withdrawn and not on the sanctioned amount. 

ii) Secondary functions 

Besides the primary functions of accepting deposits and lending money, 

banks perform a number of other functions which are called secondary 

functions. These are as follows - 

a) Issuing letters of credit, travellers cheques, circular notes etc. 

b) Undertaking safe custody of valuables, important documents, and 

securities by providing safe deposit vaults or lockers; 

c) Providing customers with facilities of foreign exchange. 

d) Transferring money from one place to another; and from one 

branch to another branch of the bank. 

e) Standing guarantee on behalf of its customers, for making 

payments for purchase of goods, machinery, vehicles etc. 

f) Collecting and supplying business information; 

g) Issuing demand drafts and pay orders; and, 

h) Providing reports on the credit worthiness of customers.