What is Commercial Banking ? Definition, Roles & Functions

What is Commercial Banking ? Definition, Roles & Functions – Banking occupies one of the most important positions in the modern economic world. It is a basic necessity for trade and industry. Hence it is one of the great agencies of commerce.

Although banking in one form or another has been in existence from very early times, modern banking is of recent origin. It is one of the results of the Industrial Revolution and the child of economic necessity. Its presence is very helpful to the economic activity and industrial progress of a country.

Meaning of a Commercial Bank -What is Commercial Banking ?

A commercial bank is a profit-seeking business firm, dealing in money and credit. It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety.

So also, it deals in credit, i.e., it creates credit by making advances out of the funds received as deposits to needy people. It thus, functions as a mobiliser of saving in the economy.

A bank is, therefore like a reservoir into which flow the savings, the idle surplus money of households and from which loans are given on interest to businessmen and others who need them for investment or productive uses.

Definition of a Bank – Commercial Banking

  • The term ‘Bank’ has been defined in different ways by different economists. A few definitions are:
  • According to Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a machine for facilitating exchange.”
  • According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use.”
  • The Banking Companies Act of India defines Bank as “A Bank is a financial institution which accepts money from the public for the purpose of lending or investment repayable on demand or otherwise withdrawable by cheques, drafts or order or otherwise.”
  • Thus, we can say that a bank is a financial institution which deals in debts and credits. It accepts deposits, lends money and also creates money. It bridges the gap between the savers and borrowers. Banks are not merely traders in money but also in an important sense manufacturers of money.

Functions of Commercial Banks – Commercial Banking

  • Commercial bank being the financial institution performs diverse types of functions.
  • It satisfies the financial needs of the sectors such as agriculture, industry, trade, communication, etc.
  • That means they play very significant role in a process of economic social needs.
  • The functions performed by banks are changing according to change in time and recently they are becoming customer centric and widening their functions.
  • Generally the functions of commercial banks are divided into two categories viz. primary functions and the secondary functions.
  • The following chart simplifies the functions of banks.

Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are given below

  1. Accepting Deposits : Commercial bank accepts various types of deposits from public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period.
  2. Making Advances : The commercial banks provide loans and advances of various forms. It includes an over draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.
  3. Credit creation : It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words while sanctioning a loan a bank automatically creates deposits. This is known as a credit creation from commercial bank.

Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several secondary functions too. It includes many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions.

Agency Functions : Various agency functions of commercial banks are

  • To collect and clear cheque, dividends and interest warrant.
  • To make payment 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.

General Utility Functions : The general utility functions of the commercial banks include

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