Commercial bank and its Functions

Commercial bank

A commercial bank is an institution that provides services such as accepting deposits, providing business loans, offering basic investment products (money), etc. Commercial banks also refer to a bank or a division of large banks which more specifically deals with deposits and loan services provided to a corporation or large or middle size business. Commercial banks are generally established with a profit motive to finance the commercial sector of the country. 

The first commercial bank in Nepal (First bank in Nepal), Nepal bank limited was established in the year 1994 B.S. This Is a major milestone in the history of Nepal as the country entered into the official financial system after its establishment. A commercial bank performs various functions like accepting money, lending, inter-financial institution relationship, cash management, treasury management, processing payments, etc.

The function of a commercial bank

A. Primary functions

1. Accepting deposits

The first important function of a commercial bank is to accept deposits in different accounts. The main forms of deposits accepted by the commercial banks are as follows

a. Demand deposit

A demand deposit is also known as the current account deposit. It is generally maintenance by traders and businessman who have to make a number of payments every day.

b. Saving deposit

This account is generally maintained by the low-income people and those who do not need to withdraw money frequently. There are certain restrictions of time and frequency while withdrawing from this deposit.

c. Fixed deposit

Fixed deposits are also known as time deposits. In this account, money is deposited for a fixed period of time and can not be withdrawn until the maturity period. The interest rate is very high in this deposit.

2. Providing loans
The banks earn profit by giving the amount deposited in it in the form of loans. Since the bank creates credit with its deposits, it is called the manufacturer of credit. The bank charges interest on loans which is usually higher than that offered on deposits. The main forms of loans provided by commercial banks are as follows:

a. Cash credit

It is a type of loan which is given to borrower against his/her current assets such as shares, stocks, bonds, etc loans are also provided on the basis of security deposit.

b. Overdraft

Sometimes the commercial banks provide overdraft facilities to its customers through which they are allowed to withdraw more than their deposits. Interest is charged to the customers on the overdrawn amount.

c. Loans and advances

These are generally long term loans which are provided by the bank to individuals and institutions against adequate securities like gold, silver, government and non-government securities that are easily traded, etc.

d. Call loans

Such loans are very short period loans. They are given for some days or weeks. Higher rate of interest is charged on such loans.

B. Secondary function/ Agency functions

Commercial banks collect and pay various credit instruments like cheques, bills of exchange, promissory note, etc. 

1. Remittance of money

Commercial bank helps its customers in transferring money from one place to another through cheques, draft, etc.

2. Purchase and sale of securities

Commercial banks undertake functions like purchase and sale of various securities on behalf of their customers.

3. Income receiving and payment

Commercial banks receive dividends, interest on shares and debentures of their customers. Similarly, they make the payment of insurance premium, rent, income tax periodically.

4. Acting as trustee and Executor

Commercial banks preserve the wills of their customers and execute them after their death.

C. Contingent Function

The contingent function is also called a general utility function. The contingent functions are as follows:

1. Locker facility

The commercial bank provides the locker facility to its customers. The customers keep their valuable things like gold, diamond, silver, etc and important documents in the locker for safety.

2. Traveler’s cheque

Commercial banks issue traveler’s cheque to their customers to help travel without fear of loss of money.

3. Letter of credit

Letter of credit is issued by the banks to their customers certifying their credit worthiness. It is very useful in foreign trade.

4.Dealing in foreign exchange

Commercial banks exchange foreign currency of customers with prior approval of the central bank.

5. Collection of statistics

Commercial banks collect statistics giving important information relating to industry, trade, and commerce and also publish financial journals.