Any economy’s progress gets a considerable push from commercial banks, for they are financial intermediaries between borrowers and depositors. They perform those functions which are essential to maintain the pace of the economy: accepting deposits, lending of funds, and payment services. Commercial banks facilitate savings mobilization and their investment into productive ventures that help in promoting growth, employment, and capital formation. Their effective credit dispensation, money management advice, and online banking facilities enable both businesses and individuals to attain financial stability. The functions of commercial banks, types, significance, and examples of prominent commercial banks in India are described in this article.
What are Commercial Banks?
Commercial banks are banking institutions that obtain deposits from the public and lend for usage, business, and investment. Their primary purpose is to gain profits by providing financial services such as accepting deposits, lending, remittances, and trade financing. Central banks like the Reserve Bank of India (RBI) regulate the activities of commercial banks in the interests of financial stability, depositors’ protection, and liquidity in the economy. They also directly intervene in financial markets and thus promote the transfer of funds from savers to borrowers, which helps in the growth and development of various sectors of the economy.
Primary Functions of Commercial Banks
As the intermediaries for both depositors and borrowers, banks are also responsible for the primary function of collection of deposits and acceptance of all forms of deposits from the public. They owe cash to the public at any given time and are prepared to use this money in any way that they find fit, a principle by virtue of which they are called the owners of the money. Bank obligations to depositors are passed on to borrowers. A bank undertakes to develop, safeguard, and administer the funds that depositors place in its trust, on the understanding that it will repay these funds, either in full or in part, to the depositors, whether on demand or at a specified time. The depositor retains the freedom to use these funds while it is directly deposited with the bank on any date or can place the limitation of using the funds for a specific purpose. The funds raised by the bank through deposits are then loaned to those who have populations that require them, keeping with the prudential principles of banking.
Accepting Deposit
Accepting deposits is the main business of commercial banks. These deposits are the major source of funds that banks invest to give loans and keep liquidity.
Savings Deposits
- Used by people to save money.
- Gives interest on deposited money.
- Limited withdrawal to cultivate habits of saving.
Current Deposits
- Used by companies mostly.
- Gives no interest.
- Gives unlimited transactions.
Fixed Deposits (Term Deposits):
- Locked-in for a particular time duration.
- Gives more interest than savings accounts.
- Early withdrawal can impose penalties.
Granting Loans and Advances
Commercial banks advance money for productive purposes and consumption requirements. It is an important feature under what are the functions of commercial banks.
- Short-Term Loans: Used for working capital requirements, trade financing, and purchase of inventory.
- Long-Term Loans: Used for infrastructure, real estate, business expansion, etc.
- Cash Credit & Overdrafts: Cash credit is provided against security. Overdraft enables current account holders to withdraw an amount greater than their balance.
Credit Creation
Banks generate credit by approving loans and overdrafts. This addition to the money supply lends to stimulating the growth of the economy. This enables banks to act as intermediaries in the capital formation and investment that are quintessential to economic growth.
Secondary Functions of Commercial Banks
These services help the banking system function and make matters more pleasant for its clients. Even though the secondary functions of commercial banks have a very much supportive role. Banking is often said to be built upon these very foundations.
Agency Services
Thus, every banking institution is an agent to its clients, providing services such as:
- Cheques Collection and Payment: The banks will clear and make payments against cheques with utmost safety and speed.
- Transfer of Funds: This entails transferring funds for the beneficiaries both across regions and on international platforms by means of RTGS, NEFT, IMPS.
- Bill Payment and Investments: Payment of utility bills and taxes and investing in bonds, mutual funds, and insurance.
Utilitarian Services
General utility services, as these additional banking services are called, afford the benefit of more convenience for the customers and enhance the banking experience.
- Locker Facilities: Convenience when storing ornaments, documents, and others.
- Issue of Cards: Cashless transactions with the convenience of credit and debit card usage.
- Internet & Mobile Banking: Smooth online interfaces for transfer, statements, recharges, and account handling.
Provide foreign currency exchange and travel cards for overseas transactions.
Ancillary Functions
The ancillary services render commercial banks more adaptable in the new economy:
- Underwriting Securities: Banks underwrite company shares and debentures on public issues.
- Consultation Services: Provide clients with market investment information on stocks, mutual funds, and end-of-life schemes.
- Merchant Banking: Issues management, restructurings, and mergers & acquisitions.
- Digital wallets and UPI: The most important part of facilitation of financial inclusion through mobile payments and instant money transfer.
Importance of Commercial Banks
Commercial banks are important institutions that maintain the economy in operation by meeting the credit and liquidity requirements of society. They play the role of intermediaries between investors and savers, with the result that capital is efficiently allocated.
- Mobilization of Savings: Persuade individuals to save through attractive deposit plans.
- Capital Formation: Make energetic productive investments of dormant savings to create capital for a social economy.
- Credit for All: No industry, entrepreneur, farmer, or consumer can say no to loans, thus bringing about industrial and agricultural development.
- Boost to Employment: Through various loan schemes to businesses and MSMEs, banks help create job opportunities.
- Implementation of Monetary Policy: Serve as tools for RBI to manage inflation, interest rates, and credit allocation.
- Support for International Trade: Provide facilities such as letters of credit, forex exchange, and remittances that facilitate exports/imports.
Types of Commercial Banks
Indian commercial banks are classified according to their ownership, region of operation, and the nature of services they offer. For instance, Public Sector Banks reach out into rural areas, enhancing economic development as compared to profit-making. Knowledge of these types helps understand the specific contributions they make towards financial inclusion and economic growth.
Banks in the Public Sector
Fully owned and controlled by the Government of India, public-sector banks emphasize rural outreach and economic development over profit-making.
These are the examples:
- State Bank of India (SBI)
- Punjab National Bank (PNB)
Private Sector Banks
Institutions owned by the private sector and offering competitive services with a thrust towards profitability and innovation.
Examples:
- HDFC Bank
- ICICI Bank
- Axis Bank
Foreign Banks
International banks having branches in India. They service primarily multinational companies and high-net-worth individuals.
Examples:
- Citibank
- Standard Chartered Bank
Cooperative Banks
Local members run and own these institutions, commonly belonging to rural or agricultural populations. They offer credit at affordable prices and enhance local development.
Examples:
- Saraswat Cooperative Bank
- Maharashtra State Cooperative Bank
Examples of Commercial Banks in India
India’s commercial banks are stable financial pillars serving various banking needs. These banks provide services tailored to savings, credit, investment, and development.
| Bank Name | Type | Key Strengths |
| State Bank of India | Public Sector | Large branch network, rural extension |
| HDFC Bank | Private Sector | Strong technology platforms, retail banking capabilities |
| ICICI Bank | Private Sector | Investment and corporate banking capabilities |
| Punjab National Bank | Public Sector | Wide reach, low-cost credit |
| Axis Bank | Private Sector | Retail & corporate banking, innovative services |
Functions of Commercial Banks FAQs
1. What are commercial banks’ functions?
Commercial banks receive deposits from the public and lend to business firms and individuals. They also provide financial facilities such as fund transfer and cheque clearing.
2. What are the 10 bank functions?
Ten are accepting deposits, lending, creation of credit, cheque clearing, fund transfer, providing lockers, foreign exchange services, bill payments, investment services, and financial advisory.
3. What are the roles of the commercial banking system?
The commercial banking system mobilizes funds through deposits and invests them into productive loans. It provides liquidity and facilitates economic growth as well.
4. What are the roles of commercial banks Wikipedia?
Commercial banks, as per Wikipedia, take deposits, lend money, create credit, and conduct other financial services such as currency exchange and investment management.
5. What are the main two roles of commercial banks?
The two primary activities are taking deposits and lending loans. These facilitate the flow of money and finance economic activities.
