Banks have become an essential part of our daily lives. Every person has one or multiple bank accounts these days for their various needs. From business tycoons to housewives and even students.

 

But what do these banks do other than keep your money safe, and provide loans? Commercial banks are, in a way, the backbone of the growth of any economy. They help stabilise the economy, provide loans and interest on your savings by investing your money and help in day-to-day transactions.

 

Beyond the tasks listed above, commercial banks do a wide range of other duties. What do their tasks entail? Are there any other kinds of banks that could aid the general public? In our discussion, which is centred on the duties of commercial banks, all of these issues will be covered.

What Are Commercial Banks

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A commercial bank is a financial organisation that handles all transactions involving public money deposits and withdrawals, lending money for investments, and other similar activities. These banks are for-profit organisations that operate solely for financial gain.

 

They fund loans using the money that their clients deposit in various kinds of accounts. The deposits serve as capital for the loans that are made. Because they contribute to the creation of capital, credit, and market liquidity, commercial banks are crucial for a nation’s economy. These banks often have physical locations in cities, but more and more of them are now operating online.

History Of Commercial Banks In India

In India, commercial banks are especially important since they support the nation’s economic expansion while also providing important information about financial operations. The development of India has long been fuelled by its banks, which provide affordable financial services to a huge portion of the people and meet the short- and medium-term credit needs of thousands of companies, especially medium-sized and small businesses (MSMEs).

 

All significant banks are categorised as commercial entities under the RBI (Reserve Bank of India) Act of 1934. There are more banking types, such as Small Finance Bank, Co-operative Banks and Payments Banks, under the scheduled bank category. Foreign banks, public sector banks, regional or rural banks and private sector banks make up the remaining ownership categories of the banks.

Functions Of Commercial Banks

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Primary Functions

  1. Accepting Deposits

Savings, current, and fixed deposits are all forms of deposits accepted by the bank. The corporate and individual surplus balances are lent money to cover the short-term needs of business transactions.

 

  1. Savings Deposits

Customers can credit money to their accounts by savings deposits up to a specific amount. People on fixed incomes choose these deposits since they can build up money over time.

 

  1. Providing Loans

Offering loans and advances to entrepreneurs and business persons while also collecting interest is a crucial role of this bank. It is the main source of revenue for every bank. In this method, a bank offers (lends) the remaining deposits to the borrowers in the form of demand loans, overdrafts, cash credits, short-term loans, and other similar loans while keeping a tiny portion of the deposits as a reserve.

  1. Credit Creation

Customers are not given liquid cash when they are given credit or a loan. The customer’s bank account is opened first, and then the funds are transferred to it. The bank is able to produce money through this technique.

Secondary Functions

  1. Providing locker Facilities

Customers who seek a secure place to store their belongings can use lockers provided by commercial banks. Locker facilities remove the constant risk of theft or loss that comes with keeping things at home.

 

  1. Exchange of Securities

Trading in bonds and securities is another duty of commercial banks. The financial institution itself is where customers may buy or sell the units, which is more convenient than other options.

 

  1. Bank as an agent

Along with completing the duty of an agent, Commercial Bank and its Function also demand them to offer customers financial services. These services often consist of

 

  • Serving as a customer-owned estate’s administrator, trustee, or executor.
  • Providing clients with assistance with tax returns, tax refunds, and other related responsibilities.
  • Providing a means for making payments for things like premiums and loan payments.
  • Providing a framework for processing checks, drafts, bills, and other financial transactions electronically.

 

  1. Discounting Bills of Exchange

In the modern day, discounting business invoices is the primary responsibility of a commercial bank. Banks are thought to make money on their investments in bill discounting. Bills produce a consistent flow of money while avoiding dangerous situations during payment because they are regarded as negotiable instruments. Additionally, they don’t subject the financial institution to any legal action.

 

  1. Dealing in Foreign Exchange

Commercial banks assist in supplying foreign currency to people and companies that export or import products from abroad. However, only a select group of banks that are authorised to deal in foreign exchange are capable of carrying out such operations.

What Role Do The Commercial Bank Play In The Indian Economy

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Growth of entrepreneurship

All types of organisations and industry sectors depend heavily on capital. It is a requirement for maintaining a business. Commercial banks step in to save enterprises by providing loans in this situation. Among them are business owners, farmers, and small and medium-sized organisations. Banks support self-sufficiency, combat unemployment, and advance the proper industries by lending money to business owners and making investments for constructive objectives.

Wealth creation

Bank professionals can guide customers to mutual funds or direct investments by offering consultation and advising services. The bank can serve as custodian for all investment securities, as well as a trustee for wills and investment funds, and it can also offer safety deposit boxes and letters of credit for potential investments.

Implementation and execution of monetary policies

A number of laws and regulations established by the Reserve Bank of India’s monetary policy promote fair and open financial transactions throughout the nation. However, this is only feasible if commercial banks consent to follow these policies and assist in their implementation. The future of an economy and its development is built on a strong and solid monetary policy.

Trading functions

Market makers for corporate, government and municipal bonds may be commercial banks. Through their market-making operations, banks can offer technical guidance, counselling, and advice to issuers.

Credit creation

Creating credit or liquidity in the system is simply the process of leveraging national operations and developments. A nation’s banks act as its financial engine, injecting capital into the system to support economic growth on many levels.

Greater economic development is attributed to a more flexible credit influx that results in higher productivity, more jobs, sales, and services.

Inculcation Savings Habits

The predictable returns that banks provide as interest income are one of the main draws for people who have bank accounts. People deposit their money in banks through a variety of deposit plans that are tied to prices and interest. This promotes the development of saving habits, which is good for the economy.

Conclusion

Commercial banks are essential for the growth of our economy. They play a vital role which you now certainly understand. Jobs in the banking sector classify as essential jobs, which was clear during the pandemic as well. Many banks kept operating in the tough times and proved to the world their importance quite clearly.

 

They offer one of the safest and most fulfilling career options if you are into commerce and want to contribute towards the economy of the country. IMS Proschool offers multiple courses which can aid you with the right knowledge and skills to secure a job in this sector and provide your contribution to this growing economy.

 

FAQ

Which was the first commercial bank of India?

The oldest commercial bank in India is the Bank of Calcutta. It became operational in the year 1806. Later, the Bank of Bengal was given to it. Its current name is the State Bank of India.

What is the most crucial function of a Bank?

The most crucial role of a bank is to gather public deposits and lend those deposits for the growth of agriculture, industry, trade, and commerce.

Why is a bank known as the backbone of the economy?

As it directly affects both financial and economic development, banking is often referred to as the foundation of any economy. More robust and effective banking industry will hasten economic development. In rising economies, the role of the banking industry is well understood.

Why is banking important?

Commercial banks play a crucial role in the economy since they generate money and market liquidity in addition to offering their clients critical services. By giving out loans from the savings of their customers, banks ensure market liquidity.