Explain the functions of commercial banks.

Commercial banks play a pivotal role in the economic development of a country by performing various functions. These functions can be broadly categorized into primary (basic) functions, secondary (agency) functions, and other functions.

Primary Functions

1. Accepting Deposits Commercial banks accept deposits from the public in various forms such as:

   • Savings deposits (interest-bearing, withdrawable on demand)
   • Current deposits (no interest, used for business transactions)
   • Fixed deposits (for a fixed period at a higher interest rate)
   • Recurring deposits (small periodic deposits with compound interest)

   This function helps mobilize idle funds and transforms them into productive investments.

2. Granting Loans and Advances Banks provide financial assistance to individuals, businesses, and industries in the form of:

   • Short-term loans (working capital, overdraft facilities)
   • Medium and long-term loans (business expansion, housing, education)
   • Consumer credit (personal loans, car loans)
   • Agricultural loans (farmers, cooperatives)

   This function facilitates economic growth by channeling funds to productive sectors.

Secondary (Agency) Functions

Commercial banks act as agents for their customers by performing services such as:

• Collection and payment of cheques, bills, and dividends
• Issuing demand drafts, bank drafts, and traveler’s cheques
• Providing safe deposit lockers for valuables
• Acting as trustees and executors in legal matters
• Offering foreign exchange services (remittance, currency exchange)

Other Important Functions

1. Credit Creation Banks create credit by lending a portion of deposits, thereby expanding the money supply in the economy. This function is crucial for economic growth.

2. Investment Services Banks invest in government securities, corporate bonds, and shares to earn profits and provide liquidity.

3. Economic Development By funding infrastructure projects, small and medium enterprises (SMEs), and industrial ventures, banks contribute significantly to national development.

4. Foreign Exchange Services Banks facilitate international trade by providing letters of credit, foreign remittances, and currency exchange services.

In summary, commercial banks perform essential financial intermediation by mobilizing deposits, granting loans, providing agency services, and contributing to economic stability and growth. Their efficient functioning ensures smooth monetary transactions and sustainable development.