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 Commercial Banks




A modern industrial society cannot be run by self-financing of entrepreneurs. Some institutional assistance is necessary to mobilize the savings of the community and to make them available to the entrepreneurs. The people, a large majority of who save in small odd lots, also want an institution which can ensure safety of their funds together with liquidity. Banks assure this with a further facility – that the funds can be drawn back in case of need. From a broader social angle, banks at as a bridge between t he users of capital and whose who save but cannot use the funds themselves. The idle resources of the community are thus activated and brought to productive use.


 Role Of A Commercial Bank


1. A developing economy needs a high rate of capital formation to accelerate the tempo of economic development. But the economic development depends upon the rate of savings. Banks offer facilities for keeping savings and thus encourage the habits of thrift in the society.


2. Not only do the banks encourage savings but they also mobilize savings done by several households and make them available for production and investment to the entrepreneurs in various sectors of the economy. Without banks these savings would have remained idle and would not have been utilized for productive and investment purposes.


3. Allocation of funds or economic surplus among different sectors, users or producers so as to make maximum social return and thus to ensure optimum utilization of savings is another important function performed by the banks. However, it may be mentioned, that commercial banks do not always work and allocate resources in the way that maximizes production or social welfare. For example, before nationalization in 1969, the commercial banks in India neglected socially highly desirable sectors such as agriculture, small-scale industries and weaker sections of the society. Therefore, it was thought necessary to nationalize them so that they should allocate resources in socially desirable directions.


4. By encouraging savings and mobilizing them from public, banks help to increase the aggregate rate of investment in the economy. Banks not only mobilize saved funds from the public, but they also themselves create deposits or credit, which serve as money. The new deposits are created by the banks when they lend money to the investors or other users. These deposits are created by the banks in excess of the cash reserves they obtain through deposits from the public. These days, the bank deposits, especially demand
deposits are as much good money as the currency issued by the government or the central bank. This creation of credit, if it is used for productive purposes greatly enlarges production and investment and thus promote economic growth.


Functions Of A Bank


(a) Receipt of deposits – A bank receives deposits from individuals, firms, and other institutions.

Deposits constitute the main resources of a bank. Such deposits may be of different types.

Deposits which are withdrawable on demand are called demand or current deposits, others are called time deposits. Savings deposits are those from which withdrawals are not restricted as regards the amount and the period. Deposits withdrawable after the expiry of an agreed period are known as fixed deposits. Interest paid by banks is different for each kind of deposit – highest for fixed deposits and lowest or even nil for current deposits.


(b) Lending of Money – Banks lend money mainly for industrial and commercial purposes. This lending may take the form of cash credits, overdrafts, loan and advances, or discounting of bills of exchange. Interest charged by banks on such lending varies according to the amount and period involved, social priority–nature of security offered, the standing of the borrower, etc.


(c) Agency services – A bank renders various services to consumers, such as:

(i) collection of bills, promissory notes and cheques

(ii) collection of dividends, interest, premiums, etc.

(iii) purchase and sale of shares and securities

(iv) acting as trustee or executor when so nominated

(v) making regular payments such as insurance premiums.


(d) General services – A modern bank performs many services of general nature to the public, e.g.

(i) issue of letters of credit, travelers cheques, bank drafts, circular notes; etc.

(ii) safe keeping of valuables in safe deposit vaults

(iii) supplying trade information and statistics; conducting economic surveys

(iv) preparation of feasibility studies, project reports, etc. Banks in some foreign countries also underwrite issue of shares and make loans for long–term purposes.


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