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Functions of Commercial Banks 🏦

Definition: A Commercial Bank is a financial institution that accepts deposits, provides loans, and offers basic financial services to individuals and businesses.

Examples in India: SBI, HDFC Bank, ICICI Bank, Axis Bank, PNB.

Primary Functions (Core Business) 💰

1. Accepting Deposits 📥

Banks accept money from public in various forms:

Types of Deposits:

  • Savings Account: For individuals. Earns interest (3-4%). Withdrawal limit.
  • Current Account: For businesses. No interest. Unlimited withdrawals.
  • Fixed Deposit (FD): Locked for period (1 month to 10 years). Higher interest (5-7%).
  • Recurring Deposit (RD): Monthly deposit. Fixed tenure. Regular savings.

Why People Deposit: Safety, interest income, cashless transactions.

2. Granting Loans & Advances 📤

Banks lend money to individuals and businesses.

Types of Loans:

  • Home Loan: To buy house (7-9% interest, 20-30 years).
  • Personal Loan: For any purpose (10-15% interest).
  • Business Loan: For working capital/expansion.
  • Education Loan: For students (Lower interest).
  • Car Loan: To buy vehicle.
  • Overdraft (OD): Withdraw more than account balance (for current accounts).
  • Cash Credit: For businesses against inventory.

How Banks Earn: Interest on loans > Interest paid on deposits = Profit.

The Banking Business Model

Example:

  • Bank pays you 4% interest on your FD of ₹1 Lakh (Bank pays ₹4,000/year).
  • Bank lends that ₹1 Lakh to someone as home loan at 8% interest (Bank earns ₹8,000/year).
  • Net Spread = 8% - 4% = 4% = ₹4,000 profit.

This is called Net Interest Margin (NIM) - the bank's profit margin!

Secondary Functions (Support Services) 🛠️

1. Agency Functions (Acting as Agent)

Banks act as agents for customers:

  • Collection of Cheques/Bills: Collect money on behalf of customer.
  • Payment of Bills: Electricity, phone bills (standing instructions).
  • Purchase/Sale of Securities: Buying shares, bonds for customers.
  • Tax Payment: Income tax, GST on behalf.
  • Dividend Collection: Collect dividends from companies.

2. General Utility Functions (Other Services)

  • Locker Facility: Safe deposit boxes for valuables.
  • Foreign Exchange: Converting currency (₹ to $).
  • Traveler's Cheques: Safe way to carry money abroad.
  • Letter of Credit (LC): Guarantee for international trade.
  • Bank Guarantee: Assurance for contracts (tender bids).
  • Demat Services: Hold shares in electronic form.
  • Insurance: Selling insurance products (Bancassurance).
  • Money Transfer: NEFT, RTGS, IMPS, UPI.

Modern Functions (Digital Era) 📱

  • Internet Banking: Online account access, bill payments.
  • Mobile Banking: Banking via smartphone apps.
  • UPI: Instant payment system (PhonePe, Google Pay, Paytm).
  • Contactless Cards: Tap-and-pay (NFC technology).
  • ATM/CDM: 24/7 cash withdrawal/deposit.

Quiz Time! 🎯

Test Your Knowledge

Question 1 of 5

1. Primary function of commercial banks is:

Selling insurance
Accepting deposits and giving loans
Printing money
Stock trading

💡 Final Wisdom: "Banks are the bloodstream of the economy - they channel money from savers to borrowers, keeping the economy alive!" 💓

Next up: Emerging Trends in Commercial Banking - The digital revolution! 🚀

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