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Class 11 Business Studies - Chapter Business Services NCERT Solutions | Explain the functions of commercial bank

Welcome to the NCERT Solutions for Class 11th Business Studies - Chapter Business Services. This page offers a step-by-step solution to the specific question from Exercise 2, Question 2: explain the functions of commercial banks with an....
Question 2

Explain the functions of commercial banks with an example of each.

Answer

The main functions of banks can be study under two broad categories that are as follows:                                                                                     (a) Primary functions.
 (b) Secondary functions or subsidiary functions.

Primary functions:

1. Acceptance of Deposits : Accepting of deposits from the public is the much important function of the bank by taking the savings and surplus of people. Banks provide a safe custody of the deposited cash of the people. Depositors can easily transfer their money and can make the payments through cheques too. Banks provide an attractive rate of interest offer on their deposits. There are several types of deposits which can be opened in the bank such as Fixed Deposit. Savings Deposit and Current Deposit.

2. Making Loans and Advances : It is another equally one of the important functions of bank. Banks accept surplus money of people and provide them loans and advances to the needy persons. It is through loans and advances, banks earn profit. Loans and advances are provided by the banks in the following forms :
(I)Loan, (ii) Overdraft, (iii) Cash credit, (iv) Discounting of bills and exchange.

(I) Loan: Loan is a lump sum advance made by a bank against the security. In this, specified amount is either paid to the customer in cash or is credited in his account. The borrower is required to pay a prefixed rate of interest to the bank on the amount of loan from the date of the sanction of the loan. The loan may be refunded in installment or in lump sum. Short and medium term loans are provided by the commercial banks.
(ii) Overdraft: Under this system a current account holder is allowed to overdraw his bank account i.e., he can make upto a fixed limit more than the balance in his account present and can do withdrawal at any time.
(iii) Cash-credit: In cash credit, customer is given credit upto fixed limit against surety bond or against other securities. The interest rate is charged on the amount overdrawn by the customer on the daily balance, not on the entire amount of the limit.

(iv) Discounting of Bills of Exchange: Bill of exchange is a negotiable instrument. It is drawn by the seller and is accepted by the buyer. The drawer has got a advantage to discount the bill of exchange before it got matured if money is required immediately. The bank discounts the bill and deducts some amount as discounting charges and pays the remaining money to the drawer.

Secondary functions or subsidiary functions: Secondary functions can be classified as follows:
(a) Agency functions (b) Utility functions.

(a) Agency functions: These are the functions which is performed by the banks as an agent of their customers.

1).Collection of cheques and bills: It collects local and outstation cheques, drafts, bills of exchange, and promissory notes of the customers and credit it to their account.

2). Collection of Interest and Dividend: It also collects interest and dividend on debentures and securities that is held by the customers.

3. Purchase and sale of securities: On the instructions from its customers, banks purchase or sell stock securities, debentures, bonds etc.

(b)Utility functions : Banks provide the following utility or miscellaneous functions which are described below:

1. Safe custody of customers’ valuable articles and securities: Some banks gives the facilities of lockers where on nominal customer can keep its valuable things like ornaments, jewellery etc.

2. Facility of Foreign Exchange: obtaining a license from the Reserve Bank India, commercial banks can deal in foreign exchange. The banks can exchange the several foreign currencies and can even do discount on the foreign bills of exchange.

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