COMMERCIAL BANKS

 What s Commercial Bank a

Functions of Commercial Banks
✓ Commercial Bank Deposits
✓ Commercial Bank Loans
✓ Organization and Structure of commercial Banks
 Powers Granted to commercial Banks

What is a Commercial Bank?

A commercial bank is a financial institution that accepts deposits, offers loans, and
provides various financial services to individuals, businesses, and governments. These
banks operate for profit and play a crucial role in the economy by facilitating financial
transactions and credit creation.

Functions of Commercial Banks

Commercial banks perform several key functions, including:

1. Accepting Deposits – Banks collect money from individuals and businesses in different types
of accounts.
2. Providing Loans and Advances – Offer loans for business expansion, home purchases,
personal needs, etc.
3. Credit Creation – Lend more than the actual deposits held, influencing economic activity.
4. Facilitating Payments – Offer checking accounts, digital banking, credit/debit cards, and
electronic transfers.
5. Foreign Exchange Services – Help with currency exchange and international trade
transactions.
6. Investment and Financial Services – Offer wealth management, insurance, and advisory
services.
7. Safe Custody of Valuables – Provide lockers for storing important documents and valuables.
8. Government Transactions – Collect taxes and disburse government payments like pensions.

Commercial Bank Deposits

Commercial banks offer various types of deposit accounts:

1. Demand Deposits (Checking Accounts) – Allow instant withdrawals and facilitate daily
transactions.
2. Savings Deposits – Encourage savings while offering interest on deposits.
3. Fixed Deposits (Time Deposits) – Require money to be deposited for a fixed period at a
higher interest rate.
4. Recurring Deposits – Allow depositors to save a fixed amount regularly for a predetermined
period.
Commercial Bank Loans

Banks provide different types of loans, including:

1. Short-Term Loans – For immediate business or personal financial needs.

2. Long-Term Loans – For capital investments like real estate, machinery, or expansion.
3. Overdraft Facilities – Allow customers to withdraw more than their account balance.
4. Cash Credit – Short-term credit for businesses based on collateral security.
5. Trade Credit and Bills Discounting – Helping businesses manage their working capital.
6. Consumer Loans – For purchasing consumer goods, vehicles, or home appliances.
7. Mortgage Loans – Long-term loans for purchasing property.

Organization and Structure of Commercial Banks

The structure of a commercial bank typically consists of:

1. Board of Directors – Governs the bank, sets policies, and ensures regulatory compliance.
2. Executive Management – Includes CEO, CFO, and other executives managing daily
operations.
3. Branches and Regional Offices – Operate under the headquarters, providing banking services
to customers.
4. Departments – Common divisions include:

1. Retail Banking (serving individuals)

2. Corporate Banking (serving businesses)
3. Treasury & Risk Management
4. Credit & Loan Department
5. Customer Service & Operations

Powers Granted to Commercial Banks

Commercial banks operate under regulatory frameworks that grant them specific
powers, such as:

1. Accepting Deposits – Collect and hold funds from customers.

2. Lending Money – Provide various types of loans based on risk assessment.
3. Creating Credit – Expand money supply through lending.
4. Investing in Securities – Buy government bonds and corporate securities.
5. Issuing Credit and Debit Cards – Facilitate cashless transactions.
6. Foreign Exchange Transactions – Buy and sell foreign currencies under regulatory limits.
7. Offering Financial Advisory Services – Provide investment guidance and wealth
management.
8. Managing Payment Systems – Process electronic transactions, including wire transfers and
online banking.
Commercial Bank : Meaning,
Functions, Types and Role
Meaning of Commercial Bank
 A commercial bank is a financial
institution which performs the
functions of accepting deposits from
the general public and giving loans for
investment with the aim of earning
profit.
 In fact, commercial banks, as their
name suggests, profit-seeking
institutions, i.e., they do banking
business to earn profit.
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 They generally finance trade and
commerce with short-term loans. They
charge high rate of interest from the
borrowers but pay much less rate of
Interest to their depositors with the
result that the difference between the
two rates of interest becomes the
main source of profit of the banks.
 Such as, Bank of Kigali (BK), G. T.
Bank, I&M Bank and so on.
Functions of Commercial Banks
1. Primary functions
 Accepting Deposits:
The primary function for which the
commercial banks were established is to
accept deposits from the general public,
who possess surplus funds and are
willing to deposit them so as to earn
interest on it.
There are various products offered by
the bank to the customers for the deposit
of their money, which includes savings
account, current account, fixed deposit
and recurring deposit.
Types of Deposits Accounts
(i) Saving Deposit Account
 These are deposits whose main
objective is to save. Savings account is
most suitable for individual households.
They combine the features of both
current account and fixed deposits.
 They are payable on demand and also
withdraw able by cheque. But bank gives
this facility with some restrictions, e.g., a
bank may allow four or five cheques in a
month. Interest paid on savings account
deposits in lesser than that of fixed
deposit.
(ii) Current Deposit Account
 Such deposits are payable on demand
and are, therefore, called demand
deposits.
 These can be withdrawn by the
depositors any number of times
depending upon the balance in the
account.
 The bank does not pay any Interest on
these deposits but provides cheque
facilities.
 These accounts are generally
maintained by businessmen and
Industrialists who receive and make
business payments of large amounts
through cheques.
(iii) Fixed Deposit Account (Time
Deposit)
 Fixed deposits have a fixed period of
maturity and are referred to as time
deposits. These are deposits for a
fixed term, i.e., period of time ranging
from a few days to a few years. These
are neither payable on demand nor
they enjoy cheque facilities.
 They can be withdrawn only after the
maturity of the specified fixed period.
They carry higher rate of interest.
(iv) Recurring Deposit
 Recurring Deposit is a special kind of
Term Deposit offered by banks, which
help people with regular incomes to
deposit a fixed amount every month
into their Recurring Deposit
account and earn interest at the rate
applicable to Fixed Deposits.
Difference between demand deposits
and time (term) deposits:
 (i) Deposits which can be withdrawn on
demand by depositors are called
demand deposits, e.g., current account
deposits are called demand deposits
because they are payable on demand
but saving account deposits do not
qualify because of certain conditions on
withdrawal. No interest is paid on them.
 Term deposits, also called time deposits,
are deposits which are payable only after
the expiry of the specified period.
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 (ii) Demand deposits do not carry
interest whereas time deposits carry a
fixed rate of interest.
 (iii) Demand deposits are highly liquid
whereas time deposits are less liquid,
 (iv) Demand deposits are chequable
deposits whereas time deposits are
not.
2. Advancing Loans
 Next important function performed by the
commercial bank is lending money to the
individuals and companies.
 This is, in fact, the main source of
income of the bank. A bank keeps a
certain portion of the deposits with itself
as reserve and gives (lends) the balance
to the borrowers.
 The banks make loans to the customers
in the form of term loans, cash credit,
overdraft, Discounting of bills of
exchange, short loans and so on.
Forms of Loans
(i) Short-term Loans:
 Short-term loans are given against
some security as personal loans to
finance working capital or as priority
sector advances. The entire amount is
repaid either in one installment or in a
number of installments over the period
of loan.
(ii) Cash Credit:
 An eligible borrower is first sanctioned
a credit limit and within that limit he is
allowed to withdraw a certain amount
on a given security.
 The withdrawing power depends upon
the borrower’s current assets, the
stock statement of which is submitted
by him to the bank as the basis of
security.
 Interest is charged by the bank on the
drawn or utilized portion of credit
(loan).
(iii) Overdraft
 An overdraft is an advance given by allowing
a customer keeping current account to
overdraw his current account up to an agreed
limit. It is a facility to a depositor for
overdrawing the amount than the balance
amount in his account.
 In other words, depositors of current account
make arrangement with the banks that in
case a cheque has been drawn by them
which are not covered by the deposit, then
the bank should grant overdraft and honour
the cheque.
 The security for overdraft is generally
financial assets like shares, debentures, life
insurance policies of the account holder, etc.
(iv) Discounting of Bills of
Exchange
 A bill of exchange represents a promise
to pay a fixed amount of money at a
specific point of time in future. It can also
be encashed earlier through discounting
process of a commercial bank.
 Alternatively, a bill of exchange is a
document acknowledging an amount of
money owed in consideration of goods
received. It is a paper asset signed by
the debtor and the creditor for a fixed
amount payable on a fixed date. It works
like this.
Difference between Overdraft facility
and Loan:
 (i) Overdraft is made without security in
current account but loans are given
against security.
 (ii) In the case of loan, the borrower has
to pay interest on full amount sanctioned
but in the case of overdraft, the borrower
is given the facility of borrowing only as
much as he requires.
 (iii) Whereas the borrower of loan pays
Interest on amount outstanding against
him but customer of overdraft pays
interest on the daily balance.
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 Suppose, A buys goods from B, he may
not pay B immediately but instead give B
a bill of exchange stating the amount of
money owed and the time when A will
settle the debt.
 Suppose, B wants the money
immediately, he will present the bill of
exchange (Hundi) to the bank for
discounting. The bank will deduct the
commission and pay to B the present
value of the bill.
 When the bill matures after specified
period, the bank will get payment from A.
Secondary functions
Agency Services: There are some
facilities provided by the commercial
banks in which they act as an agent of
the customers. Such services are:
 Collection and payment of rent, interest
and dividend.
 Collection and payment of cheques and
bills.
 Buying and selling securities.
 Payment of insurance premium and
subscriptions.