Primary and Secondary Functions of Commercial Banks with Examples
Commercial banks are essential financial institutions that play a central role in the economic development and daily functioning of individuals, businesses, and governments. Their core purpose is to accept deposits, provide credit, and offer a wide range of banking and financial services. In practical terms, commercial banks make it easier for people to save money, access loans, carry out transactions, and participate actively in the economy.
Definition and Primary Functions of Commercial Banks
A commercial bank is a financial institution that invites the public to deposit their money and, in turn, lends out these funds as loans to individuals, businesses, and even governments. This lending process follows a margin, where banks charge interest on loans and return a portion of this as interest to depositors—the difference is retained as profit.
The primary functions of commercial banks include accepting various forms of deposits, such as savings, fixed, and current accounts. They also provide various types of loans, including home, vehicle, and personal loans. Another vital function is enabling payment and settlement through services like electronic fund transfers, cheques, and online banking.
Examples to Illustrate Banking Functions
- When a student deposits money into a savings account, the bank pays a small interest while safely holding their funds. If someone else takes a personal loan for higher education, the bank uses these deposited funds for lending and earns interest from the borrower.
- For businesses, banks provide operating finance, such as overdraft facilities or invoice discounting, ensuring working capital is always available to cover daily expenses.
Secondary Functions and Business Services
Commercial banks offer many additional (secondary) services. They provide locker facilities for safe storage of valuables, enable domestic and international payments (including foreign exchange processing), and distribute investment products such as mutual funds and bonds. For businesses, they assist in receivables and payables management, handle capital raising, mergers, and IPOs, and issue corporate credit cards.
The ability of commercial banks to manage bulk cash flows and offer tailored solutions makes them key partners for small, medium, and large enterprises.
| Function | Examples |
|---|---|
| Accepting Deposits | Savings, fixed, and current accounts |
| Lending Loans and Advances | Home, personal, and vehicle loans |
| Payment and Settlement | NEFT, RTGS, UPI, cheques |
| Locker Services | Safe deposit box rentals |
| Investment Services | Mutual funds, bonds, business finance |
How Commercial Banks Support the Economy
Commercial banks help maintain the flow of money throughout the economy. By channelling savings into lending and offering payment platforms, they enable investments, boost consumption, and drive business expansion.
For businesses, access to finance through commercial banks means being able to fund operations, start new projects, and invest in infrastructure. For individuals, loans make large purchases, housing, or education accessible, creating further demand across the economy.
Types of Commercial Banks with Examples
| Type | Examples | Key Features |
|---|---|---|
| Public Sector Banks | State Bank of India (SBI) | Largest network, government ownership |
| Private Sector Banks | HDFC Bank, ICICI Bank, Axis Bank | Strong digital platforms, private ownership |
| Foreign Banks | Standard Chartered, HSBC | Global presence, NRI services |
| Regional Rural Banks (RRBs) | Various state-specific entities | Focus on agricultural and rural finance |
Key Principles and Problem-Solving Example
An important principle of commercial banking is financial intermediation—collecting savings from one group and supplying loans to another. For instance, when a business faces a cash flow gap, a bank can extend a working capital loan to bridge the shortfall.
Sample Problem: If a bank receives deposits worth ₹2,00,000 and lends out ₹1,60,000 as loans, what is the basic profit mechanism?
Stepwise Approach: Understanding Banking Functions
- Deposit: Individual places funds in the bank's account.
- Lending: Bank uses a large portion of deposits to provide loans.
- Payment Services: Customers transact via digital platforms, cheques, and cards.
- Utility Offerings: Personal lockers, investment products offered for additional convenience.
- Business Solutions: Services like working capital finance and payables management for enterprises.
Summary and Next Steps
Commercial banks are crucial for economic growth, savings mobilization, and business expansion. Their range of deposit, lending, and business solutions ensures both liquidity and stability in the marketplace.
To deepen your understanding, practice relevant case studies, explore business applications, or review more Commerce concepts using Vedantu’s comprehensive resources.
FAQs on Functions of Commercial Banks: Key Roles and Examples
1. What are the 10 functions of a bank?
Commercial banks perform many important roles, such as:
- Accepting deposits
- Granting loans
- Credit creation
- Cheque facilities
- Agency functions
- Safekeeping valuables
- Foreign exchange dealings
- Investment advice
- Fund transfer
- Standing instructions and utility payment services
2. What is the basic purpose of commercial banks?
The basic purpose of a commercial bank is to accept money from people and organizations as deposits. It then uses those funds to provide loans and other credit services, supporting investment, business, and growth in the broader banking system.
3. What are the three main objectives of a commercial bank?
The main objectives of a commercial bank are:
- Profit generation by lending and investments
- Providing safe storage for public money
- Ensuring smooth movement of capital
4. What are commercial banking roles?
Commercial banks have vital roles in the economy, including:
- Accepting deposits
- Providing business and personal loans
- Facilitating payment systems
- Supporting trade and investment
5. How do commercial banks create credit in the economy?
A commercial bank creates credit when it gives loans. The money lent usually gets deposited again, allowing banks to lend even more. This process increases the total money supply, multiplying available funds based on the reserve ratio formula: $\text{Credit Creation} = \frac{1}{\text{Reserve Ratio}} \times \text{Deposits}$.
6. Why are commercial banks important for economic growth?
Commercial banks are crucial for economic growth because:
- They finance businesses through loans
- Support infrastructure projects
- Promote savings and investments
- Create jobs by funding businesses
7. What agency functions do commercial banks perform?
Commercial banks perform agency functions for their clients, which include:
- Collecting cheques
- Paying bills
- Managing investments
- Handling standing instructions
8. How do commercial banks support individuals and businesses?
Commercial banks support individuals and businesses by:
- Providing loans for various needs
- Offering savings and current accounts
- Facilitating money transfers
- Giving investment advice
9. What is the difference between primary and secondary functions of commercial banks?
Primary functions include accepting deposits and making loans. Secondary functions focus on services such as investment advice, bill payments, and safekeeping valuables. Both are vital parts of the commercial banking system but serve different customer needs.
10. How do commercial banks help with foreign exchange?
Commercial banks handle foreign exchange by buying and selling foreign currencies for clients. This makes it easier for businesses and individuals to trade, travel, and invest across different countries, which supports international economic activity.
11. What is the role of commercial banks in fund transfer?
A commercial bank helps customers transfer money securely and quickly domestically and internationally. Popular methods include
- cheque facilities
- wire transfers
- electronic transactions
