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 primary functions of commercial banks?
The primary functions of commercial banks include:
• Accepting deposits from the public in various accounts (savings, current, fixed deposits)
• Granting loans and advances to individuals, businesses, and institutions
• Credit creation, which means generating additional deposits through lending activities.
These core roles help maintain liquidity and facilitate financial transactions in the economy.
2. What are the secondary functions of commercial banks?
Secondary functions of commercial banks are further divided into agency and utility functions:
• Agency services: Payment of bills, collection of cheques, fund transfers, purchase/sale of securities
• Utility services: Providing safe deposit lockers, issuing drafts and traveller’s cheques, and underwriting.
These additional services support customer convenience and expand banking utility.
3. What is the difference between primary and secondary functions of commercial banks?
Primary functions are the core banking activities vital for banks’ existence—such as accepting deposits and granting loans.
Secondary functions include extra services like remittances, safe deposit lockers, and investment services. In summary:
• Primary: Directly deal with money—deposits and loans.
• Secondary: Offer supporting/agency and utility services.
4. What is the role of commercial banks in economic development?
Commercial banks support economic development by:
• Mobilizing savings and channeling them into productive investments
• Providing credit to businesses and consumers, which boosts industry and commerce
• Supporting trade and payment systems
• Promoting financial inclusion and growth of GDP
These activities drive overall financial stability and infrastructure growth.
5. How do commercial banks create credit?
Commercial banks create credit through a process known as credit creation:
1. Accept deposits from customers
2. Lend a major portion of deposits as loans
3. Borrowers redeposit loaned amounts, enabling further lending
This cycle repeats, multiplying the initial deposit into a larger money supply, supporting economic activity.
6. What is the difference between a commercial bank and a central bank?
Commercial banks accept deposits from the public and provide loans; their main customers are individuals, businesses, and institutions.
Central banks (like the Reserve Bank of India) regulate currency and credit, act as the banker's bank, and supervise all other banks. Central banks do not deal directly with the general public.
7. What is an example of a commercial bank?
Examples of commercial banks include State Bank of India (SBI), HDFC Bank, ICICI Bank, and Axis Bank. These banks offer deposit accounts, loans, payment services, and other banking products to the public and businesses.
8. What are the main types of deposits offered by commercial banks?
Commercial banks commonly offer:
• Savings deposits – earn interest, allow regular withdrawals
• Current deposits – mainly for businesses, permit frequent transactions
• Fixed deposits – money kept for fixed periods at higher interest rates
Each type serves a specific financial need for individuals or businesses.
9. What are agency functions performed by commercial banks?
Agency functions involve the bank acting on behalf of customers, such as:
• Collecting cheques, dividends, and bills
• Making payments for rent, insurance, or taxes
• Buying and selling securities on customer instructions
• Fund transfers and remittance services
These enhance customer convenience and trust.
10. Why are commercial banks important for businesses?
Commercial banks help businesses by:
• Providing working capital through loans and overdraft facilities
• Offering payment solutions like cheques, NEFT, RTGS, and UPI
• Facilitating foreign exchange and trade transactions
• Assisting in cash management, payroll, and business investments
These services support smooth business operations and growth.
11. What do utility functions of commercial banks include?
Utility functions refer to additional services such as:
• Safe deposit locker facilities
• Issuing demand drafts and traveller’s cheques
• Providing internet and mobile banking
• Offering investment and insurance products
These enhance customer satisfaction and financial security.
12. How do commercial banks differ from investment banks?
Commercial banks primarily accept deposits and provide loans to the public, while investment banks focus on services like capital raising, mergers and acquisitions, and advisory services for businesses and governments. They operate in different segments of the financial sector.
