Commercial Banks

Commercial banks make up a very essential part of the banking system. Yet, they are often misunderstood to be the entirety of the banking system by most people. Banks are of several types including commercial banks, investment banks and central banks. So, let us first understand what commercial banks really are. 


A commercial bank is a financial institution, providing services such as accepting deposits, offering loans to the public, as well as offering investment products or services. They operate as a business to make profits. Commercial banks have marked extreme importance in economic development as well as fulfilled the financial requirements of the public. Commercial banks play a critical role in our lives, their functions have expanded exponentially from only accepting deposits or offering loans in basic terms, hence we shall try to understand their role and functions. 


There are primary and secondary functions of commercial banks as its two main divisions. But over time, electronic banking or e-banking has really evolved and is now a very important function of commercial banks. 

Primary Functions:

  • Accepting Deposits - Commercial banks accept deposits in the form of fixed, saving and current deposits. The surplus of the balances collected from the public(firms/individuals) is lent as loans. 
  • Providing Advancements and Loans - Another significant function of commercial banks is offering advancements and loans to the public. They collect interests on the loan which they provide, which is their primary source of income. But commercial banks also have to mandatorily maintain a reserve of the deposits they receive for liquidity, the percentage of which is fixed by the central bank and the rest of the deposits can be offered as short-term as well as long-term loans, overdrafts and cash credit facility. 
  • Credit Cash - When a customer borrows credit from commercial banks, they are not provided with the same in liquid cash, but rather first, a bank account is opened and the money is transferred into the same account for the customer. This procedure, thus, helps the commercial banks in the creation of money.

Secondary Functions:

Initially, commercial banks had a narrowed role and perspective, which was limited to, more or less, accepting deposits and extending loans to the customers, but over the decades, the functions have widened, some of which are listed below. 

  • Commercial banks assist their customers by discounting the bill of exchanges before the quoted time in case the customer requires it.    
  • Overdraft facility provided to the customers of the current account, where the customer can overdraw to a certain given limit. Such facilities are generally used by businesses or entrepreneurs.
  • Commercial banks have the facility where they assist their customers with the purchase and sale of securities and bonds. They work as their representative for customers in trade at stock exchanges.
  • Commercial banks also assist in the transfer of funds for their customer via various modes such as draft or e-transfer modes, from one commercial bank to another. 
  • Commercial banks also provide their customers with the facility of lockers where they can store their valuables and documents safely with a fee that is charged for the same. This also minimizes the risk of losses if there is any theft at home. 
  • Commercial banks also assist customers with facilities such as preparing income tax returns or claiming tax refunds. 
  • Commercial banks also act as an executor, administrator or even trustee for the estate of their customers. 
  • Commercial banks also help their customers collect their pension, interests and dividends of securities, rent or any kind of income customers need assistance with. A credit voucher is provided to the customer for information when any income has been collected by the bank. 
  • Commercial banks also assist their customers with the various obligations of their expenses including telephonic bills and paying insurance premiums and rent. A debit voucher is sent to the customers to provide information on the same when such expenses are cleared by the bank.
  • Another function of the commercial bank is issuing traveller’s cheques. This function is unknown to most people. How this works is when individuals travel outside the country, banks issue these cheques considering it's an easier way to protect money while travelling.

E-Banking Function:

Electronic banking or e-banking is now a very remarkable function of commercial banks. Here, funds can be transferred through an electronic medium instead of any physical exchange of drafts, cash or documents. A customer withdrawing cash at an ATM or paying at a mall through a debit card, all these transactions are a part of e-banking and the transfer of such funds happens electronically. Hence, a few functions as part of e-banking t commercial banks are listed as –

  • E-banking at commercial banks has functions, where the customers can check their account balance or their statement and recent transactions, anywhere at any time with net banking.
  • E-banking also provides the customers to operate their bank accounts for the transfer of funds, bill payments and trading securities. 
  • E-banking also cuts down geographical barriers and time barriers, as transactions can be made at any time of the day and at any place.
  • E-banking also helps customers to invest better and online payments at malls, groceries or other places are made in seconds, giving customers a hassle-free and simpler experience. 
  • E-banking helps customers save money, as they do not have to visit the branches from time to time, hence, it saves their time and effort as well as money to a great extent. 
  • E-banking is also a solution to lesser errors by customers since a lot of transactions fail due to errors by both customers and employees, which has been reduced due to e-banking. 

Types of Commercial Banks:

Commercial banks can be further categorized into three categories -

  • Private Bank - In this category of commercial banks, private individuals & businesses own the stakes of the bank. All private banks are legally recorded as companies with limited liability. Examples of private banks are Industrial Credit and Investment Corporation of India (ICICI), Vysya Bank and Housing Development and Finance Corporation (HDFC).  
  • Public Bank - In this category of commercial banks, the banks are nationalized, that is, the major stakes of the bank are with the government. In India, the public sector banks are operated under the guidelines of the Reserve Bank of India (RBI) which is our central bank.  Examples of public banks are the State bank of India (SBI), Corporation Bank and Bank of Baroda. 
  • Foreign Bank - In this category of commercial banks, these banks are basically established in foreign countries and are also headquartered outside of India and have their branches in India. Examples of the same are American Express Bank, Deutsche Bank and Citibank. Since the reforms of 1991 took place, the number of foreign banks has significantly increased in the country. 

Hence, we can conclude that commercial banks have been set up to make profits, also helping the public with their facilities, be it accepting deposits, offering loans or providing other services as well. Its functions have increased over the years extensively. Commercial banks have also played a huge role in helping the economy develop, as it creates scope for investments for the public. 

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