Discuss the Function of Commercial Bank

Function of Commercial Bank



Simple definition:

“Banks are Financial Departmental stores”

Experts Views:


Prof Kinley views:

“A bank is an institution which receives deposits and advances loans”



According to H.L.Hart

“A banker is one who, in, the ordinary course of his business, honours cheques drawn upon him by persons from or for whom he receives money or current account”.



According to Prof. Crowther

“A bank collects money form those who have it spare or who are saving it out of their incomes. It lends money to those who require it.”


Comprehensive Definition


According to Banking companies’ ordinance 1962



“Banker means a person transacting the business of accepting f r purpose of lending or investing of money from the public, repayable on demand or otherwise with draw able by cheque, draft, and order or otherwise.


Functions of commercial Banks Primary Functions


1. Accepting Deposits

Bank accept deposits form those who have extra money out of their income in their hands, but they can’t use it in a profitable way so banks give them opportunity to deposit their money and enjoy profit.

a. Current Account

In this account the depositor can deposit and withdraw money at any time. Normally traders, businessmen, are interested to open this account bank pays no interest on this accounts. A cheque book is given to the account holder to with draw his money.

b. Profit & Loss sharing OR saving account

This account is suitable for those people who have small level of savings. In this account a nominal interest is paid to customer cheque book is given to account holder.

c. Fixed OR term deposits account

In this account a specified amount is deposited in the bank for particular period of time. The longer the duration the higher would be the interest. In this account, a receipt is given to customer, called fixed deposit receipt (FDR).

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2. Advance loans

The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest and advances loan at high rate of interest. The difference becomes profits of the bank. Advances are given in the following types.

a. Over Draft


This is a shot period financing facility. In this facility the bank sanctions that the customer can withdraw his money over and above the balance lying in the bank. This facility is provid d to current account holders.

b. Discounting Bills of Exchange


Its mean, making payment before the maturity of the bill the payment made the bank before the date of maturity is the loan to the bill holder.

c. Cash credit


In this loan facility the bank sanctions a particular amount. The facility is provided against security.

d. Time Loans


Short term loan in which the time period is less than one year.

Medium term loan for period of 1 to 3 or 5 years

Long term loan for period of more than 5 years and the entire loan are given against proper security.


Secondary Functions



1. Transfer of money


The banks transfer money form place to place by means of draft collection of cheques telephonic transfer and direct debt. The banks purchase bills of exchange to help their customer for collection of money.


2. Issue of credit money

The banks issue various types of near money the cheques bank draft credit car, are main instrument which is valid as medium of exchange to settle their obligations.

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3. Investment of funds

The banks can invest funds in stocks shares and bounds. As per law commercial banks at least 25% of their deposits in securities.


4. Financing foreign trade

The bank performs duty of financing foreign trade. The respites and payment on accounts of exp rts and imports is possible through bank.


5. Foreign exchange dealing

The bank deal in foreign exchange they buy and sell currencies of other countries. The commercial banks are dealer of foreign exchange market.


6. Status report

The commercial bank act as r f ree for supply of information about its customer, related to financial position of party concerned.


Agency Functions



1. Collection of cheque

A commercial bank acts as agent to the customer to collect nd m ke payment on the cheques. The cheques may be local or out station.


2. Collection of income

Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent to customer for information.


3. Payment of expenses

The bank makes payment of insurance premium trade subscription, school fee and similar other expenses.


4. Act as trustee

The bank can act as trust to mange trust property as per will of property owner. The order of court is obtained to act as trustee. (Takes care affairs of its client)


5. Tax return

The bank act as agents of customers, those are bound to pay tax to government.


6. Hajj application

The bank collects Hajj application from general public on behalf of government.


7. Safe custody

The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from customer.

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8. Zakat deduction

The bank automatically deduct Zakat on first Ramzan every year from his customer accounts


Utility Functions



1. Letter of credit

Commercial banks issue letter of credit in order to provide financial assistance to the customers dealing in foreign trade.


2. Information

The banks collect and supply trade information to businessman the issue bulletins that provide update information abut companies working abroad.


3. Govt loans

The banks participate in debt management for government. The bank can buy bonds, and others securities offered by central bank


4. Lockers facility

Banks provide lockers facility to general public gold ornaments, documents and their valuables can be placed in lockers.


5. Share application

Bank accepts applications for subscription of shares on Behalf Company the price of shares is collected with application money.


6. Accepting bills of exchange

Banks accept bills of exchange on behalf of customers to meet their financial needs.





Commercial banks play a vital role in promotion economic development by mobilizing the financial resources of the country. As well as through commercial banks provided multiple services to their customers for the purpose of increasing their business and becoming reliable entity for their customers.


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