Commercial Banks

Definition
A Commercial Bank is essentially meant for providing short term credit to trade and industry. Commercial Bank is called the lender of borrowed money. The main purpose of these banks is to earn profit. It collects the surplus money of people and lends that money the deficit group. By transferring the deposited money between two groups, Commercial Bank earns profit. Commercial Bank generally deals with short term loan. The major portion of lending money comes from the deposit of people. So, by maximum utilization of this deposited money of people Commercial Bank earn profit. The purpose of providing loan to different industrial and business areas are to keep the countrys economic condition smooth and running.

To define commercial bank Prof. ROGER stated The bank which deals with money and moneys worth with a view to earn profit is known as commercial bank. According to New Encyclopedia Britannica- A commercial banker is a dealer in money in substitutes for money, such as cheques or bill of exchanges A clear concept can be derived from the comment of Prof. Holding on commercial bank. He stated A commercial bank is defined as a dealer in short term credit. The aim of the commercial bank is to earn profit. It accepts deposits from a group of people and is a lender of the borrowed funds.

Objectives of Commercial Bank:

1. Profit: The main purpose of Commercial Bank is to earn profit. Like other business organization, Commercial Bank is only concern about profit. 2. Media of Exchange: To create easy media of exchange, Commercial Bank has developed the use of cheque, bill of exchange etc. 3. Capital Formation: By accumulating the scattered savings from different sources, formation of capital is one of the main objectives of these banks.

4. Public Welfare: Other than profit earning, one of the objectives of Commercial Bank is to ensure public welfare. By providing various types of banking services and by participating in different national welfare activities, these banks ensure public welfare. 5. Help in Planning: For the development of the country these banks provide information to take right decision. It gives information about the countrys money and credit market, which help to take accurate plans. 6. Employment Creation: By providing loan and expanding industrial and business sectors, Commercial Banks help to create employment opportunities.

7.

Savings Propensity: Ensuring satisfactory interest rate and providing various services, Commercial Banks encourage the people to save. 8. Economic Stability: One of the objectives of Commercial Bank is to keep the countrys economy stable by providing loan and meeting the demand of money in the market. 9. Development of Industry and Commerce: Facilitating the domestic and international exchange, especially helping in export-import business, Commercial Bank ensure the development of industry and commerce. 10. Development of Standard of Living: Creating employment opportunity, Commercial Bank has increased the income level as well as the living standard of people.

Differences between central bank and commercial Banks

Distinction between central bank and commercial bank are existent. Their ways and thinking are quite different. The central bank thinks of grater national interest on the other hand commercial bank thinks of maximization of profit. Consequently some differences are noticed in their objectives, nature of works, methods of management and other fields. Some of their differences are given below.

Formation

It is established by a Such bank is established with special law or the approval of the govt. on ordinance the basis of existing company law under private or public ownership. Generally this bank In most of the cases, it is is established under established under private govt. ownership but ownership. sometimes it is established under private ownership Its basic objective is Its basic objective is to gain not to give profit profit. but grater public welfare.

Ownership

Objective

No. of banks

There is only one There is more than central bank in a one commercial bank country. in a country.

Control

It is totally control and It is controlled and run by the government. run by the owner or shareholders

Govt. influence

There is direct influence over it.

govt. There is indirect influence of the government over it through central bank.

Agent

It works as an agent of Sometimes it works the state. as an agent of the client.

State money market

in It is the organizer, It is only a member of the controller and director money market under control of money market. of the central bank.

Relation with There is direct relation There is no direct the govt. with the govt. relationship with the govt. But there is relation with the govt. through central bank. Competition It does not engage in It is engaged in tough any competition and it competition and survives have on competitor through competition. within the country

Foreign branches

Generally it does not It may have foreign branches have any foreign branch.

Note issue

Central bank has the authority to issue notes.

It controls credit by increasing or decreasing currency supply. As the head of clearing house it settles transaction among different banks.

Commercial banks have not the power to issue notes.

Commercial banks only help the central bank in this respect. As the members of clearing house they settle transactions among themselves through the intermediary of the central bank.

Credit control

Clearing house

Lender of the last resorts.

It acts as the lender of the last resort during monetary crisis of the govt. or commercial banks. Central bank has the authority to discount class 1 bills of commercial banks.

At the time of monetary crisis they take shelter of the central bank.

Discounting authority

One commercial bank cannot discount bills of another commercial bank. But they have authority to discount bills of clients. The customers of commercial banks are chiefly the general people and the business organization.

.Customer

The govt. is the main customer of the central bank. Commercial banks are also treated as customer as they take loan from it.

Principles of Commercial Bank:

1. Principle of Liquidity. 2. Principle of Safety. 3. Principle of Profit earning. 4. Principle of Solvency. 5. Principle of Cost Control. 6. Principle of Savings Collection. 7. Principle of Investment.

Principles of Commercial Bank:

8. Principle of Service. 9. Principle of Secrecy. 10. Principle of Confidence. 11. Principle of Goodwill. 12. Principle of Publicity. 13. Principle of Efficiency. 14. Principle of Commitment to Economic Development.

Lending Principles of commercial Banks:

1. Safety a) Character b) Capital c) Capacity d) Collateral e) Condition 2. Liquidity 3. Convertibility 4. Use of credit

Lending Principles of commercial Banks:

5. Profit 6.Type of loan 7. Diversification of credit 8. Source of return 9. Amount of Allotment 10. Legal status 11. Guide of central Bank 12. National interest

Lines of Defense of Commercial Banks:

1. 2. 3. 4. 5. 6. Cash on Primary Reserve Money at call & short notice Reserve of near cash Security Investment Cash credit, overdraft

Source of Commercial Bank Fund:

1. 2. 3. 4. Paid-up Capital Reserve Fund Deposit Borrowing

Source of Income of Commercial Bank

1. 2. 3. 4. 5. 6. 7. 8. 9. Interest on Loan Investment Discounting of Bill Advance Bank Draft, Travelers cheque Underwriting Mail Transfer Locker rent Telegraphic Transfer

Source of Income of Commercial Bank

10. Agency Services 11. Intermediation of Sales & Purchase of Shares 12. Foreign Exchange 13. Import & Export Trade 14. Consultancy Commission 15. Letter of Credit 16. Trustee 17. Rent 18. Sale of Assets

Functions of Commercial Banks:

Commercial bank holds a special contribution on the development of total economy of a country and doing a lot of significant and necessary functions fulfills this contribution. We can discuss the functions of commercial bank under different viewpoints as stated below:

A. General functions:
1. Receiving deposits: The most important function of a commercial bank is to collect its funds mainly through deposit mobilization. It pools the scattered savings of different community and thus serves as the reservoir of the communitys savings. 2. Disburse loans and advances: The other major function of a commercial bank is to disburse loans and advances to businessman, traders and others for a short period with a specific rate of interest. 3. Creation of deposit through loan: The most distinctive function of a commercial bank is to create deposit by lending money. That is commercial bank asks the client to open an account with the bank to withdraw the sanction loan and bank deposits the loan amount in that account. Then the borrower draws money in different times from the bank by issuing cheques on that account. Thus, for a short period some amount remains stay on bank account. In this way commercial bank creates deposits through loan disbursement.

4. Create medium of exchange: Through issuing different

types of cheques, promissory notes, bill of exchange etc. commercial bank creates easy and low expensive medium of exchange to fluctuate the economy. 5. Formation of capital and investment: The formation of capital for trade, industry through collection of savings is an important function of a commercial bank. And commercial bank invests the deposited money in different sectors for the development of the countrys economy. 6. Assists in credit control: As the member of money market commercial bank assists the central bank in implementing the credit control mechanisms introduced by them and thus establish a smooth economy in the country. 7. Discounting Bills: Commercial bank helps businessman financially through discounting bills, hundi etc. prior to maturity.

B. Agency Services:
1. Transfer of money: Commercial bank transfers money from one place to another through electronic transfer, mail transfer, telegraphic transfer, travelers cheques, bank draft etc. 2. Settlement of transaction: Commercial bank pays the money of bill of exchange, cheque etc. on behalf of client. Again it receives accounts receivable, bank draft, bill of exchange on behalf of clients. 3. Purchase and sell of share: Commercial bank purchases and sells shares, debentures bond etc. on behalf of clients for a sum of commission.

4. Trustee: Commercial bank acts as trustee in sometime and takes the responsibility to maintain the assets of clients. 5. Other functions: Commercial bank pays and receives house rent of clients, takes dividend, pension and receives insurance premium on behalf of clients.

C. Utility Services:
1. Appreciate on savings: It is an important task for commercial bank to appreciate on savings through different means. Because with these saved money, commercial bank maintains their business. 2. Advisor: Commercial bank gives necessary advice on payment of tax, insurance premium etc. for their clients. 3. Foreign exchange: Commercial bank helps people through buying and selling foreign currency. 4. Business consultancy: Commercial bank gives valuable advice to commercial and industrial organizations on technical and other important factors.

5. Underwriter: For formation of capital for the industrial organizations of country, commercial bank many times takes the liability to underwrite of shares, debentures etc. of different companies. 6. Help in traveling: Through issuing travelers cheque, travelers note, drafts etc. commercial bank gives chance and advantages to travelers. 7. Sefe-custody: Commercial bank helps its clients by reserving its clients valuable assets like ornaments, bonds, document etc. in its locker. 8. Secret information: Some time commercial bank gives secret financial information of his clients competitor business organization.

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