The Commercial Bank

Commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes various loans, and offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and small businesses.

In addition to deposit products like checking and savings accounts, commercial banks offer
merchant services, commercial loans, global trade services, treasury services, and other
corporate-oriented products. Payment processing is an example of a commercial banking
service.

Functions of Commercial Banks

Commercial banks are authorized to provide a variety of financial services which includes loans,
savings accounts, etc. In this article, we will talk about various functions that a commercial bank
performs.

Primary Functions of Commercial Banks

1. Accepting Deposits - Commercial banks accept deposits from people, businesses, and other
entities in the form of: Savings deposits, Time deposits, Current deposits
2.Lending of Funds - Another important activity is lending funds to customers in the form of
loans and advances, cash credit, overdraft and discounting of bills, etc.

Secondary Function of a Commercial bank

Bank as an Agent - A bank acts as an agent to its customers for various services like: Collecting
bills, draft, cheques, etc. Paying the insurance premium, rent, loan installments, etc. Working as
a representative of a customer for purchasing or redeeming securities, etc. in the stock
exchange. Acting as an executor, administrator, or trustee of the estate of a customer Also,
preparing income tax returns, claiming tax refunds, etc. General Utility Services There are
several general utility services that commercial banks offer like: Issuing traveler cheques
Offering locker facilities for keeping valuables in safe custody Also, issuing debit cards and
credit.

Universal banking is a system in which banks provide a wide variety of financial services, it
includes not only savings and loans but also commercial and investment services.

Commercial banking - is a type of bank that provides services such as accepting deposits,
making business loans, and offering basic investment products that is operated as a business
for profit.
Investment banking - is a financial services company or corporate division that engages in
advisory-based financial transactions on behalf of individuals, corporations, and governments.

Somebody who has a checking and savings account in a universal bank can take advantage of its
investment services. This is useful if customers want to open their own investment portfolio.

Universal bank is a bank that combines the three main services of banking under one roof. The
three services are wholesale banking, retail banking, and investment banking.

Universal bank services

Universal banks offer three main services:
Retail banking
Retail banking services members of the public and small and medium-size businesses. It focuses
on looking after customers’ money as well as offering loans and mortgages.
Wholesale banking
Wholesale banking involves borrowing and lending money on a very large scale. Wholesale
banks’ customers include pension funds, giant companies, governments, and other financial
institutions.
Investment banking
Investment banks focus on services for major investors and companies. They specialize, for
example, in the investment requirements of pension funds.
Financial allied undertakings
- The Monetary Board may declare such other activities as financial allied undertakings of
banks. The determination of whether the corporation is engaged in a financial allied
undertaking shall be based on its primary purpose as stated in its articles of incorporation and
the volume of its principal business.

SEC. X377 Financial Allied Undertakings. With prior BSP approval, banks may invest in equities
of the following financial allied Undertakings, subject to the limits prescribed under Sec. X378
a. Leasing companies including leasing of stalls and spaces in a commercial establishment;
b. Banks;
c. Investment houses;
d. Financing companies;
e. Credit card companies
f. Financial institutions catering to small and medium industries including venture capital
corporation (VCC), subject to provisions under Sec. X379
g. Companies engaged in stock brokerage/securities dealership; and
h. Companies engagged in foreign exchange dealership brokerage.

The use of a bank's head office and/or any or all of its branches in the presentation and sales of
financial products of allied undertakings or investment house units could give the banking
public the impression that these products are covered by the deposit insurance system or
guaranteed by the parent bank.

Sec. 1631 Financial Products of Allied Undertakings or Investment House Units of Banks
The following guidelines shall govern the use of the head office and/or any or all branches of
universal banks and commercial banks as outlets for the presentation and sale of financial
products of their allied undertakings (subsidiaries and affiliates as defined hereafter) or of their
investment houses units.
Financial products covered by this Section are the ff:
1. Credit cards;
2. Insurance products limited to:
a) Life insurance products
 Term insurance (including mortgage redemption insurance)
 Whole life insurance
 Endowment
 Health and accident policies
 Variable life insurance contracts
 Life annuities
b) Non-life insurance
 Fire insurance
 Marine cargo policies
 Home owner's policies
 Directors/officers liability insurance
Departmentalization – means grouping activities and people into departments, making it
possible to expand organizations, at least in theory, to an indefinite degree.

Kinds of Departmentalization:
1. Functional
2. Product
3. Customer
4. Geographic
5. Matrix

Functional Departmentalization – work and workers are organized into separate units that are
responsible for different areas of expertise or work functions.
Ex. A business employing functional departmentalization would tend to group together workers
that perform a particular function, such as accounting, that differs substantially from the tasks
performed by other staff members.

Advantage:
 Reduces duplication. Reducing duplication will give lower cost.
Disadvantage:
 There may be a lack of communication among the different departments.

Product Departmentalization – work and workers are organized into separate units that are
responsible for producing particular products or services. Ex. Johnson & Johnson Family of
Companies

Advantages:
 Allows people to specialize in one area of expertise
 Make it easier to assess performance
 Makes decision making faster
Disadvantage:
 Duplication of resources

Customer Departmentalization - organizes work and workers into separate units that are
responsible for particular kinds of customers. An example of a company with customer
departmentalization is NIVEA.

Advantages:
 The organization is focused on the customer’s needs.
 Companies specialize their products and services to what the customer needs.
Disadvantage:
 Workers might please customers but hurt the business.
Geographic Departmentalization – organizes work and workers into separate units that are
responsible for doing business in particular parts of the world.

An example of a company with geographic departmentalization is McDonalds. In every part of

the world, the McDonalds’ menu varies depending on the preference of the people on that
place.

Matrix Departmentalization – two or more forms of departmentalization are used together.

Advantages:
 Companies will be able to efficiently manage large, complex tasks
 Gives much more diverse set of expertise and experience
Disadvantages:
 Requires a high level of duplication
 Confusion and conflict between project bosses
Forms of Bank Credit
The liabilities of a bank to creditors take four chief forms:
1. Deposits
2. Bank Notes
3. Acceptances and Letters of Credit
4. Bills Payable

Deposits- are rights to draw on the bank for money. A depositor commonly gets such rights in
one or more of the following possiby ways:
1. By the deposit of cash or cash items
2. By depositing time items for collection and credit
3. By remitting securities or other property to the bank for sale and credit
4. By the process of loan and discount
5. By the sale of securities,real estate, personality,or services to the bank for credit

Bank notes - are promises of the bank to pay money on demand; issued in round
denominations and transferable without indorsement, they are designed to circulate in lieu of
metallic money. The transferee becomes the note holder and creditor of the bank; the five
methods described above by which a depositor gets deposits.

Acceptances - are bills of exchange drawn on the bank,which for a commission,it obligates itself
to pay, but to provide funds for which payment the person for whom the letter of credit is
procured and obligated to the bank.

Letters of credit - are agreements by the bank to accept and to pay at maturity or demand,bills
of exchange drawn under certain specified conditions.

Bills payable - are promissory notes, secured or unsecured,interest-bearing,and running for a

period of time,by which a bank borrows in large, irregular sums,at various times.