COMMERCIAL BANKS

Commercial banks are business enterprises which deals in finances, financial instruments & provides various financial services for a price known as interest, discount, commission ,fees etc.

Functions of commercial bank

Functions of commercial banks have expanded over the year. Major functions of these banks are as follows: Accepting Deposits Commercial banks accepts deposits from household sector, business enterprises & other institutions. Commercial banks perform an important function of mobilizing savings from those individuals who have surplus cash but are unable to invest it directly in any productive activity because (a)their resources are small (b)they are unable to take risk. Loans & Advances Granting loans in various forms is the main feature of commercial banks. It is through this activity that the banks earns major portion of their profits. Loans are advanced for meeting diversified needs of the customers. Bank loans are generally against marketable securities such as treasury bills , guilt edged securities & against lien

on machinery & stock ,mortgage of land & building etc. Agency function Commercial bank also act as an agent of their customers. Customers can deposit their cheques , bills ,promissory notes etc.to their accounts. On instructions from the customers bank pays regular installments of interest, insurance premium, rent etc. on behalf of the customer. Banks charge commission for all these services. Dealing in foreign exchange In most of developed countries commercial banks are allowed to buy foreign exchange & sale it to their customers for international trade & other purposes. This purchase & sale of foreign exchange is done within the regulatory provisions of the central bank of the country. Credit creation Only commercial banks have a unique distinction in creating credit. Credit creation depends on a number of factors such as business conditions, commercial banks credit policy & monetary policy of the central bank. Transfer of funds Banks provide a very economical & safe method of transferring funds within a country as well as internationally from one country to

another. These transfers may take place through cheques, bank drafts or telegraphic transfers etc.

FUNCTIONS OF RESERVE BANK OF INDIA

Following are the functions of reserve bank of India. Bank of Issue Under section 22 of the Reserve Bank of India Act, the bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes & coins & small coins all over the country is undertaken by the Reserve Bank as agent of the government. The Reserve bank has a separate Issue Department which is entrusted with the issue of currency notes. Banker to Government The second important function of Reserve Bank of India is to act as government banker, agent & advisor. The Reserve Bank is agent of Central Government & of all State Government in India excepting that of Jammu & Kashmir. The RBI has the obligation to transact Government business, via. To keep cash balances as deposits free of interest, to

receive & to make payments on behalf of the government & to carry out their exchange remittances & other banking operations. Bankers Bank The RBI acts as the bankers bank. According to the provisions of the Banking Companies Act 1949, every scheduled bank was required to maintain with the RBI a cash balance equivalent to 5% of its demand liabilities & 2% of its time liabilities in India. By an amendment of 1962, the distinction between demand & time liabilities was abolished & banks have been asked to keep cash reserves equal to 3% of their aggregate deposit liabilities. The minimum cash balance can be changed by the RBI. Lender of the last resort The reserve bank can borrow from the RBI on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the RBI to come to their help in times of banking crisis the RBI becomes not only the bankers bank but also the lender of last resort. Controller of credit The RBI is the controller of credit i.e. it has the power to influence the volume of credit created by bank in India. It can do so through changing the bank rate or open market operations. According to Banking

Regulations Act 1949, the RBI can ask any particular bank or the whole banking system not to lend to particular group or persons on the basis of certain types of securities. The RBI is armed with many more powers to control the Indian money market.ss