Course Name: B. Com.

H
Semester: II nd
Paper Code: BCOM H 202
Title of the Paper: Indian Economy
Name of Faculty: Ms. Anju Singh
Designation: Assistant Professor

BCH 202: INDIAN ECONOMY

ROLE AND FUNCTIONS OF COMMERCIAL BANK
Commercial Bank: A commercial bank is a financial institution that provides various financial
services, such as accepting deposits and issuing loans. Commercial bank customers can take
advantage of a range of investment products that commercial banks offer like savings accounts
and certificates of deposit. The general role of commercial banks is to provide financial services
to general public and business, ensuring economic and social stability and sustainable growth of
the economy. In this respect, "credit creation" is the most significant function of commercial banks.
The Banking function can be categorized in to two parts
1. Primary Function

2. Secondary Function
Primary Functions of Commercial Banks
Below are few very general functions of commercial banks, you must be familiar with all of them.
The first two functions of commercial banks are known as primary functions of commercial banks
and last two known as secondary functions of commercial banks.

1. Accept Deposits
The most important function of commercial banks is that it collects the surplus money or saving
of the people on accepting deposits. These deposits may be created in two ways, such as by direct
deposits, when a customer deposit their money in the bank by opening a bank account such as
current account, fixed account or saving account and secondly by indirect or derivative deposits,
which is credited by giving loans to their customers.
2. Advancing Loans
Next important functions of commercial banks are advancing loans to needy people at a rate of
interest against security. It is a profit making concern. The banks usually provide short-term credit
and avoid locking its funds for a long-period, because a major portion of the money comprises of
current and saving deposits, withdrawal on demand without notice. Commercial banks issue the
loan in the form of cash credit, overdraft, and fixed loans and by discounting of bill of exchange.

Secondary Functions of Commercial Banks

1. Agency Services
The commercial banks provide agency services to its customers. It acts as agent to its customers
in the collection and payment of cheques, bill of exchange and promissory notes. The banks
provide a useful service in the collection of dividend or interest earned on stock and share held by
the customers. The bank purchases and sells the securities on behalf of his customers. Banks also
make payments of regularly recurring nature of individual or firm, dues by debiting of his account,
like insurance premium etc. A bank also acts as Trustee or Executor on the direction of the

BCH 202: INDIAN ECONOMY

customers. Banks also transfer funds of the customers from one bank to another bank at home or
abroad.
2. General Utility Services
Besides the main functions of commercial banks, they also perform many other services of general
utilities to its clients. A bank transacts in foreign exchange business by discounting foreign bill of
exchange and then financing foreign trade. A bank also acts as referee for “credit worthiness” of
its client. Bank provides “lockers” facility for keeping ornaments and other valuable documents in
a safe custody. Banks also issue “letter of credit” to the businessmen and “travel’s cheque” to
tourists. Banks create instruments of credit, a suitable substitute for money. They encourage the
habit of the savings, which ultimately result in investment and capital formation. Bank also
provides trade information by publishing monthly bulletin, which contain information regarding
to trade, commerce and industry. In a sentence, banks provide indispensable services of general
utilities.
The economic significance of commercial banks is as given below;

1. Capital Formation
Capital formation is the basic requirement of country. It consists of three stages.
• Generation of savings
• Mobilization of savings
• Channelization of savings in productive uses

2. Investment in New Enterprises

The commercial banks provide capital to the entrepreneurs to take risk and invest in new
enterprises. The commercial banks thus help in increasing the productive capacity of the economy.

3. Creators and Distributors of Money

The commercials banks are creators and distributors of money. They purchase securities and allow
money to play an active role in the economy.
4. Influencing Economic Activity
The commercials banks influence economic activity in two ways. First, the lowering of interest
rate makes the investment more profitable and increases in the interest rate discourages investment.
Secondly, the making of capital available to the investors increase investment, production and
trade in the economy and vice versa.
5. Effective Implementation of Monetary Policy
The control and regulation of credit by the central bank of the country is only possible and effective
with the cooperation of the banking system in the country.
6. Expansion in Trade and Industry
BCH 202: INDIAN ECONOMY
The use of cheques, drafts, bill of exchange etc by the banks, has lead to vast expansion in trade
and industry in all over the world.
7. Encouragement of Right Type of Industries
The banks advance short, medium and long term loans to the industrialists in accordance with the
loan policies of the government. Thus helps in promoting right type of industrialization in the
country.

8. Balanced Development
The banks play an active role in balanced development in different regions of the country. They
help in transferring funds from development regions to the less developed regions. The
undeveloped areas of eth country thus get adequate funds for development.
9. Development of Agricultural and Industry
The commercial banks, particularly in developing countries are providing short, medium and long
term loans for the development of agricultural and industries in rural and urban areas.

10. Reducing Reliance on Foreign Capital

A planned banking system in the country mobilizes savings and meets credits. Thus it results more
investment in the country and reduces relying on foreign capital.

Financial Institution:
Financial Institution is not a new concept in financial history. The evolution of financial
institutions must be differentiated from economic history and history of money. In Europe, it may
have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers
and banks in the 1400-1600s in central and Western Europe. The first global financiers the Fuggers
(1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign
exchange market; the first stock exchange.
In financial economics, a financial institution is an institution that provides financial services for
its clients or members. Probably the most important financial service provided by financial
institutions is acting as financial intermediaries. Most financial institutions are highly regulated by
government bodies. Broadly speaking, there are three major types of financial institution.
1. Deposit-taking institutions that accept and manage deposits and make loans;
2. Insurance companies and pension funds;
3. Brokers, Underwriters and investment funds
Functions of financial institutions:

BCH 202: INDIAN ECONOMY

As we have already discussed that, there are numbers of financial institutions in financial market
like banks, credit unions, asset management pension providing institutions, risk management
institutions, which serve some purposes as follows:

1. Accepting Deposits
2. Providing Commercial Loans
3. Providing Real Estate Loans
4. Providing Mortgage Loans
5. Issuing Share Certificates
At the same time, there are several governmental financial institutions assigned with regulatory
and supervisory functions. These institutions have played a distinct role in fulfilling the financial
and management needs of different industries, and have also shaped the national economic scene.
Here is the list of various financial institutions.
1. Maharashtra State Financial Corporation
2. The State Industrial and Investment Corporation of Maharashtra Ltd
3. The Public/National Financial institutions
4. All nationalized banks
5. All scheduled banks
6. All co-operative banks
7. Regional Development corporations
8. Housing Development Finance Corporation
9. Export-Import bank of India
So these are the various financial institutions existing in India. All have their own contribution in
development of economy of India if we talk about that.

BCH 202: INDIAN ECONOMY

BCH 202: INDIAN ECONOMY