Commercial Studies [4 marks Question-Answer]

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A commercial bank may be defined as a financial institution which collects money from the public in the form of deposits and lends the same to borrowers. It is an institution that provides facilities for safe keeping, lending and transfer of money. According to the Banking Regulations Act, 1949, "banking means the accepting, for the ptirpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise."
Commercial banks perform a range of functions that can be categorized into two main divisions.
 (a) Primary Functions:
1. Deposit Mobilization: Commercial banks accept deposits from individuals and businesses, including savings, current, and fixed deposits. These deposited funds are then used to provide loans and advances to meet the temporary financial needs of commercial transactions.
2. Lending and Advances: Another pivotal role of commercial banks is extending loans and advances to entrepreneurs and businesspeople, generating interest income. This constitutes a primary source of profit for banks. After retaining a small portion of deposits as reserves, banks lend out the remaining funds to borrowers through various credit mechanisms like demand loans, overdrafts, cash credits, and short-term loans. This lending process also allows banks to effectively create money.
3. Credit Creation: When a bank provides a customer with credit or a loan, it doesn't necessarily provide physical cash. Instead, the bank opens an account for the customer and transfers the loan amount to that account. This practice enables the bank to create new money in the economy.
(b) Secondary Functions:
1. Discounting Bills of Exchange: Commercial banks engage in the practice of discounting bills of exchange, which are written agreements specifying the future payment for goods purchased. The bank can provide the payment earlier than the stipulated time through the discounting process.
2. Overdraft Facility: Banks offer an overdraft facility, allowing customers to withdraw more than the available balance in their current accounts, up to a predetermined limit.
3. Securities Trading: Commercial banks facilitate the buying and selling of securities, enabling customers to invest and trade in financial instruments.
4. Safekeeping Services: Banks provide locker facilities where customers can securely store their valuable items or documents for a nominal annual fee. 5. Payment and Collection Services: Banks facilitate financial transactions by employing instruments such as promissory notes, cheques, and bills of exchange for making payments and collecting dues.

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Banks are of the following types.
1. Central Bank: The central bank of a country serves as the leader of the banking system and the money market. Every country has a central bank which regulates money supply and credit with the help of the Government. It exercises supervision and control over all other banks in the country. The Reserve Bank of India is the central bank of our country. It acts as the bankers' bank. It carries out the country's monetary policy. It occupies a central position in the banking system of the country.
2. Commercial Banks: These are joint stock banks which receive deposits from the public and business firms. They also provide short-term and medium-term loans to customers. These banks carry on all kinds of banking functions within the framework of the Banking Regulation Act, 1949 in India. Com-mercial banks are classified into two broad categories scheduled and non-scheduled banks. Scheduled banks are those included in the second schedule to the Reserve Bank of India Act. Commercial banks not included in this schedule are non-scheduled banks..
3. Industrial Banks: These banks provide finance to industrial concerns for medium-term and long-time periods. They also purchase and underwrite shares and debentures of industrial enterprises. They also provide managerial and technical advice and assistance to industries. These banks are also called de-velopment banks or developmental financial institutions. Industrial Development Bank of India (IDBI), 255 Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation if India (IFCI), are examples of industrial development banks in our country.
4. Merchant Banks: These banks perform merchant banking functions such as underwriting of securi-ties. They serve as issue houses, underwriters, lead managers, brokers, etc., for companies which issue shares and debentures. SBI Capital Markets is an examples of merchant banks.
5. Agricultural Banks: These banks provide medium-term and long-term loans to farmers against the security of land. They are therefore, called Lank Development Banks. Agricultural banks also provide loans for permanent improvement in agricultural land. Commercial banks, regional rural banks and agricultural cooperative banks provide short term loans to farmers. The National Bank for Agriculture and Rural Development (NABARD) provides refinance facilities to all types of banks which give loans to agriculturists.

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