- By Muneeb Jamal
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Banks are those institutions which conduct the business purely on profit motive. Banks receive surplus money from the people who are not using it and lend to those who need it for productive purpose. When we speak of a bank, we generally mean a commercial bank. Commercial banks are those institutions which conduct the business purely on profit motive. Commercial banks receive surplus money from the people who are not using it and lend to those who need it for productive purpose.
A commercial bank is a dealer in short and medium-term credit. It borrows money from a group of people at a lower rate of interest and lends to the other group of people at some higher rate of interest. The difference between the two rates of interest is the profit of the bank.
1. Definition Of A Commercial Bank:
Some important definitions of commercial bank are given below.
1.1. Professor G. Crowther:
"A bank is a firm which collects money from those who have it spare. It lends to those who require it."
1.2. Professor Parking:
"A bank is a firm that takes deposits from households and firms and makes loans to other household and firms.
In modern time, the functions of a modem commercial bank are manifold. The functions of a bank may broadly be divided into two parts.
- Basic or primary functions.
- Secondary functions.
Basic or primary functions of a commercial bank are very important in nature. These functions provide t base of the whole operation of the bank. The basic functions of a commercial bank are as under
3.1. Accepting deposits:
Accepting deposits is the most important function of all commercial banks. Deposit is the basis of commercial banks' activities. In order to attract The general public to deposit their surplus money in the bank, the bank offers to deposit money in any of the following accounts:
3.1.1. Current or Demand Account:
Current or demand account is one where the amount can be withdrawn at any time by the depositor.
3.1.2. Saving Account:
Saving account is suitable for non-trading and small income earners. Saving account helps in mobilization of the saving of low income people. The commercial banks pay interest on this type cf deposits.
3.1.3. Fixed Deposit Account or Term Deposit Account:
Fixed deposit account is the account in which amounts are deposited for a certain fixed period of time. The deposits cannot be withdrawn before the expiry of this fixed period. The longer the period of deposits, the higher is the rate of profit.
3.1.4. Foreign Currency Account:
Foreign currency account is opened only in authorized branches. A foreign currency account may be a foreign currency saving account or foreign currency term deposit account. Foreign currency account in Pakistan can be opened in USA Dollar, UK Pound, German Mark, Japanese Yen, etc. This account is exempted from all taxes and deduction. No income tax or Zakat is deducted from this account.
3.2. Advancing Loans:
The second important function of commercial bank is advancing loans to the individuals, businessmen and government bodies. The loans are granted out of deposited money. Generally, a commercial bank grants short-term loans.
Banks grant loan in any of the following forms:
Overdraft is a short-term loan granted by commercial banks to their account holders. Under this type of loan, the customers are allowed to draw more than what they have in their current account up to a certain limit. The excess amount overdrawn is called overdraft.
3.2.2. Cash Credit:
Cash credit is a very common form of loan granted by commercial banks to businessmen and industrial units against the security of goods. The loan granted under this head is credited to current account opened in the name of borrower. The borrower can withdraw money through cheques according to his requirement. The interest is charged on the amount actually withdrawn by the borrower.
Commercial banks grant loans for short and medium-term to individuals and traders against the security of movable and immovable property. The amount of loan is credited to the borrower's account. Interest is charged on the entire loan sanctioned.
3.2.4. Discounting bills of exchange:
Banks provide short term lean to the businessmen by discounting bills of exchange. Discounting the bills of exchange means the arrangements of making payments before maturity of bills of exchange. The payment made by the bank to the holder of bill of exchange before its maturity is the amount of loan. The discount charged is the earning of the bank.
4. Secondary Functions Of A Commercial Bank:
The secondary functions of commercial bank can be classified under the following heads.
- Agency functions
- General utility functions
- Miscellaneous functions
4.1. Agency Functions:
The banks render important services as agent on behalf of their customers in return for a small commission. When banks act as agent, law of agency applies. The agency functions or services of bank are as follows:
4.1.1. Collection of Cheques:
Commercial banks collect the cheques, bills of exchange, etc, on behalf of their customers. Banks collect local and outstation cheques and bills of exchange through clearing house facilities provided by the central bank,
4.1.2. Collection of Income:
The commercial banks collect dividends, interest on investment, pension and rent of property due to the customers. When any income is collected by the bank, a credit voucher is sent to the customer for information.
4.1.3. Payment of expenses:
The banks make payment of insurance premiums, rent, trade subscription, school fee and other obligation of the customers. When any expense is paid by the bank, a debit voucher is sent to the customer for information.
4.1.4. Dealer in securities:
The banks carry out purchase and sale of securities on behalf of their customers. Banks do it well because they are aware of the market conditions.
4.1.5. Acts as trustee:
The banks act as trustee to manage trust property as per instructions of property owners. Banks are required to follow the terms and conditions of trust deed.
4.1.6. Acts as an agent:
Commercial bank sometimes acts as an agent on behalf of its customers at home or abroad in dealing with other banks or financial institutions.
4.1.7. Obeys standing instructions:
Sometimes, customer may order his bank to do something on his behalf regarding the conduct of his account. This written order is called standing instruction. The bank being the agent of its customer obeys the standing instructions.
4.1.8. Acts as tax consultant:
Commercial bank acts as tax consultant to its client. The commercial bank prepares general sales tax return, income tax return, etc. Tiles the same with tax authorities.
4.2. General Utility Functions:
Commercial bank performs different utility functions for their customers. When bank performs utility functions, it does not act as an agent of the customers. The general utility functions are as follows:
4.2.1. Provides lockers facilities:
Commercial banks provide lockers facilities to its customers for safe custody of Jewelery, shares, securities and other valuables. This has minimized the risk of losing due to theft.
4.2.2. Issue of traveler's cheque:
Bank issues traveler's cheques to the customers for traveling in and outside the country.
4.2.3. Foreign exchange:
Commercial banks deal in foreign exchange. This enables the individuals and businessmen to obtain foreign currency in exchange of their home currency. For dealing in foreign exchange, commercial banks have to obtain permission from the central bank.
4.2.4. Transfer of money:
Commercial banks provide facilities for the transfer of money to any place within and outside the country. The funds are transferred by means of draft, telephonic transfer, electronic transfer etc.
4.2.5. Finances foreign trade:
A commercial bank finances foreign trade by accepting foreign bills of exchange. Bank also issues letter of credit on behalf of its customers to facilitate foreign trade. According to Sir John Poget:
"The issuing of letters of credit is the basic function of a bank."
4.2.6. Trade information:
Commercial banks collect and provide trade information and tender advice to its customers about financial mafters. Issues credit cards: Banks issue credit cards to their trustworthy and valued customers. This facilitates the customers to pay for their necessities of life.
4.2.7. Modaraba Company:
The commercial banks act as Modaraba and leasing companies under the provisions of Modaraba Companies Ordinance, 1980.
4.2.8. Purchase PTCs:
Commercial banks underwrite or purchase Participation Term Certificate (PTCs), Term Finance Certificates (TFCs) and Modaraba Certificates. This helps the companies to raise their capital.
4.2.9. Financial standing:
Commercial banks answer reference letters regarding the financial standing and business reputation of customers. Banks provide this information with great care and utmost secrecy.
4.3. Miscellaneous Functions:
Commercial banks perform the following miscellaneous functions:
4.3.1. Collection of utility bills:
Commercial banks provide facilities for the collection of utility bills from general public on behalf of government bodies. This facilitates the public to pay utility bills in time.
4.3.2. Zakat Collection:
Commercial banks collect Zakat from their account holders and deposit the same into Central Zakat Fund, according to Zakat and Usher ordinance - 1980.
4.3.3. Hajj services:
The commercial banks provide free Hajj sendees to the intending pilgrims. Banks receive Hajj applications. Banks also facilitate to form Hajj groups. Banks make necessary arrangements for the training of intending pilgrims,
The commercial banks provide Qarz-e-Hasna to deserving patients for medical treatment and to students for higher studies within the country and abroad. The Qarz-e-Hasna is refund Ale in easy installments,
4.3.5. Electronic banking and E-banking:
Electronic banking is offering improved services to the customers as fellows:
- ATM Cards
- Credit Cards
- Electronic transfer of money