TOS4. This is second round of credit creation which is 90% of first round of increase of Rs 1800. However, besides these functions there are many other functions which these banks perform. For example post offices are not bank because they do not give loans. Interest is charged by the bank on the drawn or utilised portion of credit (loan). Those like security brokers whose credit needs fluctuate generally, take such loans on personal security and financial assets. This is, in fact, the main source of income of the bank. And the function of the commercial banks are; I. … These deposits may be of any of the following types: 2. Before publishing your Articles on this site, please read the following pages: 1. This is what is meant by credit creation. They provide references about the financial position of their customers when required. Deposits are savings, current, or time deposits. Welcome to EconomicsDiscussion.net! In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do banking business to earn profit. Hence, after collecting money by way of deposits, a bank invests it or lends it out. The security for overdraft is generally financial assets like shares, debentures, life insurance policies of the account holder, etc. A passing reference to some other types of commercial banks will be informative. They borrow in the form of deposits and lend in various forms of advances. The difference between the rates is called ‘spread’ which is appropriated by the banks. The bank does this by accepting deposits from its customers. The bank works as an agent of their constituents. initial cash deposits and (ii) Legal Reserve Ratio (LRR), i.e., minimum ratio of deposits which is legally compulsory for the commercial banks to keep as cash in liquid form. Content Guidelines 2. Occasionally, however, a small interest is paid to people who keep large balances. Commercial banks are open to the public … It collects the surplus balances of the Individuals, firms and finances the temporary needs of commercial transactions. (iii) They promote balanced regional development by opening branches in backward areas. It is a facility to a depositor for overdrawing the amount than the balance amount in his account. It is an intermediate party between the borrower and the lender. They charge high rate of interest from the borrowers but pay much less rate of Interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks. A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products that are operated as a business for profit.. In short, money (or credit) creation by commercial banks is determined by (i) amount of initial (primary) deposits and (ii) LRR. If that were so, how could a bank pay interest? Commercial banks accept deposits from businesses and individuals and use those deposits to extend credit to other customers in the form of loans and credit cards. Such deposits are payable on demand and are, therefore, called demand deposits. The discounting of bills by a bank is another way of lending money. Foreign Exchange Banks are commercial banks which are branches of foreign banks and facilitate international financial transactions through buying and selling of foreign bills. Share Your Word File The rate of interest offered by the banks to depositors is called the borrowing rate while the rate at which banks lend out is called lending rate. Again, 20% of Sohan’s deposit which is considered a safe limit is kept for him by the bank and the balance Rs 640 (= 80% of 800) is advanced to, say, Mohan. The following chart depicts main types of commercial banks in India. The bank does not pay any Interest on these deposits but provides cheque facilities. In short, banks borrow to lend. The two primary characteristics of a commercial bank are lending and borrowing. 1. This amount is passed on to the suppliers of goods. In other words, they can get more than they have deposited, but they have to pay interest on the extra amount which has to repaid within a short period. Thus the risk of theft is avoided. Banks act as intermediaries between those who have surplus money and those who need it. To receive deposits and to advance loans are thus the two main functions of all commercial banks. This is how a deposit is ‘created’ by a bank. Features of Payments Banks: Payments banks will do almost all the work that is currently being done by commercial banks, but the payments banks will work under certain restrictions like;. Some of the services provided by commercial banks mirror those provided by retail banking establishments. (ii) Locker facility. These deposits stand midway between current and fixed accounts. clearing house, controller of foreign … Content Guidelines 2. Clearly, such banks are small banks and their field of operation is also limited. Again 10% of Y’s deposit (i.e., Rs 180) is kept by the bank as cash reserve (LRR) and the balance Rs 1620 (=1800 – 180) is advanced to, say, Z. Commercial banks are able to transfer funds of a customer to other customer’s account through the cheques, draft, mail transfers, telegraphic transfers etc. The bank gets new demand deposit of Rs 1620. The second major function of a commercial bank is to give loans and advances particularly to businessmen and entrepreneurs and thereby earn interest. Transfer of funds - Fund transfers among your own accounts 5. (iv) Purchase and sale of foreign exchange (currency). For example, you can deposit your money in a bank account to save it securely, and you will also get … Mobile Banking Features. 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