Commercial Banking

COMMERCIAL BANKING
Commercial Banks are profit-seeking financial

institutions. They receive deposits from customers at a
lower rate of interest and offer business loans at a higher
interest rate. They serve individuals, small-scale
businesses, and medium-sized businesses.
These banks mainly offer loan facilities and accept
deposits. But in addition to that, they provide saving
accounts, merchant services, commercial loans, global
trade services, treasury services, lending services, current
or checking accounts, term deposits, consumer loans,
mortgages, credit cards, debit cards, cash management
services, corporate loans, and online banking services.
ROLE OF COMMERCIAL BANKS

The general role of commercial banks is to provide financial services to the
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.
1. Capital Formation
Banks play an important role in capital formation, which is essential for the
economic development of a country. They mobilize the small savings of the
people scattered over a wide area through their network of branches all
over the country and make it available for productive purposes.
Now -a-days, banks offer very attractive schemes to induce the people to
save their money with them and bring the savings mobilized to the
organized money market. If the banks do not perform this function, savings
either remains idle or used in creating other assets,(eg gold) which are low
in scale of plan priorities.
2. Creation of Credit
Banks create credit for the purpose of providing more funds for
development projects. Credit creation leads to increased production,
employment, sales and prices and thereby they bring about faster economic
development.
3. Channelizing the Funds towards Productive Investment

Banks invest the savings mobilized by them for productive purposes.
Capital formation is not the only function of commercial banks. Pooled
savings should be allocated to various sectors of the economy with a view to
increase the productivity. Then only it can be said to have performed an
important role in the economic development.
4. Banks Promote Entrepreneurship

In recent days, banks have assumed the role of developing
entrepreneurship particularly in developing countries like India by
inducing new entrepreneurs to take up the well-formulated projects and
provision of counseling services like technical and managerial guidance.
Banks provide 100% credit for worthwhile projects, which is also
technically feasible and economically viable. Thus commercial banks help
for the development of entrepreneurship in the country.
5. Encouraging Right Type of Industries

Many banks help in the development of the right type of industries by
extending loan to right type of persons. In this way, they help not only for
industrialization of the country but also for the economic development of
the country. They grant loans and advances to manufacturers whose
products are in great demand. The manufacturers in turn increase their
products by introducing new methods of production and assist in raising
the national income of the country.
6. Promotion of Trade and Industry :-

The commercial banks help in financing both internal and external trade.
The banks provide loans to retailers and wholesalers to stock goods in
which they deal. They also help in the movement of goods from one place to
another by providing all types of facilities such as discounting and
accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries
by providing foreign exchange facilities to importers and exporters of
goods.
7. Financing Agriculture:
The commercial banks help the large agricultural sector in developing
countries in a number of ways. They provide loans to traders in
agricultural commodities. They open a network of branches in rural
areas to provide agricultural credit. They provide finance directly to
agriculturists for the marketing of their produce, for the
modernisation and mechanisation of their farms, for providing
irrigation facilities, for developing land, etc.
8.Financing Consumer Activities:

People in underdeveloped countries being poor and having low
incomes do not possess sufficient financial resources to buy durable
consumer goods. The commercial banks advance loans to consumers
for the purchase of such items as houses, scooters, fans, refrigerators,
etc. In this way, they also help in raising the standard of living of the
people in developing countries by providing loans for consumptive
activities.
9. Help in Monetary Policy:

The commercial banks help the economic development of a country by
faithfully following the monetary policy of the central bank. In fact, the
central bank depends upon the commercial banks for the success of its
policy of monetary management in keeping with requirements of a
developing economy.
10. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in
developing countries. They provide loans for the education of young
person’s studying in engineering, medical and other vocational
institutes of higher learning. They advance loans to young
entrepreneurs, medical and engineering graduates, and other
technically trained persons in establishing their own business. Such
loan facilities are being provided by a number of commercial banks in
India. Thus the banks not only help inhuman capital formation but
also in increasing entrepreneurial activities in developing countries.
Thus the commercial banks contribute much to the growth of a

developing economy by granting loans to agriculture, trade and
industry, by helping in physical and human capital formation and by
following the monetary policy of the country.

Commercial Banking

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COMMERCIAL BANKING

Commercial Banks are profit-seeking financial

ROLE OF COMMERCIAL BANKS

3. Channelizing the Funds towards Productive Investment

4. Banks Promote Entrepreneurship

5. Encouraging Right Type of Industries

6. Promotion of Trade and Industry :-

8.Financing Consumer Activities:

9. Help in Monetary Policy:

10. Financing Employment Generating Activities:

Thus the commercial banks contribute much to the growth of a

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