What is a Commercial Bank?

A commercial bank is a financial intermediary that serves businesses by

providing essential liquidity functions within an economy via various
products and services.  

The institution accepts and manages deposits to earn fee income and
as a low-cost source of funds. Funds can generate interest income
via credit creation and offering credit facilities. Deposit acceptance and
credit creation are two dominant revenue sources for commercial
banks, with clients spanning a broad section of the economy.

Business banks and commercial banks jointly serve small and medium

enterprises (SMEs). For example, clients may be segmented by “small
business” under the business bank channel, with clients
meeting middle market criteria served by the commercial bank.
Regardless of the segmentation, banks cater to enterprises that rely
partly or wholly on owners’ support. This reliance wanes as a business
increases in size and complexity at or above the mid-market.

Typically, a commercial bank serves businesses with less complex

needs than those supported by corporate banking and investment
banking specialists.
 Key Highlights

 A commercial bank is a financial intermediary that provides liquidity by

bridging sources of capital from depositors and creating credit that can
be extended to borrowers.
 Functions of a commercial bank include deposit acceptance, credit
creation, treasury and payments, and other agency and advisory
services.
 Business banks and commercial banks jointly serve small and medium
enterprises (SMEs). Clients may be segmented by size and complexity.

Functions of Commercial Bank

As a financial intermediary, a commercial bank provides financial

services to organizations of varying sizes, bringing together users
(borrowers) and providers (depositors) of funds. To do so, they offer a
wide variety of business-centric products and services. They are critical
to any economy that relies on business credit and its creation.

According to McKinsey & Company Global Banking Annual Review

2021[ 1 ] , worldwide revenue under the commercial and
corporate/investment banking sector was $2,140 billion USD, larger
than revenue from retail banking at $1,934 billion USD. Payment
services revenue was valued at $868 billion USD. The total addressable
market fosters high competition, from universal banks to banks that
specialize in corporate and investment banking.

Functions may be categorized as follows. For specific products and

services, please see business banking for details.

1. Deposit acceptance

Deposit-gathering is a necessary function of any commercial bank and

is required to offer credit products and services at a lower cost than
external financing. Gathering deposits is the key to generating an
acceptable return on equity, tied to the growth of a commercial bank’s
credit portfolio and interest income. 

In the past, a bank was trusted to hold cash and valuables for
safekeeping. Depositors paid for the custodial services. With fractional
banking, a bank can lend a greater portion of its deposit to achieve
higher margins and profitability. Cash and custodial fees are no longer
the primary revenue source[ 1 ] . A commercial bank accepts deposits and
pays interest to gather low-cost funds to grow its credit portfolio. 

2. Credit creation
Regulators set the minimum cash reserve a commercial bank must hold
to support its deposit liabilities. Excess deposits may be used to create
credit to lend via commercial loans and other credit products or lend to
other institutions at the overnight rate. Credit creation is a critical
function of a commercial bank. Interest is the highest percentage of
revenue at commercial banks[ 1 ] . Credit portfolio performance and
health are widely monitored performance measures.  

Many business credit products and services are available and match
clients’ operational and strategic needs.

3. Treasury and payments 

To increase economies of scope and scale, as well as the share of

wallet, commercial banks offer invoicing, collection, and also merchant
(point-of-sale) solutions to support current asset requirements for
businesses. Expenses paid via cheque, charge and credit cards, and
electronic payments are offerings that support current liability
requirements.  

Companies specializing in the payment segment have outperformed

other business bank models over the past five years[ 1 ]  and are an
attractive area for high-tech due to the growth.

4. Agency and advisory

Commercial banks also offer many agencies and advisory functions due
to their privileged position as financial intermediaries. Advisory services
to manage risks from business-to-business activities, supporting trade
credit with global entities participating in import and export, or
documenting the performance of cross-border services, are some
examples in this category.  

Institutions are highly regulated and integrated with global systems

(e.g., SWIFT), which is a function that is a barrier to entry for firms that
do not operate on the same scale.
In our routine life, we must have visited banks. These banks help us in
many banking activities like maintaining our savings account, depositing
cash, and withdrawing the same, thus we see these banks are always at
our service. These are the commercial banks, which operate commercially
for serving the common people.

Commercial banks have a lot of other functions to do than what is

mentioned above. What are those functions? What will happen if the
commercial banks cease to perform all the banking activities? Are there
any other types of banks that might help the masses? All these questions
will be addressed in our discussion that is based on the functions of
Commercial Banks.

What are Commercial Banks?

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Before diving straight into the topic of functions of commercial banks,

first, it is obligatory to know what are Commercial Banks.

A commercial bank is a typical financial institution that accepts as well as

deposits from the general public and also, they give loans for the
purposes of consumption activities and investment activities, to make
their own profit.

Commercial banks are profit-based institutions that offer financial services

like loans, as well as services like deposits, electronic transfers of funds,
etc. to their customers. Commercial banks have a significant role in a
country’s economy as these organizations fulfill the short and mid-term
financial requirements of industries.

The functions of commercial banks are primarily based on a business

model of accepting public deposits and utilizing that fund for various
investment purposes. Such functions can be classified into two categories,
primary and secondary functions.

These functions will be discussed in our upcoming section.

What are the Functions of Commercial Bank?

Commercial Banks have both primary and secondary functions that as

explained in detail below.

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Primary Functions

 Accepting Deposits – Commercial banks accept deposits from their

customers in the form of saving, fixed, and current deposits. 
 Savings Deposits – Savings deposits allow a customer to credit
funds towards their accounts for up to a certain limit. These
deposits are preferred by individuals with a fixed income, utilized to
create savings over time.
 Fixed Deposits – Fixed deposits come with a predetermined lock-in
period. Fixed deposits are also referred to as time deposits as the
funds are deposited for a specific time frame.
 Current Deposits – Current deposits allow account holders to
deposit and withdraw money whenever necessary. In some cases,
current accounts also offer overdrafts until a pre-specified limit to
individuals and businesses.
 Providing Loans – One of the main functions of commercial banks
is providing credit to organizations and individuals, and profit from
the earned interest. Usually, banks retain a small reserve for their
expenses while offering the remaining amount to customers as
various types of short and long-term credits.
 Credit Creation – A unique function of commercial banks is credit
creation. Instead of offering liquid cash, banks create a line of credit
and transfer the loan to a business or commercial body all at once.

Categories of Secured and Unsecured Loans provided by

Commercial Banks

 Cash Credit – Commercial Banks and their Functions include

extending advances to individuals and organizations against bonds,
inventories, and other types of securities. This facility, commonly
known as cash credit, provides a more substantial sum when
compared to other forms of credit.
  Short-Term Credits – Short-term loans are usually pledged without
any security, offering a smaller loan amount and repayment tenor.
These are also referred to as personal loans.

Secondary Functions

The following can be considered as the secondary functions of commercial

banks – 
 Providing locker Facilities – Commercial banks provide locker
facilities to customers who want to store valuables safely. Locker
facilities eliminate the impending risk of theft or loss, which prevail
when kept at home.
 Dealing in Foreign Exchange – Commercial banks help provide
foreign exchange to individuals and organizations that export or
import goods from overseas. However, only certain banks which
have the license to deal in foreign exchange are eligible for such
transactions. 
 Exchange of Securities – Another function of commercial banks is
to trade in bonds and securities. Customers can purchase or sell the
units from the financial institution itself, which offers more
convenience than alternate approaches.
 Discounting Bills of Exchange – The main function of a commercial
bank in today’s date is to discount bills of businesses. Bill
discounting is considered a profitable investment for banks. Bills
create a steady flow of funds, while not becoming a risky venture
during payment as it is considered as a negotiable instrument.
These also do not involve the financial institution in any litigation. 
 Bank as an Agent – Commercial Bank and its Function also require
them to provide finance-related services to customers, fulfilling the
role of an agent. These services usually include – 

 Acting as an administrator, trustee, or executor of a customer-

owned estate.
 Assisting customers with tax returns, tax refunds, and other
similar tasks.
 Serving as a platform to pay premiums, repay loan
installments, etc.
 Offering a platform for electronic transaction of funds,
processing of cheques, drafts, bills, etc.
Importance of Commercial Banks

Thus, we now know how important are commercial banks in performing

the balanced function in an economy. In a parallel universe, if commercial
banks cease to perform these banking functions, then the economy will
collapse out of thirst for money liquidity. Along with the growth, economic
and social stability will be shattered completely. 

Types of Commercial Banks

It is necessary to understand the different types of financial institutions to

explain the functions of commercial banks effectively. Commercial banks
are commonly categorized into three types. They are as follows:
 Public sector banks
 Private sector banks
 Foreign banks

Public Sector Banks

Public sector banks refer to a type of financial institution that is state-

owned by the corresponding Government. A significant part of the share
of such organizations is held by the Government. In India, the Reserve
Bank of India, which acts as the central bank, creates operating guidelines
for the public sector banks. 

Private Sector Banks

Private sector banks are financial institutions registered as companies

with limited liabilities. The major part of the share capital of such
companies is owned by individuals or private businesses. 

Foreign Banks 

Foreign banks are financial institutions that are operating overseas within
a foreign nation. Post the financial reform of India (in 1991), there was a
marked increase in the number of foreign banks on Indian soil. They are
essential for the economic development of a nation.

Apart from these commercial banks that lend and deposit money, there is
Central Bank which is known as the ‘head honcho’ in terms of banks. The
Central Bank supervises the commercial banks, sets their interest rates,
and controls the money flow in the economy. This bank, unlike the
commercial banks, does not engage with the general public in terms of
providing banking services. Thus, Central Bank will never be as helpful as
commercial banks to the general mass. 

Did You Know?

In this section, we will know about some interesting commercial banking
facts. 
 Allahabad bank is the oldest joint stock bank existing in India.
 Bank of India was the first bank to open branches in foreign
nations. 
 Canara Bank is the first bank to be receiving the ISO 9002 Certificate.
 Bharatiya Mahila Bank is the first all-women bank formed in India.  
 Reserve Bank of India served as the central bank of two countries at
a time. It was the central bank for Pakistan after the partition of
India until June 1948.

From the above-mentioned details, you will get a clear idea about
commercial bank definition as well as its functions. For more information
on the discussed topic students can refer to Vedantu’s website today. They
can also avail study solutions on the introduction of commercial banks
from us and avail a detailed idea.
Working of the bank:

Bank Visit : a REPORT Date: 18th August 2018 Grades: VII & VIII Venue: IDBI
Bank, Wayle Nagar, Kalyan. Objectives: Students will enhance their skills and
knowledge on:  How to open a bank account  Banking: Types of Accounts 
Basic knowledge of cheque  Banking: With New Technology Start time:
9.25am Our school PODAR INTERNATIONAL SCHOOL, CIEA ( Kalyan ) had
introduce a subject Financial Education for grade 6-10 before few years ,which
has been developed by adopting a functional approach. The need of financial
education is to improve understanding of basic financial concepts and using
them in our daily life. To know about various financial products and to become
more aware of financial risks and opportunities to enable each one of us to
make informed choices, and in return we can improve our financial well-being.
The vision of financial education is that it could enable students, at their level
of need, to understand the role of money in their life, the need and use of
savings, the advantages of using the formal financial sector and various options
to convert their savings into investments, protection through insurance and a
realistic recognition of the attributes of these options. The objective of this
activity was to create awareness and educate students on access to financial
services (banking), availability of various types of servicesand their features
and to make students understand their rights and responsibilities as customers
of financial services. My students from grade 7 and 8 (25 students) had
participated in this activity. My Principal Mr Sanjay Nandi Sir had provided all
facilities required for completion the activity. Our Admin department had
arranged bus facility for students, from school premises to bank. Introduction:
Bank Manager Mr Vijay and their staff Mr Vikas and Ms Deepa gave a warm
welcome to students. The session was conducted by Mr Vikas, who gave a brief
introduction on banking and he explainedthevisit to a bank is always
informative. Working of the bank:  The working of the bank is divided into
many different departments which collectively handle the affairs of the bank.
 These departments have been provided with specific counters or windows
where the customers have to stand in queue and wait for their turn.  There
are seats put up for the people who visit the bank for work.  There are cabins
provided for the managers and general manager of the bank.  Mr Vikas made
sure students have understood what is banking and how it is useful to
individuals and businesses.  Then Mr Vikas explained various
counters/sections which are there in banks: 1. Account Opening:  This is the
department which is the busiest of all sections.  To open an account in a bank
they should fill the form which needed to be filled up along with the signature
of a confidant and one’s identity proof or kyc ( know your customer)
documents.  Bank gave Xerox copy of form to students, to make them aware
about formality to the completed for opening an account (Basic information
and kyc page) 2. Cheques Counter:  This section remained fairly less crowded.
 At this section, there are demand drafts and cheques activity performed. 
For cheque deposit, a slip has to be filled and stamping part is done by the
banker for customer’s safety.  A slip was shown and Mr Vikas explained
students how to fill it. 3. Withdrawal Counter:  The withdrawal counter is
where people come to encash cheques and withdraw money from their
accounts.  The person sitting in this counter usually has a drawer or a suitcase
filled with case so that he can hand it over to the person who has rightfully
claimed it. 4. Lockers:  Mr Vikas took students to locker room where the
assets and other valuables of the people are kept in safe boxes.  There was
one locker which was sealed by CBI, a discussion was held between Mr Vikas
and students and they were able to clear all their doubts. There are boards
attached on each wallwhich give the basic information regarding the working
of banks. A small introduction on online banking was given to students. Due to
time constrain types of accounts were not discussed in much detail, only saving
account details were discussed in general. Students had a great experience in
bank, were able to understand, apply, analysed and evaluate their knowledge
on banking. Students were able to recall the topics/contents which were
covered in the session. The activity was a great exposure for students: 
Clearing their doubts related to any topic.  They got aware to many concepts
like. ‘why CBI has sealed the locker?’  They were able see what and how
lockers are?  Students experienced live banking functioning of branch. 
Students were trying to understand how roles are performed by each bank
employee for completion of whole day activity in bank.  Students were able
to understand how borrowing, processing and lending of money are takes
place between banks and customers. At last, Bank Manager Mr Vijay gave vote
of thanks for Mr Sanjay Nandi Sir and appreciated a lot for conducting this
kinds of activity for students. Conclusion: Visit to the bank was a great
experience for my students to learn many new and different things about the
functioning of the banks. Thanks to Principal Mr Sanjay Nandi Sir for giving this
opportunity.