What are CENTRAL and COMMERCIAL BANKS ?

Commercial banks

What is a commercial bank?

·       A commercial bank are institutions which perform the function of accepting deposits, granting loans and making investing on the aim of earning profits.

·       They act as intermediaries by collecting money from household in the form of savings and lend them to the productive sector in the form of lending money.

·       The rate at which the bank borrows money is known as ‘borrowing rate’ and the rate at which it lends money is known as ‘lending rate’.

Functions of a commercial banks

1.    Primary functions

A.    Accepting deposits

n Current account deposits/demand deposits: - deposits that are repayable by banks on demand. Mostly maintained by businessmen. Banks do not pay interest on these accounts but charge you for the services they provide.

n Fixed deposits/time deposits: - deposits are deposited in the banks for a fixed period. These accounts have high interest rates.

n Saving deposits: - these accounts have interest rates less than the fixed deposits accounts. There are restrictions on how many times the savings can be withdrawn.

B.    Advancing of loans

n Interests on loans given by the banks are one of the main sources of income for the banks.

n Cash credit: - these are loans given to borrowers against securities like shares, stocks, bonds etc.

n Demand loans: - these are loans which can be recalled by banks at any time.

n Short term loans:-personal loans given against any collateral security.

2.    Secondary functions

n Overdraft facility:- this is a facility given to current account holders that the customers can overdraw his account up to an agreed limit.

n Discounting of bills of exchange:- the holder of bill of exchange can get his bill discounted before its maturity. A small part is taken as commission by bank, and on maturity the bank receives and takes the payment from the party.

n Bank performs many other functions like transfer of funds from one bank to another, collection and payments of bills, purchase and sale of foreign exchange, securities, locker facility etc.

Central bank

What is a central bank?

Ø The central bank is the apex body that controls, monitors, regulates the entire banking and monetary structure of a country.

Ø It acquires the top most position in the country for the banking system.

Ø There will only be one central bank in a country.

Ø Central bank does not directly deal with the public.

Ø Central bank in India is known as Reserve Bank of India; in UK it’s known as Bank of England; in USA it’s known as Federal Reserve System.

Functions of a central bank

1)    Currency authority: - central bank of a country has the sole authority for the issue of currency in a country. Central bank is obliged to back up the currency printed with assets to maintain the public confidence in the paper currency.

n Advantages of sole authority of currency printing in a country:-

-         It leads to uniformity.

-         Central bank could influence money supply and control the market.

-         Ensures public faith in the currency.

2)    Banker to the government.

n The central bank acts as a banker, agent and a financial advisor to the government.

n The bank gives advice to the government on the financial matters related and within the country.

n The central bank maintains an account for the government and pays its debt and receives payments on the behalf of the government.

n The central bank also lends to the government by borrowing treasury bills from the government.

3)    Bankers bank and supervisor.

The central bank supervises all the commercial banks in a country and also lends money to the commercial banks.

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