Commercial bank - SS2 Commerce Lesson Note

A commercial bank is a type of financial institution that primarily serves businesses and corporations. Its main function is to provide various banking services to help these entities manage their finances and meet their financial needs.

Functions of Commercial Banks:

Accepting Deposits: Commercial banks accept deposits from individuals and businesses. These deposits can be in the form of savings accounts, current accounts, fixed deposits, or other types of deposit accounts. Customers deposit their money into these accounts, and the bank keeps it safe while also paying them a certain amount of interest on their deposits.

Providing Loans and Credit: One of the essential functions of commercial banks is to provide loans and credit facilities to individuals and businesses. Banks offer different types of loans, such as personal loans, business loans, mortgages, and vehicle loans. These loans enable borrowers to access funds for various purposes, such as starting a business, buying a house, or financing their education.

Facilitating Payments and Transfers: Commercial banks facilitate payment and transfer services. They provide services such as issuing checks, debit cards, and credit cards, which allow customers to make purchases or payments conveniently. Banks also enable electronic fund transfers, allowing customers to transfer money to other accounts or make online payments.

Offering Overdraft Facilities: Commercial banks offer overdraft facilities, which allow customers to withdraw more money from their accounts than they currently have. It provides a temporary extension of credit, allowing customers to make payments or cover expenses even when their account balance is insufficient. Overdrafts are typically subject to certain limits and interest charges.

Loans:

Loans are a financial arrangement where a lender, such as a commercial bank, provides a specific amount of money to a borrower. The borrower agrees to repay the loan amount over a specified period, usually with added interest. Loans can be used for various purposes, such as purchasing a home, financing a vehicle, or funding a business venture. Borrowers typically make regular installment payments to repay the loan, including both principal (the loan amount) and interest.

Overdrafts:

An overdraft is a financial facility provided by a bank that allows a customer to withdraw more money from their account than the available balance. It means spending or withdrawing more money than what is currently in the account. Overdrafts are useful when there is a temporary shortage of funds, allowing customers to cover expenses until they have sufficient funds. However, overdrafts often come with interest charges and may have certain limits or fees associated with them.