Question

What are the functions of a commercial bank? How do its functions differ from those of a savings bank?

Short answer

Commercial banks provide various services to individuals and businesses, including accepting deposits, granting loans, facilitating fund transfers, and offering additional services like foreign exchange. On the other hand, savings banks focus on promoting savings by accepting deposits, offering interest on deposits, and providing limited withdrawal services. The primary difference between them lies in their purpose and the range of services they offer, with commercial banks catering to a wider variety of customers and offering a broader scope of services compared to savings banks, which primarily focus on individual customers and basic banking functions.

Step-by-step solution

Identify the functions of a commercial bank

A commercial bank is a financial institution that provides various services to individuals and businesses. Some of its primary functions are: 1. Accepting deposits (such as current, savings, and fixed deposits) from the public. 2. Granting loans and advances to borrowers (such as personal, business, and mortgage loans). 3. Facilitating the transfer of funds (through instruments like cheques and electronic funds transfers). 4. Providing additional services (such as foreign exchange, cash management, and safe deposit lockers).

Identify the functions of a savings bank

A savings bank is a type of bank that specializes in accepting savings deposits and offering interest on these deposits. Its main functions are: 1. Encouraging savings by accepting small and regular deposits from the public. 2. Paying interest on these deposits, thereby providing an incentive for individuals to save. 3. Offering limited withdrawal services, often via a passbook or ATM card.

Compare the functions of commercial and savings banks

Having identified the functions of both types of banks, we can now analyze their differences: 1. The primary function of a commercial bank is to provide a variety of services, such as loans and money transfers, whereas the primary function of a savings bank is to encourage individuals to save by accepting deposits and offering interest. 2. Commercial banks offer loans and credit facilities to their customers, whereas savings banks do not typically engage in lending activities. 3. Commercial banks cater to a wider variety of customers, including businesses and individuals, while savings banks primarily focus on individual customers. 4. Commercial banks tend to provide a broader range of services and facilities, such as foreign exchange and cash management, whereas savings banks focus on more basic banking functions. In conclusion, the functions of commercial banks and savings banks differ mainly in their purpose and the types of services they offer. Commercial banks offer a wide variety of services to businesses and individuals, while savings banks primarily aim to promote savings among individuals by offering interest on deposits and limited withdrawal services.

Key concepts

Accepting Deposits

One of the primary functions of commercial banks is accepting deposits, which form the basis of their lending capacity. Banks accept various types of deposits, such as current accounts, which are used for daily business transactions and allow frequent deposits and withdrawals; savings accounts, which encourage individuals to save money by offering interest rates; and fixed or term deposits, where money is locked away for a certain period at a higher interest rate.

By gathering funds from the public, banks can use these deposits to generate loans, and the difference between the interest they pay on deposits and the interest they charge on loans is a primary source of their income. Understanding this concept is key for students to grasp the foundational role banks play in the economy as intermediaries between savers and borrowers.

Granting Loans

Granting loans is a fundamental activity for commercial banks, as it directly impacts economic growth. Banks offer various types of loans including personal loans for individual needs, business loans for enterprises, and mortgages for home buyers. To grant a loan, banks assess the borrower's creditworthiness, set appropriate interest rates, and determine repayment schedules.

This process is critical in circulating money in the economy and involves careful risk management by banks. Students must understand that while loans represent a risk for banks, they also create opportunities for individuals and businesses to invest, grow, and ultimately contribute to the national economy.

Transfer of Funds

Banks facilitate the transfer of funds both domestically and internationally. This includes services like issuing cheques, enabling online banking transactions, and providing wire transfers. The ability to efficiently and safely transfer money underpins personal finance management, business operations, and even global trade.

Students should be aware of the security measures and electronic infrastructure that make these transfers possible, as well as the legal frameworks banks adhere to, such as anti-money laundering regulations. The smooth functioning of fund transfers is crucial in a globalized economy, allowing for quick settlement of transactions.

Savings Bank Functions

Contrasting with commercial banks, savings banks have a more specific focus—encouraging the public to save. They accept savings deposits and pay interest on these deposited funds. While they may allow limited withdrawal services, their primary aim is not to facilitate daily transactions but to promote a saving habit among customers.

Offering passbook or ATM services for account access, savings banks seek to serve individual depositors rather than businesses. Students will benefit from appreciating the role of savings banks in fostering financial security and helping to pool community resources that can be used for loans in a limited capacity.

Bank Services Comparison

Understanding the differences between services provided by commercial and savings banks is critical for anyone engaging with the banking sector. Commercial banks are multipurpose entities offering a wide range of services such as loans, transaction processing, and business services. They cater to a diverse clientele, from individuals to large corporations.

In contrast, savings banks focus on individual savers, offer interest on deposits, and provide limited transaction services. Recognizing these distinctions helps differentiate the banking choices available and grounds students' understanding of the financial services industry and its various components.