Lecture: 2 Banking & Financial Institutions By Dr. Nabonita Debnath, Assistant Professor,Deptt of Economics, Radhamadhab College, Silchar- 06

Commercial Bank and its functions Commercial bank is a bank or an institution which takes money from people and also gives money to the people whenever required. In other words, it is an institution which serves as medium of exchange for the people and whose main aim is profit maximization

Functions of Commercial Banks Accepting deposits- The most important function of commercial bank is to accept deposits from those people who want to save in banks with a particular rate of interest. Advancing loan-The second important function of commercial bank is to advance loan to the people. The commercial bank lends money to the needy borrowers after keeping a certain percentage of cash reserves at a low interest rate.

Credit creation-An unique function of commercial bank is to create credit. Credit creation is a natural outcome of the process of advancing loan as adopted by the bank. Locker system-Commercial bank provides locker facilities where the customers of commercial banks can keep their valuable things and documents.

Cheque facility-Commercial bank can provide money to its customers through cheques and drafts in place of cash which can be easily transferred from one place to another. Purchase and sale of securities-Commercial bank can undertake the purchase and sale of various securities like shares, bonds etc. on behalf of its customers with the help of brokers who help in this purchase and sale of securities.

Differences between central bank and commercial bank Central bank is the topmost monetary authority of a country and commercial bank is a constituent unit of the banking system of a country. The primary aim of central bank is to achieve the objectives of economic policy of government and maximize the public welfare but commercial bank has profit earning as their primary objective.

The central bank is generally a state-owned institution while commercial bank is normally privately owned institution. The central bank does not deal directly with public but commercial bank deals directly with the public.