Commercial Bank

Subject: Accountancy

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Overview

A commercial bank is regarded as the eldest financial institution in the history of banking. The bank, which is established to promote the trade and industry in the country, is called a commercial bank. This note has information about commercial bank and its functions.
Commercial Bank
Rastriya Banijya Bank
Rastriya Banijya Bank

A commercial bank is regarded as the eldest financial institution in the history of banking. Commercial bank is the type of bank which is established to promote the trade and industry in the country. Commercial bank refers to the bank which accepts depoysits of the public and organization and grants loan to them against securities and provide financial services such as agency service, transfer of money, exchanging foreign currency, issuing capital, etc. They carry out agency functions for the promotion of trade and industry and deal with the foreign currency exchange. The major objective of the commercial bank is to earn a profit. The difference between the rate of interest allowed on deposits and charged on loans granted is the main source of earning of commercial banks.

Nepal Bank Limited is the first commercial bank of Nepal. It was established on 1991 B.S. In 2022 BS, another commercial bank Rastriya Banijya Bank was established.

The following are the important definitions of the commercial bank:

“Commercial banks are those banks which are established under this act to perform commercial functions except those which are established for specific purposes like development, cooperatives etc.” - Commercial Bank Act, 2031

“A bank is an institution which deals in money and credit.” – ML Seth

Functions of Commercial Banks

The following are the important functions of the commercial banks:

  1. Accepting deposits
    Commercial banks accept a deposit of money made by different persons and institutions mainly under three accounts. It operates current account, saving account and fixed deposit account.
    a) Current account:The account where the customers can withdraw and deposit money at any time according to the requirement is called current account. b) Saving account:The account having some features of current account as well as fixed deposit account is called saving account. In this account, the customers can withdraw the amount from saving account through issuing cheque. c) Fixed deposit account: The account where the amount is deposited in a bank fro fixed period is known as fixed deposit. The amount deposited cannot be withdrawn before the expiry of the time period.
  2. Granting loan
    A commercial bank provides a loan to persons and institution productive purposes against the security of patents, shares, debentures, gold, silver and other fixed properties. It provides a short-term, mid-term and long-term loan for which it charges interest at a certain rate greater than that given on the client's deposit.

  3. Serving with agency functions
    A commercial bank performs a number of agency services like payment to the creditors, water, and electricity bills, subscriptions, insurance premium, etc. and collection from debtors receiving dividends, interest and commission, etc. on behalf of the clients as per outstanding instructions. It charges a certain commission for serving with such agency functions.

  4. Exchanging foreign currencies
    Exchanging Foreign Currency
    Exchanging Foreign Currency

    Various business persons frequently demand foreign currencies to conduct their foreign trade. General individuals may also need foreign currencies for their foreign tour and study programs. A commercial bank provides the necessary foreign currencies on the permission of Nepal Rastra Bank.

  5. Transfer of money
    Commercial banks transfer money from one place/person to another in a fast and safe means of a different instrument of payment. Telegraphic transfer, travelers’ cheque, credit cards, bank drafts, electronic transfer, etc. are the different instruments used by the banks to transfer money.

  6. Issuing capital
    Commercial banks also help trading and industrial companies by issuing or providing capital through the sale of shares, debentures, etc. by motivating the investors. They also provide finance or capital in terms of investment or lending, which is the base for companies to conduct their activities smoothly onward and adding new programmes and projects.

  7. Creates credit
    It is the most important function of the commercial bank. It can grant more amount of loan than the deposits it gets. The process of granting more amount of loan by the bank than the deposits it has on a given point of time is known as credit function of the commercial bank.

  8. Collects credit instrument
    The commercial bank accepts credit instruments such as cheques, bill of exchange and bank drafts of its customer and makes payment against them. It facilitates the customers in settling accounts.

  9. Opens letter of credit (L.C.)
    Commercial banks provide a letter of credit facility to their clients. LC is a kind of guarantee given to the supplier or exporter by the purchaser/importer as a deposit to provide such as guarantee letter. This promotes the foreign trade dealing. Similarly, banks issue credit cards to their clients at their request and assure the seller for the payment of what is purchased by the customers.

  10. Other functions
    Commercial banks manage to keep gold, silver and other valuable property safely, avail money by purchasing/accepting bills (especially of 90 days terms) and provide commercial services like financing for transportation carriage, storage etc. These banks also activate all the economic sectors by collecting savings and mobilizing capital for strengthening the national economy.
Things to remember
  • A commercial bank is regarded as the eldest financial institution in the history of banking.
  • The bank, which is established to promote the trade and industry in the country, is called a commercial bank. 
  • Commercial banks provide a letter of credit facility to their clients. 
  • Commercial banks also help trading and industrial companies by issuing or providing capital through the sale of shares, debentures, etc. by motivating the investors. 
  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.
Questions and Answers

Commercial bank refers to the bank which accepts deposits of the public and organization and grants loan to them against securities and provide financial services such as agency service, transfer of money, exchanging foreign currency, issuing capital, etc.

A commercial bank is regarded as the eldest financial institution in the history of banking. Commercial bank refers to the bank which accepts deposits of the public and organization and grants loan to them against securities and provide financial services such as agency service, transfer of money, exchanging foreign currency, issuing capital, etc.

According to Commercial Bank Act, 2031,“Commercial banks are those banks which are established under this act to perform commercial functions except those which are established for specific purposes like development, cooperatives etc.”

From the above definition, it is clear that the commercial bank is the bank, which is established to promote the trade and industry in the country.They carry out agency functions for the promotion of trade and industry and deal with the foreign currency exchange. The major objective of the commercial bank is to earn a profit.

The following are the major functions of commercial bank:

  1. Accepting deposits
    Commercial banks accept a deposit of money made by different persons and institutions mainly under three accounts viz. current account, saving account and fixed deposit account.

  2. Granting loan
    A commercial bank provides a loan to persons and institution productive purposes against the security of patents, shares, debentures, gold, silver and other fixed properties. It provides short-term, mid-term and long-term loan for which it charges interest at a certain rate greater than that given on the client's deposit.

  3. Serving with agency functions:
    A commercial bank performs a number of agency services like payment to the creditors, water, and electricity bills, subscriptions, insurance premium, etc. and collection from debtors receiving dividends, interest and commission, etc. on behalf of the clients as per outstanding instructions. It charges a certain commission for serving with such agency functions.

  4. Exchanging foreign currencies
    Various business persons frequently demand foreign currencies to conduct their foreign trade. General individuals may also need foreign currencies for their foreign tour and study programs. A commercial bank provides the necessary foreign currencies on the permission of Nepal Rastra Bank.

  5. Transfer of money
    Commercial banks transfer money from one place/person to another in a fast and safe means of a different instrument of payment. Telegraphic transfer, travelers’ cheque, credit cards, bank drafts, electronic transfer, etc. are the different instruments used by the banks to transfer money.

  6. Issuing capital:
    Commercial banks also help trading and industrial companies by issuing or providing capital through the sale of shares, debentures, etc. by motivating the investors. They also provide finance or capital in terms of investment or lending, which is the base for companies to conduct their activities smoothly onward and adding new programmes and projects.

  7. Creates credit:
    It is the most important function of the commercial bank. It can grant more amount of loan than the deposits it gets. The process of granting more amount of loan by the bank than the deposits it has on a given point of time is known as credit function of the commercial bank.

  8. Collects credit instrument
    The commercial bank accepts credit instruments such as cheques, bill of exchange and bank drafts of its customer and makes pyment against them. It facilitates the customers in settling accounts.

  9. Opens letter of credit (L.C.):
    Commercial banks provide a letter of credit facility to their clients. LC is a kind of guarantee given to the supplier or exporter by the purchaser/importer as a deposit to provide such as guarantee letter. This promotes the foreign trade dealing. Similarly, banks issue credit cards to their clients at their request and assure the seller for the payment of what is purchased by the customers.

  10. Other functions:
    Commercial banks manage to keep gold, silver and other valuable property safely, avail money by purchasing/accepting bills (especially of 90 days terms) and provide commercial services like financing for transportation carriage, storage, etc. These banks also activate all the economic sectors by collecting savings and mobilizing capital for strengthening the national economy.

The differences between central bank and commercial bank are as follows:

Central Bank

Commercial Bank

Central bank is the bank of government.

Commercial bank is the bank of general people.

Central bank controls the monetary systems and banking structure of the country.

Commercial bank accept deposits and grants loan to individuals and organizations to promote trade and industry in the country.

Central bank is established for performing financial transactions on behalf of the government and developing sound banking system in the country.

Commercial bank is established for providing banking facilities to individuals and organizations and promoting trade and industry in the country.

Central bank is owned by the government.

Commercial bank is owned either by government or by private sector.

Central bank issues metal coins and paper notes.

Commercial bank does not issue metal coins and paper notes.

Central bank controls credit.

Commercial bank creates credit.

Central bank is found in a single number in the country.

Commercial bank is found in many in number in the country.

Central bank is the agent bank of the government.

Commercial bank is the agent bank of individuals and organizations.

Central bank grants loan to the government and commercial banks.

Commercial bank grants loan to the individuals and organizations.

Central bank has the monopoly right to control foreign currencies.

Commercial bank has the right to exchange foreign currencies.

Central bank is established under Nepal Rastra Bank Act.

Commercial bank is established under Commercial Bank Act.

Creation of credit is the process of providing loan by commercial bank to their customers.

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