Credit creation is the most significant function of the commercial banks. Commercial banks accept deposits and lend loans and advances. In this process they create two types of deposits, namely primary deposits and derivative or active deposits. The former refers to the cash deposited by a customer in a bank or deposit a cheque with the bank for collection. The banker merely accepts cash am converts it into a deposit. Hence, this is merely a passive role performed by the banks. These primary deposits do not add to the money stock in the economy. From their experience and observation the banks know that not all the customers will withdraw their deposits on any single day.… Read the rest
Bank Management Concepts
Bank Draft – Meaning and Definition
A bank draft is an order from one branch to another branch of the same bank to pay a specified sum of money to a person named therein or to his order. A draft is always payable on demand. Banks issue drafts at the request of the customers on their branches at the place of destination for remitting money from one place to another place. Any person who wants to remit money has to purchase a draft from the bank by paying the amount in advance to the bank. The purchaser of the draft then sends the draft to the payee’s place of residence by post or courier for the purpose of encashment at the drawee branch of the bank.… Read the rest
Different Modes of Granting Loans by Commercial Banks
The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits.The loans are particularly granted to businessmen and members of the public against personal security, gold and silver and other movable and immovable assets. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rates of interest allowed on deposits and the rate charged on the loans is the main source of a commercial banks income. … Read the rest
Different Modes of Acceptance of Deposits by Commercial Banks
The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. The following types of deposits are usually received by banks:
- Current Deposit: Also called ‘demand deposit’, current deposit can be withdrawn by the depositor at any time by cheques.
Functions of Commercial Banks
The main functions of commercial banks are accepting deposits from the public and advancing them loans. However, besides these functions there are many other functions which these banks perform.
Paul Samuelson has defined the functions of the Commercial bank in the following words: “The Primary economic function of a commercial bank is to receive demand deposits and a honor cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists.”
The major functions performed by the commercial banks are:
1. Accepting DepositsThis is one of the primary functions of commercial banks. The commercial banks accept different types of deposits, the deposits may be broadly classified as demand deposits and time deposits. … Read the rest
Liquidity Risk Management in Banks
While introducing the concept of Asset-Liability Management (ALM), it has been mentioned that the object of any ALM policy is twofold — ensuring profitability and liquidity. Working towards this end, the bank generally maintains profitability/spreads by borrowing short (lower costs) and lending long (higher yields). Though this process of price matching can be done well within the risk/exposure levels set for rate fluctuations it may, however, place the bank in a potentially illiquid position.
Efficient matching of prices to manage the interest rate risk does not suffice to meet the ALM objective. Price matching should be coupled with proper maturity matching.… Read the rest