Meaning of Commercial Bank
The commercial bank is the oldest form of bank. There is considerable change in the original form of commercial bank. In general, bank means the commercial bank. Hence, the definitions of bank are also equally applicable to commercial banks. Hence, only two definitions have been presented here.
According to Prof. Kinley “Bank is an establishment which makes to individuals such advances of money or other means of payments as may be required and safely made and to which individuals entrust money or means of payment not required by them for use“.
According to the World Bank, “Banks are financial institutions that accept funds in the form of deposits repayable on demand or in short notice“.
Hence, the banks that collect deposits and advance loans are called commercial banks. The profit maximization is the main objective of this bank.
In the present context, the term commercial bank itself is a misnomer. It does not separate banks from other financial institutions. This name was appropriate at the time when the banks used to grant the ‘commercial loans’ to the traders for production, transport and storage of commodities. They did not provide loans. According to Wolfgang Stutzel “The relationship of commercial bank with medium and long-term loans is like the relationship of a virgin with a baby. As a virgin ceases to be virgin after given birth to a baby, so is the commercial bank ceases to be a commercial bank after it starts to provide medium and long-term loans“.
The reasons for the inappropriateness of the word ‘commercial bank‘are:-
1. In present time, the commercial banks alone do not provide short-term credit to the business. Hence, this word does not clearly separate the bank from other financial institutions.
2. In present time, the commercial bank also provides long-term credit to business. This makes the word commercial bank inappropriate.
3. In present time, other financial institutions also collect deposits.
Due to these facts, it has become difficult to give the working definition of commercial bank. Nevertheless, the word ‘commercial bank’ is still widely used to separate a bank from other financial institutions. The commercial bank is a great institution that conducts the payment mechanism of a country. The individuals and institutions make payments to each other through the mechanism of commercial bank. The commercial bank plays a leading role in the smooth operation of an economy. It makes available all financial services to individuals and institutions. To conclude in the words of Dudley G. Luckett “From the view point of both the banker and public, the essence of the commercial bank can best be captured if it is thought of as a department store of financial services”.
Nepal Bank Ltd. is the first commercial bank of Nepal, which was established in 1994 B.S. It is a semi-government bank. The second commercial bank of Nepal is Rastriya Banijya Bank. It was established in 2022 B.S. as a fully government-owned bank. After restoration of multiparty democracy in the country, several joint venture banks were established. Now the total numbers of commercial banks has reached 17.
Functions of Commercial Bank with Reference to Commercial Banks in Nepal
The commercial bank plays an important role in the modern economy. The accepting of deposits from individuals and institutions and providing loans to the needy persons and businesses are its two important functions. Besides, it performs many other functions. On the one hand, it helps in capital formation by mobilizing savings. On the other hand it promotes trade and industries by providing loans.
The functions of commercial banks are as follows:-
- Primary Functions
The collection of deposits and granting of loans are the primary or main functions of commercial banks. The commercial bank collects deposits in different types of accounts and grants different forms of loans.
1. Accepting Deposits
The commercial banks accept deposits in different accounts. This is the first most important and oldest function of the commercial bank. The main forms of deposit accepted by banks are as follows:-
(a) Current or Demand Deposit
The men and the institutions needing cash frequently deposit their money in current account. The amount deposited in this account can be withdrawn by drawing cheque without prior information. Since the bank should keep all money in reserve and cannot make investment, no interest is offered in this account. The bank may instead, take incidental or bank charge for the management of money. The minimum amount to be deposited and maintained in this account is stipulated. The amount varies from bank to bank. If the minimum amount is not maintained, the bank charges some amount of fees. The pass book containing account and cheque book to withdraw money are issued to depositors.
(b) Saving Deposit
The low income people and those not needing to draw money frequently deposit their money in the saving account. The money deposited in this account can be withdrawn only once or twice in a week or only in stipulated amount. In this account as well, the minimum amount to be deposited and maintained are stipulated. The amount varies from bank to bank. The pass book and cheque book’ are issued to depositors. However, at present, the joint venture banks issue financial statement on quarterly basis instead of issuing passbook in both the current and saving account.
If the customers draw more than stipulated amount without prior notice, the bank charges interest on the excess amount. The bank provides interest in this account since the bank can use money.
A variant of saving account is ‘Home Saving Account’. The purpose of this account is to encourage children and illiterate persons to save. These persons drop money in a box supplied by the bank. The bank occasionally opens the box and the amount is deposited in the person’s account. The interest is offered in this deposit as in saving account.
(c) Fixed or home Deposit
The amount deposited for a fixed period is called fixed or time deposit. As the name implies, the amount deposited cannot be withdraw before the fixed period. However, the depositor can take loan from the bank against the security of fixed deposit receipt. The interest rate is higher than offered by bank. Since the bank can utilize the money for a fixed period, high interest is offered in this account. The fixed deposit in Nepal is of 3 months, 6 months, 1 year and 2 years and above. No cheque book and passbook is issued in this account. Only fixed deposit receipt is given as an evidence of deposit.
Beside the above mentioned deposits, the banks have introduced many other types of deposits, like marriage account, education account, and cumulative account and so on.
2. Providing Loans
The second important function of the bank is to provide different types of loans. The bank earns profit by giving the amounts deposited with it in the form of loans. Since the bank creates credit, with its deposits, it is called manufacturer of credit. Likewise, since the bank earns profit by utilizing the deposits it is said “It is banker’s brain and other people’s money“.
Traditionally, a commercial bank can grant only short-term credit. But in present time, it also provides loan of medium and long-term nature to some extent to even industry and agriculture. The bank charges interest on loans which are usually higher than those offered on the deposits. Since the banks in Nepal are how free to fix interest rates, the rate of interest on both deposits and loans varies from bank to bank.
The main forms of loan provided by the bank are as follows:-
(a) Loans and Advances
The loans and advances are provided by the bank to individuals and institutions for various purposes. The bank provides loans only against the securities like gold, silver, government and non-government securities which are easily marketable, stable in value and liquid. Some banks offer the personal loans without security on the basis of honesty and prestige of the customers. The bank charges interest on full amount of the loan. The loans provided against the export bills are called advances.
The banks grant overdraft facilities to the honest customers. In this provision, the customer can withdraw the amount more than deposited in his account. But the limit and period of overdraft is stipulated earlier. The borrowers need to pay interest only on the amount actually drawn. Generally, the bank charges more interest on it than in ordinary loans. The bank may demand security in it as in ordinary loan.
(c) Cash Credit
The practice of cash credit was originated in Scotland. The importance of cash credit to Scotland was shown by H.D. Macleod in these words “Cash credit is to Scotland what the river Nile is to Egypt, a fertilizer”.
The cash credit is not based on personal security. It is provided against the collateral of shares, debentures, cotton, Jute, rice etc. The borrower needs to pay interest only on the actual amount taken as in overdraft. There is only one difference between cash credit and overdraft. In overdraft, more amount can be withdrawn from current account for a temporary period, whereas, a new account is opened in case of cash credit.
(d) Discounting of Bills
The bank provides loans by discounting bills such as the bill of exchange. In modern days, transactions are made with the help of credit. The sellers draw bill of exchange making borrower to pay after some fixed time. When the seller needs money he submits the bills in the bank. The bank discounts the rate of interest from the face value of the bill and allows drawing the remaining amount by cheque. This is called discounting of bills. After the maturity of the bills, the bank receives full payment of the bill. The commercial bank can make the bills rediscounted by the central bank in case of the need of money. The bill has the guarantee of both drawer and drawee. Hence, the loans against bills are regarded as safe as well as liquid.
Banks also invest in shares and debentures of companies. Nepalese banks have invested on shares and debentures of Nepal Insurance and Transport Company, National Insurance Company, Nepal Oil Corporation, Credit Guarantee Corporation, Agricultural Projects Services Centre, Rural Development banks and so on. Similarly, banks have invested on government securities and NRB bonds. The banks also have entered into consortium financing. Banks earn interest by investing government and non-government securities.
- Secondary Functions
The functions other than main functions performed by commercial bank are called secondary functions. There functions are also called agency functions. The bank charges minimum fees for undertaking these functions. The objective behind undertaking such functions is to attract or retain customers rather than to earn income.
The secondary functions are as follows:-
4. Economic Information and Statistics
A separate department of research and statistics can be found in every bank. This department makes available the local and foreign information to the businessmen. The bank publishes monthly and annual bulletins giving information about the situation of trade, industry, rate of interest etc.
5. Work as Referee
The bank also works as the referee of the customers. The information on economic condition of other persons or institutions may be taken from the bank. But due to the need of maintaining secrecy, such information is supplied only on the consent of the concerned party. The bank knows well about the honesty and reliability of the costumers. Hence, it is easier to make contract by taking secret information from the bank.
6. Lesson of Moral Virtue
The moral virtues like honesty, utmost good faith, soundness, reliability etc. can be learnt from banking transactions. These are useful in everyday life. The people of the country learn moral virtue. It moulds the character of the people.
The functions of a commercial bank have been presented in a chart below.