Q. What is a commercial bank?

A. A commercial bank is a financial institution which accepts deposits, makes business loans, and offers related services. Commercial banking is usually associated with business banking. These banks offer services to individuals, businesses, and not-for-profit organizations.

Q. What are the main functions of the commercial bank?

The main functions of the commercial bank include accepting deposits and giving loans and advances to the customers. Accepting deposits is the most important function of the commercial or for that matter any other bank. There is no other way the banks can do their business. They, therefore, mobilize deposits from the general public and give them interest on the deposits. The public, in turn, benefits in two ways. They keep their money secure from theft and they earn interest as well. A higher rate of interest motivates the public to invest more with the banks. These banks offer a wide range of services including personal finance, business finance, wealth management and commercial services.

Q. How are the deposits accepted?

A. The banks receive deposits in five different modes:

• Current deposit
• Saving deposit
• Fixed deposit
• Recurring deposit
• Miscellaneous deposits

 Each type of deposit has a different rate of interest.

The banks use the deposits to grant loans to the needy account holders including big business organizations. They charge higher rates of interest on loans than they give on deposits. This is done to cover the administrative costs as well as to make profits for the owners and shareholders of the banks.

Q. What is the difference between a loan and an advance?

A loan is granted for a specific time period or term. Although banks normally give short-term loans, long-term loans are also granted. The loan amount may either be drawn in smaller parts or installments as and when needed or the entire amount in one lump sum. Loans are normally granted by securing some assets or collaterals.

An advance is also a form of loan. It differs from the loan in respect of time period. While a loan may be granted for a long term, an advance is granted only for a short period of time. The objective of granting an advance is to meet the day-to-day requirements of the customers. The rates of interest on advances vary from bank to bank. Although the advance sanctioned may be large, the customers can draw as much as they require within the sanctioned limit and have to pay interest only on the amount withdrawn.