Overview
Do you not understand the roles played by commercial banks? As long as you're nodding your head in agreement, you aren't alone. The issue is one that many students encounter. To learn more about the roles played by commercial banks, we conducted research and interviews with a few finance experts that give students solutions to their financial assessment questions throughout the globe. Our experts define a commercial bank and discuss its purposes in this article.
How do commercial banks operate?
Students must first comprehend what commercial banks are to move on to the subject of the fundamental functions of commercial banks.
A typical financial organisation that takes personal deposits is a commercial bank. Additionally, they provide loans for investment and consumption purposes so they may profit.
Commercial banks play a significant role in a nation's economy because they meet various industries' short- and medium-term financing needs.
Commercial banks are primarily profit-based organisations that offer services like loans, deposits, electronic transfers of funds, etc., to their customers.
The primary way that commercial banks conduct their business is by accepting public deposits and employing the money they receive for a variety of investment endeavours.
HSBC Holdings, NatWest Groups, Barclays, Lloyds Banking Group, and HSBC are some of the most prominent commercial banks in the UK.
Top 5 Roles Commercial Banks Play
1. Examining the mobilisation of savings
Banks collect people's savings through deposits. These deposits may be current, fixed, or savings deposits, among others. A deposit is unquestionably a liability because it is nothing more than a debt to the bank. If you have money in your current account, it is referred to as demand deposits or demand liabilities. Time deposits are used to describe funds in savings or fixed accounts. On-demand, users can take money out of their current account. However, there are limitations if you wish to take money out of fixed or savings accounts.
2. Access to financing
Banks lend money for various uses, including commercial and industrial ones. These loans may be provided in several methods, including cash credits, overdraft facilities, and the discounting of commercial documents. Commercial banks often restrict lending to short-term loans secured by readily available assets such as checks, gold, government promissory notes, etc. However, mortgage or industrial banks provide long-term loans using the security of commercial real estate, industrial assets, etc.
3. Making money
Banks provide a portion of the medium of exchange. Before this, private banks had the authority to print notes used as currency. But this ability has since been taken away in the majority of nations. But even so, a portion of the medium of exchange is provided by private banks.
They employ the ability to create deposits in this industry. After approving a loan, a bank may credit the funds to the customer's deposit account and demand that they write a check against it. To distinguish this form of deposit from one made in actual cash by the consumer, it is referred to as a "manufactured deposit." A bank may establish deposits within specific parameters without designating any particular funds specifically for the loan.
Some authorities consider a bank's capacity to establish claims against it in deposit accounts to be a necessary quality of banking organisations.
4. Economy development and expansion
You may find out how commercial banks contribute to a developing economy by studying it. Commercial banks are also a source of social control. But they always have as their primary goals the expansion and prosperity of the economy.
That is why: Commercial banks fund industrialists and farmers liberally; they build branches in villages and urban suburbs; they entice customers with alluring offers and high-interest rates; and
5. Subsidiary activities
Every commercial bank carries out several additional tasks on behalf of its customers.
Some of them include:
They function as agents when buying securities and shares.
Banks safeguard your belongings to keep you risk-free.
Banks help with money transfers, the collection of money, and the payment of unpaid invoices.
They serve as the executor, trustee, or administrator of a client's estate.
Banks file tax returns and request refunds, among other things.
They dispense debit/credit cards, traveller's checks, etc.
Final observations
You should now clearly understand what a commercial bank is and what its primary responsibilities are, according to LiveWebTutors' corporate finance assignment help experts. Commercial banks are essential to our daily lives in this sense.
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