A commercial bank is a particular kind of financial organization that offers services like deposit acceptance, business lending, and basic investment products.
The term "commercial bank" can also refer to a bank, or a section of a big bank, that focuses more on deposit and loan services offered to corporations or large/middle-sized businesses than to individual customers or small businesses. This is also known as merchant banking or merchant banks.
World Bank: Banks are financial institutions that accept funds in the form of deposits repayable on demand or in short notice.
"Bank" means a corporate body incorporated to carry on Banking and financial transactions as referred to in Sub-Section (1) of Section 49 and the word also includes a branch office or other office of a foreign bank located in Nepal, a branch office or other office opened outside Nepal by a bank incorporated in Nepal and an infrastructure development bank to carry out functions referred to in sub-section (5) of section 49. –BAFIA.
Commercial banks are a part of the organized money market; they mobilize savings in urban and rural regions and make them accessible to large and small industrial and trading units, mostly for the need for working capital. Commercial banks obtain money from the group of spending, surplus units and distribute it to other, deficit units. They both have assets and liabilities. Their obligations consist of various sorts of deposits, borrowings, payable bills, and other counter items. Additionally, banks have some assets. These include cash, money available on demand or short notice, investments, and other forms of bank credit.
This category includes the banks that have a minimum paid-up capital of $8 billion as well as the authorization to conduct business throughout the nation. Class A financial institutions in Nepal include Bank of Kathmandu Ltd., Investment Bank Ltd., Kumari Bank, etc.
Role and Functions of commercial banks
Commercial banks function as go-betweens for people who need money and those who have extra. The primary duties of all commercial banks are to accept deposits and provide loans. In a nutshell, they lend to borrow. They labor for financial gain. The following is a discussion of the primary duties of commercial banks:
1. Accepting Deposits: By accepting deposits in the form of idle savings, banks draw in customers. Any of the following deposit types could make up these deposits.
Current account/ Demand deposits: Demand deposits and current accounts are immediately repayable without prior warning. No interest is given on this account since the bank is required to hold all of the money in reserve and is unable to invest it. On the other side, the management of the money comes with a little commission. Nevertheless, those who maintain substantial balances may occasionally receive a little interest payment.
Savings account: Depositors in this account receive a certain percentage interest. To withdraw money, check or ATM machines are available. Only the predetermined amount may be withdrawn by depositors, and prior notice of large withdrawals must be given to the bank.
Fixed/Time Account: Typically, deposits range from three months to five years. Only after the deposit's maturity time has passed may it be removed. The interest rate on this account is higher.
2. Advancing loans and Advances: Commercial banks only lend their depositors' money for brief periods of time. But at the moment, it also offers certain medium- and long-term loans. Any one of the following approaches can be used by banks to advance loans:
Overdraft: Commercial banks offer their clients the option of using an overdraft, which allows them to withdraw more money than they have deposited. However, they must pay interest on the additional sum, which must be paid back quickly.
By creating a deposit: In this sort of loan, banks advance loans to borrowers in exchange for their current assets, such as bonds, stocks, and debt obligations, or their fixed assets, such as gold, silver, real estate, and houses.
Bill discounting: It is an additional method of money lending. The bank buys discounted bills from bill brokers. These bills offer very liquid assets that are simple to convert into cash. After removing the discount (interest) from the bill's face value, banks promptly hand over cash in exchange for it.
Remitting funds: Commercial banks transfer money on behalf of their clients via bank drafts.
3. Agency role: The commercial bank serves as the clients' agent. Rent, dividends, interest on shares, and debentures are all paid to the bank. On behalf of its customers, it also collects and pays insurance premiums, income taxes, power fees, etc.
4. Credit creation: A commercial bank's exclusive duty. When a bank offers a consumer a loan, it merely deposits the appropriate money and does not open an account in the borrower's name. Credit creation, which raises the money supply in an economy, is the process of creating such deposits.
5. Issue credit instruments: The bank provides its clients with master cards, traveler's checks, drafts, and letters of credit.
6. General utility services: Modern banks offer a wide range of general utility services in addition to agency services, some of which are listed below:
- Buying and selling assets
- Offering useful consulting services to customers
- Converting customers' foreign currencies.
- Offering different economic and statistical data.
- Assists the central bank in putting various monetary and fiscal policies into action.
