Commercial Banks: Objectives, Functions, and Challenges

Commercial Banks are one of the categories of the financial institutions. It is a profit-based financial institution that offers loans and offers deposits from individuals or institutions and offers various financial services.

Commercial Banks play a very prominent role in the financial development of the country. And also, if you want to have an upper hand in your business use Zintego

Commercial Banks in India

Indian Banking Sem is categorized into commercial banks, co-operative banks and regional rural banks. Commercial banks are further categorized into Public Sector Banks (PSBs), Private Sector Banks and Foreign Banks.

SectorNumber of Banks
Private Sector Banks22
Public Sector Banks17
Foreign Banks46

A. Private Sector Banks

Private Sector Bank is a type of commercial bank where the ownership is private to individuals and businesses and they own a majority of the share capital. All private banks are considered as limited liability businesses.

Example: Axis Bank Limited, Bandhan Bank Limited, HDFC Bank Limited, ICICI Bank Limited are some of the Indian Private Sector banks.

B. Public Sector Banks

Public Sector Banks is another type of commercial bank where the government holds a significant stake.

Example:Allahabad Bank, Punjab National Bank, State Bank of India (SBI) are some of the  state owned banks.

C. Foreign Banks

Foreign banks are those banks which are operating in foreign land through branches.

For Example: Australia and New Zealand Banking Group Ltd., National Australia Bank, AD Bank Limited, Mizuho Bank Ltd. are some of the foreign banks.

Function of Commercial Banks

Functions of Commercial banks can be categorized into two categories;

  1. Primary Functions

a.Accepting Deposits          

  Accepting deposits is the most important function of commercial banks. Banks act as the financial intermediaries which collect the surplus money from the individuals and firms.

  • Demand Deposits: Demand deposits are those deposits were deposited money can be withdrawn anytime by simple procedure.
  • Time Deposits: Time deposits are deposits for a certain period of time. In time deposits, the  rate of interest in time deposits is higher than demand deposits. This is also referred to as Fixed Deposit.

b. Lending Funds

     Lending is another important function of commercial banks. This function is the major source of revenue for the banks. The deposit from the individuals and firms are disbursed in the form of lending to the group who shortage fund.

c. Credit Creation

            Banks have a credit creation function where banks earn interest by allowing customers to withdraw the money from their account by paying for them with their own cheques. Here, lump sum funds are not given rather customers withdraw the money when needed.

2. Secondary Functions

a. Agent Function

Bank acts as an agent on the behalf of individuals or business firms in many cases. Bank represents its customers or stands as a guarantor in various operations. For acting as an agent, banks change service charge or commission from their clients. Some of the agent functions are:

  • Collection of Cheques, Dividend and Interests:

Banks collect cheques, bills of exchange, dividends, Interest etc. on the behalf of its customers. Bank also accepts standing instructions from the customers and makes arrangements to collect dividend, interests, pension, allowances, salaries etc. on the behalf of customers.

  • Conduct of Stock Exchange Transactions:

Banks act as intermediaries to conduct the purchasing and selling of stocks, bonds and other securities. All the transactions of primary and secondary markets are conducted via banks i.e. banks act as agents for both the individual customers as well as firms i.e. buyers and sellers.

  • Payment of Subscription, Rent, Insurance Premium, Salary Disbursement:

For the payment of subscriptions, rent, premiums and other services, customers allow banks to act on the behalf of them and debit the account with the amount. Banks make arrangements for customers to make certain periodical payments as well on the behalf of customers.

For such services, the bank charges a small amount in the form of commission or service change.

b. Foreign Exchange and International Trade Intermediaries:

It is mandatory for firms and organizations to conduct any international transaction through banks. They are the exchange counter for selling and purchasing foreign currencies.

International trade also highly depends on banks for operation from business financing to payment. Banks act as the guarantor for businesses in international trade. Letter of Credit for international trade is conducted via banks.

c. General Utility Functions:

  • Locker Facility

Banks provide locker facilities to its customers where customers can keep their jewelry and other important documents. For providing this service, banks charge fees based on the period of uses.

  • Letter of Credit

Letter of Credit is an important component in business and it is also important in international operation. It is a document issued by a bank which guarantees payment of the transactions.

  • Traveller’s Cheque

The traveller’s cheque is a medium of exchange that is used in place of hard currency which is issued by a bank. The bearer of the traveller’s cheque can exchange the cheque for the liquid currency.

  • Letter of Reference

Banks provide information about the financial position of the customers and clients when needed. 

d. Electronic Banking Function

Along with all other functions, the e-banking function is contemporary. Banks are providing the services like debit and credit card facilities, mobile and internet banking which has become an integral function of commercial banks.

Objectives of Commercial Banks

 The primary objective of commercial banks is Profit Maximization which is attained by offering a wide variety of services to individual and business customers.

Roles of Commercial Banks in Economic Development

Commercial banks hold an important position in the economic development of the company. They are one of the most prominent institutions that play a decisive role in the development of individuals and businesses.. In functionality, commercial banks are considered as the custodian of the wealth of the country. Some of the prominent roles of commercial banks are :

  1. Capital Formation
  2. Credit Creation
  3. Channelizing fund and Encouraging Investment
  4. Bank rate policy
  5. Finance to Government
  6. Banks as Employers
  7. Banks as Entrepreneurs


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