Commercial Banks and their Function

Bank: 

Since a modern bank performs various functions, it is difficult to give an accurate definition of it. A bank is an institution that deals with money. It accepts deposits from the public and gives loans. Broadly speaking, a bank draws surplus money from the people who are not using it at the time and lend it to those who are in a position to use it for productive purposes. The distinguishing feature of a bank is its use of credit instruments, cheques, drafts, bills of exchange etc. No other financial institution can use these credit instruments.  

Commercial Banks: 

Commercial banks are joint-stock companies dealing in money and credit. A commercial bank may be defined as a financial institution that accepts chequable deposits of money from the public and uses it for lending. The most distinctive function of a commercial bank is that it accepts deposits called demand deposits from the public, which are chequable, i.e., withdrawal through cheques. Acceptance of chequable deposits alone, however, does not give it the status of a bank. Its essential function is to make use of these deposits for lending to others. Commercial banks usually give short-term loans and advances.

Function of a commercial bank: 

Some basic functions performed by the commercial banks are discussed below:-
I. Primary Functions: Commercial Banks performs various primary functions some of them are given below:-
a) Accepting Deposits: This is the oldest function of Commercial banks. It accepts various types of deposits from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period.
b) Making Loan and Advances: Commercial banks provide loans and advances of various forms. It includes an overdraft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.
c) Credit creation: It is the most significant function of commercial banks. Credit creation refers to the ability of a bank to expand deposits as a multiple of its reserves. A bank keeps a certain proportion of its deposits as a minimum reserve for meeting the depositors' demand and lends out the remaining excess reserve to earn income. The bank loan is not paid directly to the borrower but is only credited into their account. Every bank loan creates an equivalent deposit in the bank. Thus a credit is created by expanding deposits as a multiple of its reserves.
II. Secondary Functions: The secondary functions of commercial banks can be divided into agency functions and utility functions.
1. Agency Functions: Various agency functions of commercial banks are
a)To collect and clear cheques, dividends and interest warrants.
b)To make payment of rent, insurance premium, etc.
c)To deal in foreign exchange transactions.
d)To purchase and sell securities. 
e)To act as trusty, attorney, correspondent and executor. 
f)To accept tax proceeds and tax returns.
2. General Utility Functions: The general utility functions of the commercial banks includes:
a)To provide safety locker facilities to customers.
b)To provide a money transfer facility.
c)To issue travellers’ cheques.
d)To accept various bills for payment e.g. phone bills, gas bills, water bills, etc.
e)To provide merchant banking facility.
f)To provide various cards such as credit cards, debit cards, smart cards, etc. 

Additional Notes: 

Credit instrument: A credit instrument is a term used in the banking and finance world to describe any agreed-upon item that can be used as currency. Credit instruments are ever popular due to their convenience by not having you carry around piles of cash everywhere you go. Any item can serve as a credit instrument, so long as both parties (the borrower and the lender) have agreed on the use of that instrument. The instrument is basically a promise by the debtor that they will pay back the debtor.

A simpler example of a credit instrument is the cheque. When one person gives another a cheque, they are basically saying that this piece of paper proves I owe you a certain amount of cash, and if you take it to the bank, they will gladly pay you on my behalf. Even simpler than the cheque is the promissory note, which is also very similar in nature. Banks also issue credit instruments in the form of credit cards. Customers, in turn, use these credit instruments to make purchases 'on credit' and pay the amount 'borrowed' back to the bank either at the end of the month, quarter, or whatever term has been agreed upon.
Cheques: A cheque or check is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, the drawer, has a transaction banking account where their money is held. The drawer writes the various details, including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated.
Bank Draft: A banker's draft is a cheque provided to a customer of a bank or acquired from a bank for remittance purposes that are drawn by the bank and drawn on another bank or payable through or at a bank. A normal cheque represents an instruction to transfer a sum of money from the drawer's account to the payee's account.

Bills of exchange: A written order to a person requiring them to make a specified payment to the signatory or to a named payee Eg., a promissory note. Bills of exchange are negotiable instruments that contain an order to pay a certain amount to a particular person within a stipulated period of time. Bill of exchange is issued by the creditor to the debtor when the debtor owes money for goods or services.

Joint-stock company: A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders can transfer their shares to others without any effects to the continued existence of the company. In modern-day corporate law, the existence of a joint-stock company is often synonymous with incorporation and limited liability. Therefore, joint-stock companies are commonly known as corporations or limited companies.
Credit: Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), but promises either to repay or return those resources (or other materials of equal value) at a later date. In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people. The resources provided may be financial (e.g. granting a loan) or consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower.
Chequable deposits: Any demand deposit account against which checks or drafts of any kind may be written.
Travellers’ cheque: A traveller's cheque is a medium of exchange that can be used in place of hard currency. They can be denominated in one of a number of major world currencies and are preprinted, fixed-amount cheques designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege. They were generally used by people on vacation in foreign countries instead of cash, as many businesses used to accept traveller's cheques as currency.
Merchant banking facility: In India merchant banking services were started only in 1967 by National Grindlays Bank followed by Citi Bank in 1970. The State Bank of India was the first Indian Commercial Bank had set up a separate Merchant Banking Division in 1972. In India, merchant banks have been primarily operating as issue houses than full-fledged merchant banks as in other countries. A merchant bank may be defined as an institution or an organisation that provides a number of services including management of securities issues, portfolio services, underwriting of capital issues, insurance, credit syndication, financial advice, project counselling etc. There is a distinction between a commercial bank and a merchant bank. The merchant banks mainly offer financial services for a fee. while commercial banks accept deposits and grant loans. The merchant banks do not act as repositories for the savings of the individuals.