Breaking Down the Functions of Commercial Banking: An Essential Guide

A world without commercial banking would be very bleak. Companies would grow at a slow pace or remain stagnant. Many start-ups would lack the capital to improve infrastructure or buy new equipment. And many entrepreneurs would be unable to get their ideas off the ground. Without proper funding, many business dreams would dissipate like smoke.

Thankfully, we live in a world where commercial banking exists, and has played a massive role in the growth of the Indian economy. They have collectively engineered India’s rapid development since independence, offering financial assistance and credit facilities to small and medium-sized ventures and industries. In 1969, 14 large commercial banks were nationalised by the government to offer better services to small-scale businesses and agricultural sectors.

Despite its historic past, commercial banks still hold a valued place in the 21st century. They have employed innovative and tech-savvy methods, adding convenience and security that heighten the customers’ banking experiences. There are many functions in commercial banking to ensure customers have their financial needs met. Let’s learn more about them.

Functions of Commercial Banking

A commercial bank operates on two simple functions — to borrow and to lend money. 

There are different services and facilities set up to help the banks optimise the funds received from the public. 

1. Taking deposits 

Every commercial bank get the funds through the deposit scheme. It is a vital part of how a commercial bank functions. They invite individuals, families and companies to open an account with them. Most of the major commercial banks have millions of customers who use their services to store their savings securely. In exchange, the account holder receive interest on their money. The deposits are only for cash, and no other assets are accepted. 

Types of deposit accounts:

• Saving Accounts — a type of account most commonly used by people to save their monthly income which earns them interest. 
• Current Accounts — companies and entrepreneurs set up a current account to deposit and withdraw money for business purposes. However, the account holders don’t receive any interest. 
• Fixed Deposits — customers can put in a sum of money for a fixed period of time during which they can’t withdraw any part of that amount. At the end of that period, you get compounded interest.  
• Term Deposits — these are similar to fixed deposits, except the lock-in period tends to be smaller. 

2. Offering loans and credit

Another of the main functions of commercial banking is to lend money to small businesses, industries and entrepreneurs. Banks reserve a portion of the deposits they receive and the other part is use for short-term or medium-term loans. They also offer a line of credit to customers to carry out various business or personal transactions. Banks make their profits from their money-lending services. 

Types of lending facilities:

• Loans— Businesses need loans for buying equipment, inventory, expansion purposes, working capital and several other reasons. Individuals can also avail loans for homes, cars or higher education.
• Credit cards — Bank customers can use credit cards for smaller purchases and pay off the loan on a monthly basis. 
• Trade Finance — another one of the functions of commercial banking is to finance local and global trade-centric transactions. 
• Commercial vehicle funding — companies that need to purchase business vehicles can apply for funding with commercial banks.

Also Read – Key skills for Managers in Commercial Banks

Other functions of commercial banking 

• Locker facilities

For a fee, customers can rent lockers to store jewellery and other valuable items in the bank. 

• Investment services 

One of the lesser known functions of commercial banking, limited investment opportunities are also provided such as offer funds for mergers and acquisitions, asset management services and securities exchange.  

• Foreign exchange 

Banks play a big part in the forex part and offer foreign currencies to customers and businesses. They also ensure international transactions, project loans and M&A deals go smoothly. 

The role of commercial banks in the Indian economy

It is impossible to narrate the growth of the country’s economy without mentioning the important role commercial banks have played. The banks give funding to commercial ventures, allowing them to hire employees, expand their business and become a profitable organisation. 

The creation of credit allows so many companies to operate seamlessly. Imagine how many businesses would shut down or plateau because they lack the capital which banks provide. It is one of the functions of commercial banking to generate funds for businesses and to aid them with economic development. Commercial banks such as ICICI and SBI empower small businesses through the MSME and SME loans. 

Also Read – How to Get a Job in a Private Sector Bank – A Detailed Guide

How Proschool can help you get into commercial banking 

If you want to apply for the position of a relationship manager in a commercial bank, Proschool has several financial courses that can help you. As one of India’s top ranking coaching institution, IMS Proschool offers the CFA, CFP, PG investment banking and financial modelling programs, all of which are very beneficial to finance students. These courses are taught by industry experts who have worked in the field extensively. As teachers, they are able to guide and mentor students while offering unique insights about finance. The classes teach core concepts, practical skills and real-world applications. You also learn about the functions of commercial banking and other relevant topics. 

The staff uses innovative teaching methods and hands-on training techniques to give students a well-rounded learning experience. Resources such as practice papers, mock tests, study libraries and prep books are readily available and will enhance your exam preparation. Once you clear the course, you can apply for jobs through Proschool’s online placement portal and even receive special recruitment training.

Proschool’s top courses for commercial banking

1. CFA

• • The Chartered Financial Analyst course is one of the best and most intensive certifications in finance and investment banking, recognised in over 165 countries.
  • The course covers various topics such as portfolio management, quantitative methods, equity investments, functions of commercial banking, etc. 
  • The CFA program is valued among top finance companies, investment firms and commercial banks. 
  • You can work in positions such a relationship manager, portfolio manager, equity analyst, etc.

2. CFP

• • The Certified Financial Planner course offers a highly reputed qualification in financial planning in over 26 countries.
  • The syllabus offers a deep understanding of various financial products such as mutual funds, insurance, taxation, etc.
  • The certification allows you to work in fields such as commercial banking, financial planning, wealth management and mutual funds.

3. PG Investment Banking

• • The investment banking course has been designed by experienced finance experts to meet the growing needs of a complex and challenging industry.
  • The syllabus contains relevant topics in investment banking such as financial modelling, mergers and acquisitions, underwriting, etc. 
  • Professionals can work in various fields, such as investment advisory, research and commercial banking

4. Financial Modelling

• • The financial modelling course teaches how to create a summary and analysis of a company’s finances using a spreadsheet software such as MS Excel.
  • There are many different models that can be used for the functions of commercial banking.

FAQs

How do commercial banks affect the economy?

One of the functions of commercial banking is to mobilise funds into the economy, ensuring that small and mid-sized businesses get the money they need to expand and grow. Many times, companies have the capacity to improve their profitability but lack the capital. Commercial banks support these enterprises and they also enable them to circulate money within the economy. 

How do commercial banks make money?

Commercial banks make their profits from charging interest for loans and other services. 

Is commercial banking different from investment banking?

Yes. The function of commercial banking is to take deposits from customers to fund loans and create credit for businesses and entrepreneurs. Investment banking builds wealth by creating investment opportunities in the stock market and other securities. 

Can you name some of the top commercial banks in India?

SBI is India’s largest commercial bank and also one of the oldest. Other notable banks include ICICI, Punjab National Bank, HDFC, Bank of Baroda and Axis Bank.

Conclusion 

Commercial banking functions on the basic principles of borrowing and lending. These banks help to fuel the economy, strengthen small businesses and lead to robust financial development. If you are hoping to join a commercial bank in the near future, you need the right credentials for the job. Recruiters look for candidates who possess the expertise required for the job. There are a few courses and qualifications that teach you the knowledge and skills to kickstart your professional journey in banking.