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The commercial banks play a significant role in the economic activities of the nation. They are almost an indispensable factor in the modern society and form the core of the money market. Modern banking operations touch almost every sphere of economic activity. They are interlinked in an inseparable way to all sections of the economy like agriculture, industry, trade, commerce, import, export etc.
The primary functions of a commercial bank can be classified into two as below:
- Accepting Deposits, and
- Lending Money.
In this article, we shall see the functions of commercial banks in accepting deposits.
Primary functions of Commercial banks in accepting deposits
Accepting deposits is the most important function of a commercial bank. The bank borrows money from the public by way of accepting different kinds of deposits. They are repayable on demand. Generally banks accept the following types of deposits:
- Current Deposits.
- Savings Deposits.
- Fixed Deposits.
- Recurring Deposits.
1. Current Deposits
Current deposits are also called as current accounts. Businessmen generally operate current account for carrying out their banking transactions more conveniently. A customer can open a current account in a bank by making an initial deposit prescribed by the bank time to time.
The customers can remit any amount to the bank and also withdraw amount in any quantity by issuing cheques without any prior notice to the banker. But a customer will not be permitted to withdraw more than what he has paid to the credit of his account unless there is an arrangement to overdraw the account. Generally no interest is allowed on the current account.
The bank charges certain amount on the customers having current accounts. These deposits are repayable on demand. Hence they are also known as demand deposits. However, as all the depositors do not withdraw the money at the same time, bank can use a large part of the money in current accounts for profitable purposes.
2. Savings Deposits:
Savings deposit accounts are maintained by commercial banks to mobilize the savings of the salaried, middle and low-income group. They encourage thrift among the persons who earn fixed income every month. Only individuals and non-profit organizations can open this type of accounts. Any person who wants to open a savings bank account in any commercial bank has to deposit a prescribed amount as deposit initially say Rs.500.
Restrictions as to number of withdrawals in a week and the amount of withdrawal at each time have been imposed on the customers under this account. These restrictions may vary from bank to bank. Bank offers Cheques facility to depositors to withdraw money from the account. The rate of interest allowed on this account is rather low.
3. Fixed Deposits
Fixed deposits are also called as time deposits. Here the customer deposits a certain sum of money for a fixed period, which is not withdrawable before the maturity date. He gets interest on the deposit for the period. The rate of interest charged on these deposits is normally higher than that allowed on current and savings deposits.
The banker fixes the rate of interest by considering the amount and period of deposits i.e. longer the period and greater the amount, higher the rate of interest. Customers are allowed to borrow money on the security of their fixed deposits. The fixed deposit receipts are not transferable to other persons.
Under the account, banker receives money for a fixed period and the money is withdrawable on the expiry of the said period. In the mean time, banker can make use of the money for granting loans and advances.
4. Recurring Deposits
In recurring deposits, customers remit certain sum of money on monthly installments for a period ranging from 12 months to 120 months on a uniform pattern. The entire amount along with interest is payable after the payment of last installment. This type of deposits is much useful to the middle and low-income group of the people. It works on the principle of “little drops of water make a big ocean”.
Any person can open this account. It can be opened in joint names also. The rate of interest paid on this deposit is generally compounded.