UNIT 2 Commercial Banks

Commercial banks are businesses that trade in money. They receive and hold deposits, pay money according to customers’ instructions, lend money, etc. People use these banks for their everyday money matters.

They can open current accounts. This type of account is very popular as it enables people to keep their money in a safe place. It allows them to withdraw money at any time and it provides them with a chequebook so that they don’t have to carry a lot of cash. A current account is used for everyday transactions such as paying bills, transferring money and drawing cheques. A customer can have an overdraft on this type of account but it pays no interest.

A deposit account is used for saving money. It’s not possible to draw cheques or have an overdraft on it but it earns interest for a customer.

Another function of commercial banks is to provide credits in the form of overdrafts and loans. Using an overdraft a customer can take out more money than he has in his account up to a certain limit agreed with the bank. He has to pay the money back when requested by the bank, and he also has to pay a relatively high rent of interest when he is overdrawn. For this reason, an overdraft is not the best option for long-term borrowing.

A loan is cheaper if a large amount of money has to be borrowed over a longer period. It is usually taken out for a car or a house, and is repaid in monthly instalments along with a fixed rate of interest. A loan used to buy a house or land is called a mortgage.

Other commercial bank services include: standing order facilities, where some amount of money is transferred from one account to another at regular intervals; opening letters of credit; advising their customers on making investments, for example in gold, property or shares; providing safe facilities for their customers to lock up valuable articles such as jewellery or important documents; foreign currency and travellers’ cheques transactions; paying out cash for example from cash dispensers.