Unit 2
Question: Explain non- traditional functions of a commercial banks.
Answer:
What is Commercial Bank?
A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of
money for the general public, providing loans for investment, and other such activities. These banks are profit-making
institutions and do business only to make a profit. Non-traditional functions of commercial banks go beyond their
conventional roles of accepting deposits and providing loans. These functions cater to the evolving needs of customers
and advancements in the financial sector.
Non-traditional Functions
The following can be considered as the secondary functions of commercial banks –
Providing locker Facilities – Commercial banks provide locker facilities to customers who want to store
valuables safely. Locker facilities eliminate the impending risk of theft or loss, which prevail when kept at
home.
Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to individuals and
organizations that export or import goods from overseas. However, only certain banks which have the
license to deal in foreign exchange are eligible for such transactions.
Exchange of Securities – Another function of commercial banks is to trade in bonds and securities.
Customers can purchase or sell the units from the financial institution itself, which offers more convenience
than alternate approaches.
Discounting Bills of Exchange – The main function of a commercial bank in today’s date is to discount bills of
businesses. Bill discounting is considered a profitable investment for banks. Bills create a steady flow of
funds, while not becoming a risky venture during payment as it is considered as a negotiable instrument.
These also do not involve the financial institution in any litigation.
Investment Banking Services: Investment banking involves financial advisory services to corporations and
governments for large-scale financial transactions.
Insurance Services: Partnering with insurance companies to sell life and non-life insurance products. Banks
act as distribution channels for insurance companies.
Venture Capital and Private Equity Support : Providing funding to startups and businesses with high growth
potential. Investing in startups at their early stages. Supporting expanding businesses in scaling operations.
Loan Syndication: Coordinating with multiple banks to fund large projects requiring substantial capital.
Organizing the syndicate and managing negotiations. Distributing loan risks among participating banks.
Ensuring compliance with the loan agreement.
Bank as an Agent – Commercial Bank and its Function also require them to provide finance-related services
to customers, fulfilling the role of an agent. These services usually include –
Acting as an administrator, trustee, or executor of a customer-owned estate.
Assisting customers with tax returns, tax refunds, and other similar tasks.
Serving as a platform to pay premiums, repay loan installments, etc.
Offering a platform for electronic transaction of funds, processing of cheques, drafts, bills, etc.
