Commercial Bank

The term "commerce" refers to the business activity of establishing mutual contact between producers and consumers of various goods and services, creating a favorable environment for their purchase and sale, and earning profits.

Such business activities require a reliable financial institution to act as an intermediary in the market. Any bank or financial institution established to fulfill this need is called a commercial bank (Commercial Bank).

In Nepal, Nepal Bank Limited was established in 1937 as the first commercial bank. After the establishment of Nepal Rastra Bank in 1956, Rastriya Banijya Bank was established in 1965, and Agricultural Development Bank in 1967.

As of May 2023, 21 "A" class commercial banks are established and operational. Among these commercial banks, three are government-owned, and the remaining are operated by the private sector.

Bank Account

A bank account is a record where a bank or financial institution opens an account in the name of a general person or organization to deposit their funds and register them for the facility to deposit and withdraw money.

Generally, documents such as a citizenship certificate, photograph, fully filled application form, required minimum amount, and signature specimen are required to open a bank account. In the case of a minor, the parent's citizenship, photograph, and signature on the application form are required as a guardian.

In addition, the account opening form requires details such as family details and the names of grandparents to fully reflect the customer's identity. This is to ensure that the bank has full information about the customer.

When a bank takes deposits (money) from the general public, it opens an account in the name of the concerned person. It provides the facility to deposit and withdraw money from that account.

After opening a bank account, the depositor or customer receives a deposit voucher, passbook, and checkbook. Money is deposited into the account by filling out the voucher.

The bank fills in the transaction details in the passbook. In recent times, banks and financial institutions that conduct transactions through computers have been providing bank statements instead of passbooks as needed.

This provides information about transactions, money in the account, interest earned, and tax paid on interest earned. The checkbook received from the bank allows the customer to withdraw money as per their needs.

Bank accounts are of various types. Among these, the most common accounts are current accounts, savings accounts, and fixed deposit accounts.

Functions of Commercial Banks

Modern commercial banks have a wide range of financial functions. The main objective of these banks is to earn profits within the guidelines of the central bank and the interest rate limits.

Their business relationship is mainly with individuals and organizations that can deposit and repay loans. Commercial banks provide current accounts, savings accounts, and fixed deposit accounts according to the convenience and needs of their customers.

They also act as facilitators in other financial transactions of consumers by returning the deposits received from various customers and providing loans by taking collateral security.

Some of the important functions of commercial banks can be divided into three parts and explained as follows:

A. Primary Functions

The primary functions of commercial banks include accepting deposits from depositors in various accounts and providing loans or credit under various headings. A brief introduction to the primary functions is as follows:

1. Accepting Deposits

Accepting the amount that the general public wants to save as a deposit is the main function of a commercial bank. Depositing money in the bank not only keeps the money safe but also earns interest for the depositor. Banks provide the following three types of accounts for depositing money:

(a) Fixed Deposit Account (Fixed Account):

Commercial banks provide the facility to open fixed deposit accounts according to the needs of any person or organization. Fixed deposit accounts allow deposits for a fixed period of time, such as 3 months, 6 months, 1 year, and 5 years. 

A fixed deposit account is an account where customers deposit money for a fixed period of time without having to deposit or withdraw money frequently. In other words, a fixed deposit account is an account opened with the provision that money cannot be withdrawn for a fixed period. T

his account earns more interest than a savings account. The longer the period for which money is deposited in this account, the higher the interest rate. If the money deposited in this account needs to be withdrawn before the specified period, a loan can be taken from the bank by pledging the deposit certificate. 

However, when taking such a loan, the bank has to be paid a few percent more interest than the interest earned on the fixed deposit.

(b) Savings Account: 

A savings account is an account where customers can deposit their money at any time but can withdraw money only within a certain limit. When operating this type of account, the bank sets a limit on how much money customers can withdraw at a time. 

Nowadays, banks are gradually increasing the maximum limit of money that can be withdrawn from savings accounts. The bank provides less interest on the money deposited in this account than in a fixed deposit account. 

Generally, this account is considered more useful for people who deposit small amounts of money regularly and withdraw money when needed, such as daily wage laborers and salaried employees. This account is also equally useful for students, youth, housewives, and senior citizens.

(c) Current Account:

A current account is an account where bank customers can deposit and withdraw any amount of money as many times as they want in a single day as needed. This type of account is opened especially for the security of large amounts of money and to manage transactions. 

This type of account does not earn interest on the money deposited. This account is more useful for industrialists, traders, and offices.

The summary of all three types of accounts at commercial banks:

1. Fixed Deposit Account (Fixed Account):

   • Deposits are made for a fixed period (e.g., 3 months, 6 months, 1 year, 5 years).

   • Money cannot be withdrawn before the specified period.

   • Earns higher interest than a savings account.

   • If money needs to be withdrawn early, a loan can be taken by pledging the deposit certificate.

2. Savings Account (Saving Account):

   • Deposits can be made anytime, but withdrawals are limited.

   • Earns less interest than a fixed deposit account.

   • Suitable for students, youth, housewives, and senior citizens.

3. Current Account (Current Account):

   • Money can be deposited and withdrawn freely.

   • No interest is provided.

   • Used mainly by industrialists, traders, and offices.

2. Lending Money

Commercial banks do not just keep the money deposited by individuals, organizations, and companies for security but also lend it to productive sectors to earn interest for depositors and profits for the bank. Banks lend the reserve amount of the deposit amount received from the general public under the following headings:

(a) Cash Loan:

A cash loan (cash credit) or ordinary loan (ordinary loan) is a loan provided by commercial banks to specific individuals or organizations at a specified interest rate for business or industrial operations by pledging securities such as shares, bonds, and debentures. 

The bank deposits the loan in the customer's current account. However, interest is paid only on the amount withdrawn. The customer can withdraw and spend the loan received in this way through a check as per their need.

(b) Overdraft:

An overdraft (overdraft) is a facility where commercial banks allow customers to withdraw more money than the amount deposited in their account based on an agreement with the customer. 

The bank charges a certain percentage of interest for providing such loan facilities. This type of arrangement also helps to create credit in the bank.

(c) Call Loan:

This is a loan used for a very short period of time. The borrower must repay this loan compulsorily when the bank demands it. In Nepal, this type of loan is used when conducting interbank transactions.

B. Secondary Functions

The functions performed by commercial banks other than the primary functions are called secondary or auxiliary functions. This is also called agency function. The bank charges a minimum service fee for performing this type of function.

(a) The bank buys and sells shares and guarantees of various companies on behalf of customers. It also buys and sells valuable goods.

(b) The bank collects commissions and pays various types of payments for customers, such as premiums to insurance companies, house rent, and income tax.

(c) Conducts foreign exchange transactions based on the directions of the central bank.

(d) At the request of the customer, the commercial bank transfers money from one place to another by taking a commission.

C. Other Functions

(a) The bank issues traveler's checks at the request of its customers.

(b) With the permission of the central bank, it also exchanges foreign currency for its customers.

(c) The bank provides locker facilities to protect its customers' precious metals, jewelry, and documents. One key is given to the customer, and the other key is kept by the bank. The bank charges a certain amount from the customer for providing this service.

(d) When needed, commercial banks provide various economic and commercial advice to their customers and also collect and publish related information from time to time.