Operations of Commercial Banks

Operations of Commercial Banks

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1. Financial Intermediation - A commercial bank's main economic activity is financial intermediation. To put it another way, it makes a profit by funding the granting of loans with deposits from the general population. These banks are able to make money by adding interest to the financing they offer. As a result, they are able to both repay the money they borrowed and make additional income. Commercial banks often open and maintain savings accounts and current accounts. Customers invest these products with their money in an effort to secure their funds and get a small return. Commercial banks play a significant role in a nation's economy. They offer customers the essential banking services they require while contributing to the creation of market capital and liquidity.

2. Financing the industry - Commercial banks provide numerous forms of financing for the industrial sector. In order to support the industry, which is relatively underdeveloped, particularly in the case of some developing countries, they offer short-term, medium-term, long-term, and even three-year or multi-year loans to help it expand and prosper. Commercial banks give manufacturers and business owners the assurance they need to expand their operations on a large scale. Similar to this, commercial banks are able to finance the endeavours and acts of big businesses that become public.

3. Financing trade - Commercial banks assist in funding both domestic and international trade. Banks lend money to businesses and big-box stores so they can store the products they sell. Additionally, they facilitate the transportation of products by offering a variety of services, including discounts and the acceptance of letters of credit or promissory notes as payment. They do, however, support the exports and imports of emerging nations by offering currency exchange services to those who sell and import goods.

4. Financing agriculture - Commercial banks provide a variety of financial services to support agriculture in emerging nations. To traders of agricultural commodities, they offer loans. In addition, they expand its branch network in rural areas by offering agricultural finance. Commercial banks offer farmers direct finance for the commercialization of their goods, the modernisation and technological advancement of their farms, such as irrigation technologies and land development resources. Additionally, these banks offer financial support for horticulture, livestock, fish, poultry, and fish farming on an industrial scale. Small farmers are occasionally also served by commercial institutions' or microfinance organisations' microcredit tools. Theoretically, commercial banks are prepared to finance all forms of economic activity in rural areas.

5. Financing of consumer goods - Commercial banks support consumers in emerging nations who want to purchase durable products like vehicles and household appliances. Consumers can obtain credit from these Banks to purchase both moveable and immovable commodities. By giving people access to the resources they need, they also assist people in raising their level of living.

6. Finance activities that generate employment - Commercial banks support the financing of activities that create jobs in both developed and developing nations in a variety of ways. They offer loans to help young people further their studies in fields like engineering, medicine, and other highly skilled professions. Additionally, they offer credits to budding entrepreneurs, students studying engineering and medicine, and others looking for technical training to launch their own firms. Such lending facilities are provided by all commercial banks. Consequently, support the development of human capital for start-ups and foreign businesses that establish themselves in a nation. However, they also support entrepreneurship and new companies, products, skills, etc.

Helping the central bank and the government to frame monetary policy - Commercial banks support a nation's economic growth by devoutly adhering to its central bank's monetary policy. Commercial Banks are obligated to carry out monetary policy as directed by Central Banks in order to advance economic growth.

To sum up, it must be noted that by providing loans for industry, agriculture, and the development of physical and human capital, as well as by adhering to a nation's monetary policy, these banks significantly contribute to the expansion of national economies.