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Commercial banks are profit-making financial institutions that act as intermediaries between savers and borrowers. Their core purpose is the mobilization of savings from the public and the disbursement of credit to various sectors of the economy, thereby acting as a pillar of the national financial system. In India, these banks are primarily regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949, and the RBI Act, 1934.

Functions of Commercial Banks

Commercial bank functions are broadly categorized into primary and secondary roles, alongside modern utility services.

A. Primary Functions

1. Accepting Deposits: This is the most fundamental function where banks collect surplus funds from the public.

  • Savings Accounts: Aimed at encouraging small savings; they offer modest interest and limited withdrawal flexibility.
  • Current Accounts: Used mainly by businesses; these accounts offer high liquidity with no interest and sometimes incur service charges.
  • Fixed Deposits (FDs): Deposits for a specific period with higher interest rates.
  • Recurring Deposits (RDs): Regular monthly deposits for a fixed term.

2. Providing Loans and Advances: Banks lend a portion of their deposits to earn interest income, which is their primary source of profit.

  • Cash Credit: A short-term loan against a bond or other security.
  • Overdraft Facility: Allows customers to withdraw more than their account balance up to a specified limit.
  • Term Loans: Provided for specific periods (short, medium, or long-term) for personal or business use.

3. Credit Creation: This is a unique and vital function. When a bank grants a loan, it does not typically provide cash; instead, it opens a deposit account in the borrower's name. This "derivative deposit" increases the total money supply in the economy beyond the initial cash reserves.

B. Secondary and Agency Functions

  1. Discounting Bills of Exchange: Banks provide immediate cash to businesses by purchasing their bills of exchange at a discount before the maturity date.
  2. Agency Services: Acting as an agent for customers by collecting cheques, paying insurance premiums, managing dividends, and acting as trustees or executors for wills.
  3. General Utility Services: This includes providing safe deposit lockers, issuing traveller’s cheques, and acting as a referee for the financial standing of customers.

C. Modern Functions

  1. Digital Banking: Facilitating real-time, cashless transactions through NEFT, RTGS, and UPI.
  2. Advisory and Capital Services: Assisting corporations with Mergers and Acquisitions (M&A), Initial Public Offerings (IPOs), and merchant banking.

Organizational Structure

Commercial banks typically have a hierarchical organizational structure that encompasses different levels and departments. While the specific structure may vary across banks, here is a general outline of the organizational components commonly found in commercial banks:

1. Board of Directors: The Board of Directors is the highest decision-making body in a commercial bank. It consists of individuals appointed or elected to oversee the bank's operations, set strategic objectives, and ensure compliance with regulations. The board appoints the bank's top management, including the Chief Executive Officer (CEO) or Managing Director (MD).

2. Executive Management: The executive management team comprises senior level executives responsible for overseeing different functional areas of the bank. This includes the CEO/MD, Chief Financial Officer (CFO), Chief Risk Officer (CRO), Chief Operations Officer (COO), and other key positions. They collaborate to develop and implement the bank's strategic plans and policies.

3. Business Units/Divisions: Commercial banks are organized into various business units or divisions, each focusing on specific areas of banking operations. Some common divisions include Retail Banking, Corporate Banking, Investment Banking, Treasury and Financial Markets, Risk Management, Operations, Human Resources, and Compliance. These units handle different aspects of banking activities and serve specific customer segments or product lines.

4. Branch Network: Commercial banks typically have a widespread branch network to provide banking services to customers. Branches are headed by Branch Managers who oversee the daily operations and customer service. The branches serve as touchpoints for customers to conduct transactions, open accounts, seek assistance, and access various banking services.

5. Support Functions: Banks have support functions that provide essential services to the bank's operations. These functions include:

a. Finance and Accounting: This department manages financial operations, accounting, financial reporting, budgeting, and financial analysis.

b. Risk Management: The risk management department is responsible for identifying, assessing, and mitigating various risks faced by the bank, including credit risk, market risk, operational risk, and compliance risk.

c. IT and Operations: This department oversees the bank's information technology infrastructure, systems, and operations, including core banking systems, network management, data security, and digital banking platforms.

d. Human Resources: The HR department handles recruitment, training, performance management, compensation, employee relations, and other human resource-related functions.

e. Compliance and Legal: This department ensures the bank's adherence to applicable laws, regulations, and internal policies, and manages legal matters and regulatory compliance.

6. Relationship Managers/Officers: Relationship managers or officers are responsible for building and maintaining relationships with individual and corporate customers. They assist customers in understanding and accessing various banking products and services, address their needs, and provide personalized financial advice.

7. Operations and Customer Service: Banks have dedicated departments to handle back-office operations, customer service, and transaction processing. These departments ensure smooth and efficient execution of customer transactions, account maintenance, and customer query resolution.