functions of commercial banking. (business studies) commercial bank a commercial bank is a type of...
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FUNCTIONS OF COMMERCIAL BANKING
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Commercial Bank
A commercial bank is a type of financial intermediary.
Commercial banking is also known as business banking.
A financial institution that provides services such as a accepting deposits and giving business loans.
Its primary liabilities are deposits and primary assets are loans and bonds.
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Functions of Commercial Bank
The functions of a commercial banks are divided into two categories:
i) Primary functions,
ii) Secondary functions
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Primary Functions
a) accepting deposits;
b) granting loans and advances;
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Accepting Deposit
People who have surplus income and savings find it convenient to deposit the
amounts with banks. Depending upon the nature of deposits,
funds deposited with bank also earn interest.
If the rate of interest is higher, public are motivated to deposit more funds with the bank.
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Grant of Loans and Advances
Loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.
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Loans
Short term loans as well as long term loans are given by commercial bank.
The borrower may withdraw the entire amount in lumpsum or in installments.
Interest is charged on the full amount of loan.
Loans are generally granted against the security of certain assets.
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Advances
An advance is a credit facility provided by the bank to its customers.
It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time.
The purpose of granting advances is to meet the day to day requirements of business.
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Mode of Short term Financial Assistance
Banks grant short-term financial assistance by way of
cash credit, overdraft bill discounting.
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Cash Credit
Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit.
Interest is charged on the amount actually withdrawn.
Cash Credit is granted as per agreed terms and conditions with the customers.
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Overdraft
A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account.
Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security,or both.
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Discounting of Bills
It is making payment of the amount before the due date of the bills after deducting a certain rate of discount.
The party gets the funds without waiting for the date of maturity of the bills.
In case any bill is dishonored on the due date, the bank can recover the amount from the customer.
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SECONDARY FUNCTIONS
Issuing letters of credit, travellers cheques, circular notes etc.
Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers;
Providing customers with facilities of foreign exchange.
Transferring money from one place to another; and from one branch to another branch of the bank.
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Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc.
Collecting and supplying business information; Issuing demand drafts and pay orders; and, Providing reports on the credit worthiness of
customers.
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Financial Statements
Income Statement
Balance Sheet
Statement of Cashflows
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Financial Management by Van Horne
Income Statement
A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.
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Managerial Finance By Lawrence Gitman
Barlett Company Income Statement
Sales Revenue $3,074
Less:COGS 2088
Gross Profit $986
Less:Operating Expenses
Selling Expense $100
General & administrative Expense 194
Lease Expense 35
Depreciation Expense 239
Total Operating Expense $568
Operating Profit $418
Less:interest Expense 93
Net profit before taxes 325
Less:Taxes(rate=29%) 94
Net Profit after taxes 231
Less:Preferred Stock dividend 10
Earning Available for Common Shareholders $221
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Financial Management by Van Horne
Balance Sheet
A summary of firm’s financial position on a given date that shows that
Total assets = Total liabilities + owner’s equity
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Managerial Finance by Lawrence Gitman
Barlett Company Balance Sheet
Assets Liabilities and Stockholders' Equity
Current Assets Current Liabilities
Cash $363 Accouts Payable $382
Marketable securities 68 Notes Payable 79
Accounts receivable 503 Accruals 159
Inventories 289 Total current liabilities $620
Total Current assets $1,223 Long term Debt $1,023
Gross fixed assets Total Liabilities $1,643
Land and buildings $2,072
Machinery and Equiptment 1866 Stockholders' Equity
Furniture and fixtures $358 Preffered Stock $200
Vehicles 275 Common Stock $191
Other(Financial Lease) $98 Paid in Capital in excess of common stock $428
Total Gross assets $4,669 Retained earnings $1,135
Less:Accumulated depreciation $2,295 Total Stockholders equity $1,954
Net fixed assets $2,374 Total Liabilities & Stockholders Equity $3,597
Total Assets $3,597
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Financial Management by Van Horne
Cashflow Statement
A summary of the firm’s operating, investment and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.
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Managerial Finance by Lawrence Gitman
Barlett Company Statement of Cashflows
Cashflow from operating activities
Net Profit after taxes
$2
31
Depreciation 239
Increase in A/R-
138
Decrease in Inventories 11
Increase in A/P 112
Increase in Accruals 45
Cash provided by operating activities $500
Cashflow from Investment Activities
Increase in Gross fixed assets($347)
Change in business interests 0
Cash provided by Investment activities ($347)
Cashflow from Financing Activities
Decrease in notes payable($20)
Increase in long term debts 56
Changes in Stockholders' equity 11
Dividend paid 108
Cash provided by financing activities -61
Net increase in cash and marketable securities $92
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