SERVICES OF COMMERCIAL BANKS

SERVICES OF COMMERCIAL BANKS

Commercial banks accept deposits from depositors and make loans to borrowers, conduct deposit and current accounts for customers, keep valuables in custody, pay standing orders for customers. A standing order is a regular payment made on behalf of a customer and deducted from his account on a regular basis, for example, mortgage payment to the building society. Banks give advice on income tax matters and overseas trading, buy and sell shares for customers, issue foreign currency and travellers’cheques, provide firms with change and “make up” cash wage packets for customers, act as executors and trustees for deceased persons, change old bank notes for new ones.

Banks lend money by a personal loan and by an overdraft loan or arrangement.

If the bank makes a personal loan to a customer of say 1000 pounds and charges him an interest rate of 10% repayable over 11 months, then the customer will have to pay the bank total of 1,100 pounds. The extra 100 pounds is the interest charged by the bank for the loan and is its profit. Therefore the personal loan is charged at a fixed rate of interest repayable over a fixed period of time.

The overdraft as borrowing facility is used mostly by businessmen. The advantage with the overdraft is that interest is repayable only on the amount owed at a particular time and is calculated on a daily basis. The borrower pays a lot of interest when the debt is large, but if he makes a good deposit reducing the size of the overdraft then the interest will be lowered accordingly. Overdraft may be recalled by the bank at very short notice.

Commercial banks issue reliable customers with cheque guarantee cards. If the card number is written on the back of the cheque, then the bank guarantees to honour the cheque. However, the cheque is not legal tender and if there are no funds in the account then the cheque will not be honoured by the bank.