XII Banking Chapter 3 Commercial Banks

XII Banking Chapter 3 Commercial Banks
XII Banking Chapter 3 Commercial Banks

Short Question/Answer

Q1) Give five differences between Commercial Bank and Central Bank?


                  Central Bank

       Commercial Bank

1.       This bank is set up either under an ordinance of the government. Or under an Act of parliament.



2.       The earning of profit is not its primary aim.


3.       This bank acts as a government bank, agent and advisor.

4.       The Central bank cannot have foreign branch.

5.       A Central bank is called the leader of money market.

1.       Pakistan present commercial banks are established under the companies Ordinance 1984. Prior to it they were established under Joint Stock Companies Act 1913.

2.       It is the primary aim to earn maximum profit.

3.       This bank does not acts as government bank rather if facilitates general public.

4.       A Commercial bank may have hundreds of foreign branches.

5.       A Commercial bank is a member of money market.



Q2) List the general/common utility services of commercial bank Describe any one?

General/Common Utility Services of Commercial Bank

 Commercial banks also perform many public utility functions or services for their clients or customers. They provide lockers, business information, underwriting services and many  other functions important public utility services of commercial banks are following.

1.       Provision of Lockers

2.       Provision of Business Information

3.       Underwriting Services

4.       Credit Insurance

5.       Acceptance of bill of Exchange

6.       24 Hr. Cash Delivery

7.       Foreign Exchange

Provision of Lockers

Commercial banks provide lockers for their customers. They provide safe custody to the valuables of the customers. This has minimized the risk of losing valuables like gold diamond and jewellery special documents due to theft, robbery and spoilage.

Q2) Describe the methods/ tools used in e-banking?

Methods or Tools used in E-Banking

The methods of tools used in e-banking are following.

1. Credit Cards

In e-banking, the banks issue credit cards to their customers. These credit cards have a magnetic strip and a magnetic chip. The credit cards holder can make immediate payment of goods purchased without using cash. Credit cards are classified into two groups Bank charge cards and Non-Bank Charge cards.

2. Debit Cards

Debit cards are also considered as a useful product or tool of e-banking. It is a facility which is provided by commercial banks to their customers. They do not need to keep cash amount for buying goods from different outlets.

3. Automated Teller Machine (ATM)

Automated Teller Machine (ATM) is a useful tool of e-banking. The customers keeping in view his own convenience can withdraw money through ATM of his bank and its branches but also from any other bank.

4. On-line Banking

On-line banking is an important method of e-banking. In on-line banking the customer can deposit and withdraw money through interest.



Q3) describe the primary functions of a commercial bank?

Primary Function of a Commercial Bank

The functions which are required to establish the basis of the operations of commercial banks are called Primary Functions. These functions are central in nature and cover the whole operations of Commercial Banks. Important primary functions of commercial Bank are following.

1.       Acceptance of deposits

2.       Advancing Loans

Q4) Describe the secondary functions of a commercial Bank?

Secondary Functions of a Commercial Bank

Commercial Banks perform various secondary functions along with their basic and primary functions are related to their services to their customers. Important secondary functions of commercial banks are following.

1.       Agency Functions

2.       Public Utility Services

Q5) How do commercial banks create credit-money?

Commercial Banks and creation of Credit Money

A commercial bank is an institution which accepts deposits of money and repays cash to its depositors on demand. The bank borrows money at a lesser rate of interest and lands borrowers at a higher rate of interest, therefore bank is considered as a profit making institution. It is desire of every commercial bank that it should lend all money deposited with it. But it cannot do it. All commercial bank have to deposit a certain portion of the total deposits in cash with them in order to meet the cash requirement of the individual and business concern. Cash reserve is the liquid from asset. It is to be kept by a bank in vaults and with central bank of the country in order to meet the demands of their customers. The cash reserves present in a bank for the payment of cheques is called Till Cash. If the amount of Till Cash becomes less according to the payment of cheques then this inability of the payment of cheque makes the bank in the condition of insolvency. Following factors are responsible for the determination of cash reserves or Till Cash to a required level for a bank.

Q6) Define commercial Bank?

Commercial Bank

A banking company is one that receives deposits and advance loans and plays an important role in the creation of credit money

There are two types of commercial banks

1.       Scheduled Bank

2.       Non-Scheduled Bank

Q7)Distinguish, between a scheduled bank and non-scheduled bank?

         Scheduled Bank

   Non-Scheduled Bank

1.       A bank which is entitled as a recognized ban with the central bank and satisfy all the conditions mention is SBP Act 1956, clause 37, sub clause 1 is known as Scheduled bank.

2.       Its minimum paid up capital is Rs.10 billion (by 31-12-2013)

3.       Scheduled banks work in the interest of depositors to win the faith of the Central Bank.

4.       Since the Central Bank control and guides all the scheduled banks, therefore their business remains more stable and successful.

5.       With permission of Central Bank, scheduled bank can obtain loans from international institution.

1.       A bank is no entitled as recognized bank with the Central bank and not satisfy the conditions of SBP Act 195, clause 37, sub clause 1 is known as Non-Scheduled Bank


2.       Its paid-up capital is less then Rs.10 billion.


3.       They have no need to win the faith of Central Bank.


4.       Non-Scheduled banks have a possibility of failure in business because of lack of control and proper guidance.


5.       Non-Scheduled Banks are not allowed to obtain funds from international institution.




Long Question/Answer


Q1) Define commercial bank. Describe the function of commercial bank?

Commercial Bank

A banking company is one that receives deposits and advance loans and plays an important role in the creation of credit money. It also provides various utility services to its customers. Commercial Banks accepts deposits and provides them short, medium and long terms loans. The examples of commercial banks are following,

1.       Habib Bank Limited

2.       Muslim Commercial Bank

3.       National Bank of Pakistan

4.       Allied Bank Limited

5.       United Bank Limited

Functions of Commercial Bank

There are two functions of commercial bank.

1.       Primary Function

2.       Secondary Function

Primary Function

The functions which are required to establish the basis of the operations of commercial banks are called Primary Functions. These functions are central in the nature and cover the whole operations of Commercial Banks. Important primary functions of commercial bank are following.

1.       Acceptance of deposits

2.       Advancing loans

Acceptance of Deposits

The fundamental primary function of a commercial bank is to receive demand deposits and to honor cheques drawn upon them. A second important function is to lend money to local merchants, farmers and industrialists. Acceptance of deposits is the fundamental primary function. Banks accepts deposits from those who have surplus money. The commercial bank provides an opportunity to general public to make good use of their savings by depositing them in a bank. The commercial bank also motivates people to save their surplus money. Bank receives deposits from public and pay interest. Different kinds of commercial banks are following.

a)      Current Account

b)      Fixed Deposit Account

c)       Saving Account

d)      Foreign Current Account

Advancing Loans

The second important primary function of a commercial bank is to lend money to common people, traders, farmers and industrialists. All the commercial bank lends money at a rate of higher interest then the interest they are playing to the depositors. These loans are provided on the basis of some legal terms and conditions. These loans can be recovered as lump sum or installments according to the desire of borrowers. Commercial Banks Advancing loans are following.

a)      Loans

b)      By Opening Loan Account

c)       Mortgage

d)      Discounting Bill of Exchange

e)      Cash Credit 


Q2 How do Commercial Banks create credit? Explain.

 Commercial Banks and Creation of Credit Money

           All the deposits of money which commercial banks obtain from different sources and use them for productive and non-productive purposes to corm their profit are called as Bank Funds.

Sources of Bank Funds

         The primary functions of commercial banks are receiving deposits and advancing the loans. All the other functions are well connected with these primary functions. Banks collect funds from different sources to make their profitable use. The sources of bond funds are the following.

(1) Bank’s Own Funds:

           The funds which are created by commercial banks from their own resources are called as Bank’s Own Funds. Bank’s own funds can be classified into the following groups.

     i.            Paid–Up or Share Capital

The capital which is collected at the time of formation of a commercial bank by selling its share to the general public is called Bank’s Own Capital. It is also known as paid-up or share capital. The people who purchase the share of the bank are known as shareholders of the bank. It is the maximum amount of capital which is mentioned in the capital clause of the Memorandum of Association of the company. It is further divided into paid up capital and Subscribed capital.

 ii.            Reserve Fund:

At the time of declaration of dividend, a certain portion of the profit is saved with a view to meet any deficiency in the future by commercial banks which are called Reserve Funds. This accumulated reserve fund becomes a huge amount and a good source of further investment. This reserve fund belongs to the shareholders and at the time of liquidation, the shareholders are entitled to this reserve along with the capital.

iii.            Profit:

           Profit is another source of the bank’s own funds. The banks invest their deposits and earn profit. Profit signifies the credit balance of the profit and loss account which has not been distributed. The accumulated profits over the year increase the working capital of the bank and strengthen its financial position.

(2) Borrowed Funds:

            The funds which are obtained from the loans and grants from other banks and financial institutions at the time of need are called Borrowed Funds. The sources of Borrowed Funds are following.

     i.            Central Bank:

           Commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required by commercial banks.

 ii.            Deposits:

Public deposits are a powerful source of funds of commercial banks. The banks collect these deposits from current accounts, saving accounts and Term deposit accounts.

iii.            Other Sources:

Commercial banks also raise their funds by, issuing bonds, debentures, and cash certificates.  This process of obtaining the loans is not common but by making comprehensive policies the banks collect the funds from their sources.

Q3) Classify and explain the functions of Commercial Bank?

Functions of a Commercial Bank

The two functions of a commercial bank are the following:

1.       Primary Function

2.       Secondary Function

1.  Primary Function

                Important Primary Function of a commercial Bank is following:

         i.            Advancing Loans

       ii.            Receiving deposits

     i.            Advancing Loans

Types of advancing Loans are following:

a)      Call loans

b)      Loans

c)       Cash loans

d)      Overdrafts

e)      Discounting B/E

 ii.            Receiving Deposits

Types of Receiving Deposits are the following:

a)      Fixed Deposit

b)      Saving accounts

c)       Current account

2.  Secondary Functions

   Important secondary functions are the following:

         i.            Public Services

       ii.            Agency Services


     i.            Public Services

a)      Lockers

b)      Foreign exchange

c)       Financial advice

d)      Underwriting

e)      Accepting B/E

f)       Trade information

g)      Status inquiry

h)      Foreign trade

i)        Credit creation

j)        Payment of salaries

k)      Transfer of money

 ii.            Agency Services

a)      Receiving cheques, bills,

b)      Receiving interest, premium

c)       Buying and selling shares

Working as attorney