Commercial Banks
1 Quick Explanation 1–3 min
Commercial banks are profit-seeking institutions that accept deposits and lend money.
They create money through credit creation — their most exam-important function.
2 Detailed Notes
Definition
Definition
A commercial bank is an institution that accepts deposits (payable on demand) and advances loans, with the objective of earning profit. Examples: SBI, HDFC, ICICI.
Key idea
Functions
- Primary: Accept deposits (demand & time), grant advances (loans, cash credit, overdrafts), and create credit.
- Secondary (agency): payment & collection of cheques, transfer of funds, trusteeship.
- Utility: locker facility, foreign exchange, letter of credit, ATM/banking apps.
Comparison
Demand vs time deposits
| Basis | Demand deposits | Time deposits |
|---|---|---|
| Withdrawal | On demand (cheque) | After fixed period |
| Interest | Low | Higher |
| Moneyness | Counted in M₁ | Counted in M₃ |
| Example | Savings/current account | Fixed deposit |
Important
Why banks matter
A bank does NOT need to keep 100% of deposits in cash. It keeps only a fraction as reserves and lends the rest — this is fractional reserve banking and the basis of credit creation.
In One Minute
Commercial banks accept deposits, lend money and create credit. Deposits = demand (M₁) + time (M₃). They run on fractional reserves.
Important for Exam
- ⭐ Functions of commercial banks (3 marks).
- ⭐ Demand vs time deposits (table).
- ⭐ Credit creation function — link to next topic.
- ⭐ Agency and utility functions list.
Watch & Learn
Watch on YouTubeClass 12 Economics Chapter 6 - Banking: Commercial Banks & Central Bank (Sandeep Garg) Full Chapter
by Magnet Brains
Why watch? Complete coverage of primary, secondary & utility functions.
Open on YouTube Watch on YouTubeClass 12 Economics Chapter 6 - Banking: Commercial Banks & Central Bank (Sandeep Garg) Full Chapter
by Magnet Brains
Why watch? Very student-friendly language.
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