Commercial Banks in India: Functions, Types & Examples (2026 Guide)

Commercial banks in India are the backbone of the country's financial system. They accept your deposits. Lend money to businesses.

And keep the wheels of the economy turning every single day. If you are preparing for JAIIB. CAIIB or any IIBF banking exam.

Mastering the functions and types of commercial banks is non-negotiable. This topic shows up year after year. And the questions are surprisingly easy to score if your basics are clear.

This 2026 guide breaks down everything you need: what a commercial bank is. Its primary and secondary functions. The different types operating in India. And the exact way examiners frame these questions. Let's build your foundation the right way.

What Is a Commercial Bank?

A commercial bank is a financial institution authorised by law to accept deposits from the public. Lend that money to individuals. Businesses, and institutions.

In simple words. It borrows money cheap (from depositors) and lends it dearer (to borrowers). The difference, called the interest spread, is its core profit.

Most people interact with commercial banks every day. Which makes them the most familiar type of banking institution. When you open a savings account. Swipe a debit card. Or take a home loan, you are using a commercial bank.

In India. Commercial banks are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act. 1949 and the Payment and Settlement Systems Act, 2007. Depending on their structure and services. They may also fall under other central and state laws.

Why Commercial Banks Matter

Commercial banks are not just money shops. They mobilise idle savings. Channel funds to productive sectors, and create credit that fuels growth.

Without them. Capital would sit unused and trade would grind to a halt. That is exactly why exam setters love this topic.

Primary Functions of Commercial Banks

The two most distinctive features of a commercial bank are borrowing. Lending &mdash. Accepting deposits and giving loans to earn interest. These form the heart of every bank's business model. Let's unpack each primary function.

1. Accepting Deposits

A commercial bank accepts deposits in the form of current. Savings, and fixed accounts. By pooling the surplus balances of households and firms. Banks finance both short-term and long-term needs. Deposits are the lifeblood of banking operations.

There are three main types of deposits you must know cold.

(i) Current Account Deposits

• Payable on demand with no limit on withdrawals
• No interest is paid by the bank
• Cheque and overdraft facilities are provided
• Typically used by businesses, traders, and industrialists who make large, frequent payments

(ii) Fixed Deposits (Time Deposits)

• Money is locked in for a fixed period (days to years)
• Not withdrawable on demand; no cheque facility
• Higher interest rates than savings accounts
• Recurring deposits are a popular variant for regular savers
• Not counted as part of the narrow money supply

(iii) Savings Account Deposits

• Designed for individual household savers
• Combine features of current and fixed deposits
• Withdrawable by cheque with some restrictions on frequency
• Interest is paid, but lower than on fixed deposits

2. Providing Loans and Advances

The second major function is lending money to borrowers &mdash. Mainly businesses and entrepreneurs — at interest. This is the bank's principal source of income. A bank keeps a portion of deposits as reserves. Lends the rest in several forms.

(i) Cash Credit

The borrower is sanctioned a credit limit. Can withdraw amounts within it against security. Usually current assets like stock or receivables. Interest is charged only on the amount actually drawn. Not the full limit.

(ii) Demand Loans

A loan that can be recalled on demand with no fixed maturity. The entire amount is disbursed in a lump sum. Security brokers and others with fluctuating credit needs commonly use these.

(iii) Short-Term Loans

Given against security for working capital or priority-sector needs. Repayment is made in one or more installments over the loan period.

3. Investment in Securities

Commercial banks invest surplus funds to earn additional income while staying liquid. They typically invest in three categories:

• Government securities (G-Secs and treasury bills)
• Approved securities recognised by the regulator
• Other marketable securities available in the market

Secondary Functions of Commercial Banks

Beyond deposits and lending. Commercial banks perform several secondary functions that support trade and commerce. These are split into agency functions and general utility services. Plus a couple of credit-related facilities.

4. Discounting Bills of Exchange

A bill of exchange is a written promise to pay a fixed sum on a specified future date. Instead of waiting until maturity. The holder can present the bill to a bank for discounting. The bank deducts a small commission and pays the present value immediately. On maturity, the bank collects the full amount from the debtor.

Example: Seller B sells goods to buyer A. Receives a bill due in 90 days. B needs cash now, so B discounts the bill with the bank. The bank pays B today. Recovers the money from A after 90 days.

5. Overdraft Facility

An overdraft lets a current-account holder withdraw more than the available balance. Up to an agreed limit. It is essentially a short-term borrowing facility built into the account.

6. Agency Functions

Banks act as agents for their customers. Earn commission on these services:

• Fund transfers: demand drafts, mail transfers, and electronic transfers
• Fund collection: cheques, bills, and drafts on the customer's behalf
• Bill payments: taxes, insurance premiums, and utilities per standing instructions
• Securities trading: buying, selling, and safeguarding shares and securities
• Dividend & interest collection: on the customer's investments
• Trustee services: acting as executor or trustee for customer property
• References: providing standing information about traders

7. General Utility Services

Banks also offer everyday convenience services:

• Traveller's cheques and gift cheques
• Safe-deposit lockers for valuables and documents
• Security underwriting for government and private issuers
• Foreign exchange (forex) trading and remittances

Primary vs. Secondary Functions at a Glance

Here is a clean comparison you can revise in seconds before the exam.

Types of Commercial Banks in India

Commercial banks in India are classified into two broad categories based on RBI regulation: scheduled banks. Non-scheduled banks. There are also several specialised banks worth knowing.

Scheduled Banks

Scheduled banks are listed in the Second Schedule of the Reserve Bank of India Act. 1934. To qualify.

A bank must meet the minimum paid-up capital. Reserve requirement. Satisfy RBI that its affairs are not run against depositors' interests.

Scheduled banks enjoy borrowing and rediscounting facilities from the RBI.

Examples include:

• State Bank of India (SBI) and its associates
• Nationalised public sector banks
• Private sector banks
• Foreign bank branches operating in India

Note: The historic threshold of Rs 5 lakh paid-up capital. Reserves is widely quoted in textbooks. Always confirm the exact. Current figure on the latest official IIBF notification or RBI circular before the exam. As requirements are periodically revised.

Non-Scheduled Banks

Non-scheduled banks are not included in the Second Schedule of the RBI. They generally have lower paid-up capital and reserves. Operate on a limited scale. And do not get the same RBI facilities as scheduled banks.

Specialised Commercial Banks

Beyond the scheduled and non-scheduled split. India has several specialised bank types you should recognise:

• Industrial Banks: finance industry through equity subscriptions. Debentures, and long-term loans for plant and machinery
• Foreign Exchange Banks: branches of foreign banks that handle forex bills. Cross-border payments
• Agricultural Banks: provide long-term farm credit for tractors, irrigation, and land development
• Saving Banks: mobilise small savings (e.g., the Post Office Savings Bank)
• Cooperative Banks: community-owned banks that lend to members at fair rates

How to Study This Topic for JAIIB & IIBF Exams

Knowing the content is half the battle. Scoring it in the exam needs a smart study angle. Here is a proven approach.

1. Build the skeleton first. Memorise the three primary functions. The secondary functions as two clean lists. Everything else hangs off this frame.
2. Master the comparisons. Demand vs. time deposits, overdraft vs. loan, scheduled vs. non-scheduled — these comparison points are gold for objective questions.
3. Use active recall. Close the book and write the seven functions from memory. Repeat until it is automatic.
4. Practise application questions. Most IIBF questions are scenario-based. Attempt our mock tests to train your speed and accuracy under time pressure.
5. Revise with tables. A one-page summary table beats re-reading paragraphs. Glance at it daily in the final week.

For more structured chapter-wise notes and exam strategies, explore our free guides covering the entire JAIIB and CAIIB syllabus.

Common Mistakes to Avoid

Even strong candidates lose easy marks here. Steer clear of these traps.

• Confusing primary and secondary functions. Investing in securities is primary; bill discounting is secondary. Keep the lists separate.
• Assuming current accounts pay interest. They do not. Only savings and fixed deposits earn interest.
• Mixing up cash credit and overdraft. Cash credit is against current-asset security with a limit. Overdraft sits on a current account.
• Quoting outdated capital figures as gospel. Always verify thresholds on the latest official IIBF notification.
• Ignoring examples. Knowing SBI is a scheduled bank. Or the Post Office is a saving bank. Helps you eliminate wrong options fast.

FAQ: Commercial Banks in India

What is a commercial bank in simple words?

A commercial bank is a financial institution that accepts deposits from the public. Lends money to individuals and businesses to earn interest. In India. It is regulated by the Reserve Bank of India under the Banking Regulation Act. 1949.

What are the primary functions of a commercial bank?

The primary functions are accepting deposits (current. Savings. And fixed).

Providing loans and advances (cash credit. Demand loans. Short-term loans), and investing surplus funds in government and approved securities.

What is the difference between a current and a savings account?

A current account offers unlimited withdrawals. Cheque facilities but pays no interest. Making it ideal for businesses. A savings account offers interest on the balance with some restrictions on withdrawal frequency. Making it ideal for individual savers.

What is the difference between scheduled and non-scheduled banks?

Scheduled banks are listed in the Second Schedule of the RBI Act. Enjoy RBI borrowing facilities. Non-scheduled banks are not listed. Hold lower capital, and operate on a limited scale. Confirm the exact capital threshold on the latest official IIBF notification.

Why are commercial banks important for the economy?

Commercial banks promote savings. Finance trade and industry. Create credit. Support priority sectors like agriculture and small business. And help expand banking to underbanked regions — driving overall economic growth.

Conclusion: Master the Basics, Score with Confidence

Commercial banks are where banking begins. And where your exam preparation should begin too. Once the primary and secondary functions.

Deposit types. And bank classifications are crystal clear. This becomes one of the easiest scoring areas in the entire syllabus.

Keep your notes tight. Revise the comparison tables daily, and test yourself often. Consistent. Focused practice is what turns a good attempt into a guaranteed pass. You have got this — now go and own that exam.

Related Guides

For more on commercial banks in India. See the official IIBF circulars. Our chapter-wise free notes on iibf.store.

For more on “commercial banks in India”, explore our free mock tests and chapter notes on iibf.store.

Bookmark this page — we keep our “commercial banks in India” guidance current as IIBF revises its rules.

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Practise exam-style questions on “commercial banks in India” free on iibf.store to lock in the concept.

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