Commercial StudiesICSE Class 9 · Banking

Functions of a Commercial Bank: Primary and Secondary Functions (ICSE Class 9 Commercial Studies)

Updated 18 October 2026 · Fact-checked

A commercial bank accepts deposits from the public and lends money for profit, earning mainly the difference between the interest it charges on loans and the interest it pays on deposits. Its primary functions are accepting deposits and granting loans and advances (loans, cash credit, overdraft and discounting of bills). Its secondary functions are agency functions (acting for the customer) and general utility functions (services to the public).

Notice that primary functions are deposits and lending (four types of advances), while agency and utility services are secondary.

Illustration drawn for QuestionBuddy.

Understand Functions of a Commercial Bank: Primary and Secondary Functions with Calculations

Meaning. A commercial bank is a financial institution that accepts deposits from the public, repayable on demand or after a fixed period, and lends money to individuals and businesses, with the aim of earning profit. Profit comes mainly from Interest earned on loans minus Interest paid on deposits (plus service charges). Commercial banks in India include public sector banks, private sector banks, foreign banks, regional rural banks and small finance banks, all working under the regulation of the Reserve Bank of India.

Primary functions.
1. Accepting deposits: money is accepted in savings, current, recurring and fixed deposit accounts. This keeps money safe, pays interest (usually not on current accounts) and mobilises savings.
2. Granting loans and advances:

Loan: a fixed amount for a fixed period, repaid in instalments or in a lump sum with interest (home loan, term loan for machinery).
Cash credit: the borrower may withdraw up to a limit against security such as stock and pays interest only on the amount actually used; used by traders for working capital.
Overdraft: a current account holder may withdraw more than the balance up to an agreed limit; interest is charged only on the overdrawn amount for the period.
Discounting of bills of exchange: the bank pays the holder of a bill before the due date, deducting a discount, and collects the full amount at maturity.

Secondary functions.

Agency functions (the bank acts as the customer's agent): collecting cheques, drafts, bills, dividends and interest; making payments on instructions (insurance premiums, instalments, bills by standing instruction); buying and selling securities; acting as trustee or executor; remitting funds (NEFT, RTGS, demand drafts).
General utility functions: safe deposit lockers; ATMs, debit and credit cards, internet and mobile banking and UPI; letters of credit and bank guarantees; foreign exchange services; references about customers' creditworthiness; selling insurance and mutual fund products and collecting taxes.

Simple interest used in illustrations. SI = P x R x T / 100, where T is in years; for months use T = months / 12. The rates in questions are assumed ("Suppose"); real rates are set by banks from time to time.

Neighbouring topics: the four types of deposit accounts and how they differ are on the next page of this chapter.

Functions of a Commercial Bank: Primary and Secondary Functions with Calculations: key facts

Bank profit: Profit (mainly) = Interest earned on loans - Interest paid on deposits | plus service charges, minus costs; Main source of income.
Simple interest: SI = P x R x T / 100
T in years
months divided by 12; Used for loans, deposits and overdrafts.
Overdraft interest: Interest = Amount overdrawn x Rate x Time / 100 | on the overdrawn amount only; Not on the full limit.
Functions: Primary: deposits, loans and advances | secondary: agency, general utility; Give an example of each.

Functions of a Commercial Bank: Primary and Secondary Functions with Calculations in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

How a bank earns

Suppose a bank holds deposits of Rs 50,00,000 on which it pays 4 per cent a year, and has lent Rs 40,00,000 at 10 per cent a year (assumed rates, simple interest).

Find the interest paid, the interest earned and the difference for one year.

Try it first, then show the solutionSolution

Interest paid = 50,00,000 x 4 / 100 = Rs 2,00,000.
Interest earned = 40,00,000 x 10 / 100 = Rs 4,00,000.
Difference = 4,00,000 - 2,00,000 = Rs 2,00,000.

Answer: Interest paid Rs 2,00,000, interest earned Rs 4,00,000; the difference of Rs 2,00,000 is the main source of profit (before costs).

Memory hook: Earn more on loans than you pay on deposits.

Tricks to remember Functions of a Commercial Bank: Primary and Secondary Functions with Calculations

Short memory aids. Say each one aloud once, then use it on a question the same day.

Deposits in, loans out
Primary functions are money coming in and money going out.
Use it when: Primary functions.
Agent or assistant
Agency: the bank acts for you. Utility: the bank serves everyone.
Use it when: Secondary functions.
Overdraft is over the balance
You draw beyond the balance and pay interest only on the excess.
Use it when: Overdraft.

Functions of a Commercial Bank: Primary and Secondary Functions with Calculations: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Agency function · 1 mark · MCQBoard level

Paying a customer's monthly insurance premium on standing instructions is:
(a) a primary function (b) an agency function (c) a lending function (d) a deposit function

Try it first, then show the solutionSolution

The bank acts as the customer's agent when it makes payments for him.

Answer: (b) an agency function

Example 2: Classify the services · 3 marks · Short answerHarder board level

Classify each as a primary function, an agency function or a general utility function: (i) allowing an overdraft; (ii) providing a safe deposit locker; (iii) collecting a cheque for a customer; (iv) accepting a fixed deposit.

Try it first, then show the solutionSolution

(i) Primary: lending (an advance). (iv) Primary: accepting deposits. (1 mark)
(ii) General utility function. (1 mark)
(iii) Agency function: collecting cheques on behalf of the customer. (1 mark)

Answer: (i) primary (ii) utility (iii) agency (iv) primary

Example 3: Bank profit · 3 marks · Short answerHarder board level

A bank has deposits of Rs 50,00,000 on which it pays 4 per cent a year and has lent Rs 40,00,000 at 10 per cent a year. Find the interest paid, the interest earned and the difference for one year.

Try it first, then show the solutionSolution

Interest paid = 50,00,000 x 4 / 100 = Rs 2,00,000. (1 mark)
Interest earned = 40,00,000 x 10 / 100 = Rs 4,00,000. (1 mark)
Difference = Rs 2,00,000, the main source of profit before expenses. (1 mark)

Answer: Rs 2,00,000 paid, Rs 4,00,000 earned, difference Rs 2,00,000

Example 4: Case study: three facilities · 4 marks · Case-basedHOTS / competency

(A) A trader can draw up to Rs 5,00,000 against his stock and pays interest only on the sum used. (B) Meera's current account has Rs 15,000; the bank lets her withdraw Rs 35,000 in all. She pays 12 per cent a year on the overdrawn sum for one month. (C) A bank pays Rs 97,000 now for a bill of Rs 1,00,000 due in three months.
(i) Name the facility in A, B and C. (3)
(ii) Find the interest Meera pays in B. (1)

Try it first, then show the solutionSolution

(i) A: cash credit. B: overdraft. C: discounting of a bill of exchange (discount Rs 3,000).
(ii) Overdrawn amount = 35,000 - 15,000 = Rs 20,000. Interest = 20,000 x 12 x 1 / (100 x 12) = Rs 200.

Answer: (i) cash credit, overdraft, discounting (ii) Rs 200

Example 5: Which service · 3 marks · Short answerHarder board level

A customer asks the bank to (i) pay his insurance premium automatically every month, (ii) keep his property papers in a locker, and (iii) transfer money to a relative in another city. Name the function in each case and say whether it is an agency or a general utility function.

Try it first, then show the solutionSolution

(i) Making payments on standing instructions: an agency function. (1 mark)
(ii) Safe deposit locker: a general utility function. (1 mark)
(iii) Remitting funds (NEFT, RTGS, draft): an agency function. (1 mark)

Answer: (i) agency (ii) general utility (iii) agency

Where students lose marks in Functions of a Commercial Bank: Primary and Secondary Functions with Calculations

The slips examiners see most often, and what to write instead.

Mistake: Charging overdraft interest on the full limit
The limit and the overdraft are confused.
Wrong working
Interest on Rs 35,000
Right working
Interest on the overdrawn Rs 20,000
Do this: Only the overdrawn part.
Usually costs: 1 mark
Mistake: Mixing agency and utility functions
Both are secondary.
Wrong working
Lockers are agency functions
Right working
Lockers are general utility; collecting cheques is agency
Do this: Agency: acting for you.
Usually costs: 1 mark
Mistake: Forgetting months to years
T is taken as 2 months.
Wrong working
T = 2
Right working
T = 2 / 12 years
Do this: Divide months by 12.
Usually costs: 1 mark

Exam tips

Classify functions first and then give an example of each.
Write SI = P x R x T / 100 before each interest sum.
For overdraft, compute the overdrawn amount first.
Use the words agent, utility, deposit and advance.

Practice questions on Functions of a Commercial Bank: Primary and Secondary Functions with Calculations

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Interest on an overdraft is charged on:
(a) the full limit (b) the amount actually overdrawn (c) the balance in the account (d) no amount
Hint
Only the excess used.
Answer
(b) the amount actually overdrawn
Q2 · 2 marks · Very short answerBoard level
Name any two primary functions of a commercial bank.
Hint
Money in, money out.
Answer
Accepting deposits and granting loans and advances.
Q3 · 3 marks · Short answerHarder board level
A bank lends Rs 2,00,000 at 9 per cent per annum simple interest for 2 years. Find the interest and the total amount to be repaid.
Hint
SI = P x R x T / 100.
Answer
SI = 2,00,000 x 9 x 2 / 100 = Rs 36,000. Total repaid = 2,00,000 + 36,000 = Rs 2,36,000.
Q4 · 3 marks · Short answerHarder board level
A current account has Rs 8,000. The holder draws Rs 30,000 under an overdraft arrangement at 12 per cent a year for 2 months. Find the interest.
Hint
Overdrawn amount first.
Answer
Overdrawn = 30,000 - 8,000 = Rs 22,000. Interest = 22,000 x 12 x 2 / (100 x 12) = Rs 440.
Q5 · 3 marks · Short answerHOTS / competency
Explain how a bank acts as a bridge between savers and borrowers and how it earns from this role.
Hint
Think of deposits and loans.
Answer
It collects deposits from savers and pays them a lower interest, and lends the money to borrowers such as farmers, traders and industries at a higher interest. The difference between the interest earned and paid is its main profit.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.How does a bank earn profit?Show answer
Mainly from the difference between interest earned and paid.
2.What is cash credit?Show answer
A facility to draw up to a limit against security, with interest on the amount used.
3.What is discounting of a bill?Show answer
Paying the holder before due date less a discount.
4.Name a general utility function.Show answer
Safe deposit lockers.
5.Name an agency function.Show answer
Collecting cheques.
6.Which body regulates commercial banks?Show answer
The Reserve Bank of India.

Functions of a Commercial Bank: Primary and Secondary Functions with Calculations: frequently asked questions

Are rates in the questions real?

No. They are assumed for practice; banks set actual rates from time to time.

Is a loan the same as an overdraft?

No. A loan is a fixed sum for a fixed period; an overdraft is a limit on a current account with interest on the amount drawn.

Do banks pay interest on current accounts?

Usually not.