Commercial Banks in Australia - Essay Example

? Commercial Banks Commercial Banks in Australia Introduction The main purpose of a commercial bank is to provide the facility of depositing money for safe keeping and to provide loans to individuals and private organizations for organizational and personal purposes. Banks obtain funds through deposits and borrowings from other banks. The earn money by giving loans and earning interest on them. Purpose The main function of commercial banks in Australia is to ensure that a smooth flow of money is available to the private individuals so they can continue operating their business. To conduct this purpose commercial banks tend to lend money to private individuals as well as organizations so these individuals and organizations can use this money to make further investments and conduct expenses. Another purpose of such banks is to accept deposits made by individuals and organizations (Viney, 2009, p.50). Commercial banks even conduct several secondary functions which include: creation of credit, funds transfer and services that are general in nature. Sources and Use of Funds The main source of finance for commercial bank which contributes heavily to its cash inflow is deposits. Deposits are regarded as the money that a particular commercial bank’s account holder transfers to the bank for the purpose of safekeeping in order to use this money whenever the account holder needs it. These deposits are added by two kinds of account holders, these include those who have a saving account and who hold a current account. Other than deposits, commercial banks even attain funds through the act of borrowing money. Commercial banks do not normally borrow money but in order to respond to short term financing needs it borrows money from other banks or they even borrow money through the Federal Reserve (Madura, 2011, p.442). Banks even earn money through by charging for the various services it provides to its account holders from those who have borrowed money. Those who borrow money pay interest which is the return that commercial banks attain for providing the service of borrowing money. Commercial banks even obtain finances by putting up its stock for sale on the stock market; this is mostly done when the bank wants to expand in size. There are different uses of a commercial bank’s funds, they primarily use their funds in order to lend money and this is the main way through which they earn profit for their services. These loans are provided for a particular period of time and the bank charges a fixed rate of interest on these loans and in order to provide loans, they obtain collateral in shape of property and assets from the borrowers (Viney, 2009, p.60). In most cases the collateral is the asset that is being financed by the commercial bank itself. These loans are provided for the purpose of consumer lending and organizational lending. Another primary use of the funds of banks includes purchase of securities that are short term in nature. Banks even use their funds to conduct activities that are not stated on the balance sheet of the bank. These activities include: forward contracts, standby letter of credit and others. Commercial Banks and Businesses Commercial banks are of great importance to any business or organizations. The main way in which a business uses a commercial bank is that a commercial bank is a source of finance for a business. Both large organizations as well as small and medium sized organizations rely on commercial banks for financial purposes. There are several reasons due to which a business may borrow money from a particular commercial bank. Businesses obtain loans for the purpose of commercial mortgages, this means that when a business wants to purchase a new building or a factory or any other asset it resort to commercial mortgages. Businesses even obtain loans for the purpose of the purchase of new equipments so the business can obtain equipments and machinery in order to remain competitive in the market (Madura, 2011, p.450). A major reason due to which organizations borrow money from commercial banks is for the purpose of expansion or when they want to start a new business. One of the primary activity of any commercial bank through which it raises money is bank deposits that are held in current as well as savings account (Viney, 2009, p.55). A business uses a bank as a safe keeper or a locker where they can securely keep their money safe. Businesses tend have loads of money in their reserve and in order keep that money in a safe environment, they deposit that money in commercial banks. Secondly, the money that is not in use for a business is even used by businesses to earn further money in the face of interest that is paid by the bank to the account holder. This money then can be used by the businesses for further expenses. A business can even obtain undertaking services from a particular commercial bank in order to help the client meet his/her financial obligation. In this case bank ensures the client of a business that if the client fails to make the payment by himself, then the bank will make the payment and the bank later recovers the paid amount from the business. Businesses even use banks for the purpose of market exchange rate related activities. In this case, a business can pre purchase foreign currency from the bank to make a payment in the future, this mostly happens if the business speculates that a decline in foreign exchange rate or an appreciation in the rate may occur. Commercial Bank in Australia and Foreign Nations The most prominent and the largest commercial bank of Australia include the Commonwealth Bank of Australia. Similarly the largest bank of US is Bank of America Corp. and the Citigroup. Conclusion There are several commercial banks in Australia and the largest of them is the Commonwealth Bank of Australia. Businesses can use banks to obtain loans in order to fund their transactions; they can use these banks to deposit money for safe keeping and to earn profits in the shape of interests. Businesses even use banks for the purpose of undertaking and exchange rate related services offered by commercial banks. References Madura, J. (2011). Financial markets and institutions (Abridged 9th ed.). Australia: South-Western Cengage Learning. Viney, C. (2009). Mcgrath's financial institutions, instruments and markets (6th ed.). North Ryde, N.S.W.: McGraw-Hill Australia. Read More