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Table of ContentFunctions Of Banks
What is a Bank?
Primary Functions Of Banks
Loaning Functions Of Bank
Secondary Functions Of Banks
Utility Functions of Bank
Tools Of Money Measurements
In terms of the Circular economy model, banks are the intermediaries between the population at large and the business houses. The banks channel the savings of the public into credit for the capitalists or the entrepreneurs. Concerning a layman, banks can be seen as a safe avenue to deposit savings and profits which at times may not be convenient to save oneself. Further, the deposits of customers up to 5 lakh are secured through the Deposit Insurance Act in India. The functions of banks can be categorized into Primary - More traditional like deposit and loan; and secondary functions like insurance, share market, etc.
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A bank is a lawful organization that accepts deposits that can be withdrawn on demand. Banks are institutions that help the public in the management of their finances, The public deposit their savings in banks with the assurance to withdraw money from the deposits whenever required.
Banks accept deposits from the general public and the business community as well and give two assurances to the depositors –
- Safety of deposit
- Withdrawal of deposit, whenever needed
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Section 5(b) of the Banking Regulation Act (1949) defines 'banking' as the accepting, for lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order, or otherwise. Demand liabilities, according to the Act, mean liabilities, which must be met on demand, and time liabilities mean liabilities, which do not demand liabilities.
The various types of Deposits in Banks are as follows:
- Demand deposits (Current Accounts) do not earn any interest; on the contrary, the holders of such accounts pay service charges to banks. These accounts are operated through cheques and there is no restriction on the number of transactions in a demand deposit account. Normally, businessmen hold this kind of account for their day-to-day operations. Further, the account holder can avail of an overdraft facility through this type of account.
- Savings bank deposits earn some rate of interest although the holders of such accounts enjoy tremendous flexibility in terms of depositing and withdrawal. This type of account is preferred by individuals, who hold it basically for transaction purposes. These are operated through cheques and no service charge is levied on the account holder. However, one has to maintain a stipulated minimum balance to avail of the checkbook facility. Corporate entities are not allowed to open savings bank accounts. This can be seen as the most important function of a bank
- Fixed Deposit Accounts: In the case of fixed deposits the period of the deposits is usually fixed at the time of depositing the money. The fixing of the period enables the banker to invest money or otherwise employ it in business without having to keep a reserve and this is one of the reasons why fixed deposits are so popular with banks in India. Customers usually keep their money as fixed deposits to earn interest as well as withdraw the same on the expiry of the stipulated period in case they need it either for meeting certain expenses or employing it more profitably.
- Recurring Deposits: Recurring deposits are those where a monthly installment is deposited in the accounts every month. The deposit amount, along with interest accrued, is paid on the date of maturity.
The different types of loans provided by the banks are-
- Personal Loan.
- Business Loan.
- Home Loan.
- Gold Loan.
- Rental Deposit Loan.
- Loan Against Property.
- Two & Three Wheeler Loan.
- Personal Loan for Self-employed Individuals.
The banks also make advances which are as follows:
- Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money anytime more than available in bank balance but up to the provided limit. An overdraft facility is granted against collateral security. The interest for overdraft is paid only on the borrowed amount for the period for which the loan is taken.
- Cash Credits: a short-term loan facility up to a specific limit fixed in advance. Banks allow the customer to take a loan against a mortgage of certain property (tangible assets and/or guarantees). Cash credit is given to any type of account holder and also to those who do not have an account with a bank. Interest is charged on the amount withdrawn more than the limit. Through cash credit, a larger amount of loan is sanctioned than that of an overdraft for a longer period.
- Loans: Banks lend money to customers for brief or moderately long periods, such as 1 to 5 years, in exchange for tangible assets. These days, banks do make long-term loans. The borrower can choose to pay back the money in one big sum or through monthly payments spread out over a predetermined time frame. No matter whether the loan is withdrawn or not, the bank charges interest on the actual amount sanctioned. Compared to overdraft and cash credit facilities, the interest rate is lower.
- Discounting the Bill of Exchange: It is a sort of short-term loan in which the seller pays a charge in exchange for a discount on the bank bill. By buying or discounting the bills of exchange, the bank advances money. By subtracting the customary discount fees, it pays the bill amount to the drawer (seller) on behalf of the drawee (buyer). When the bill is ready to be paid, the bank hands it to the drawee or acceptor.
With the evolution of financial markets and the development of the Economy, the banks now a crucial role in non-traditional sectors. Now banks are utilized as tools for financial inclusion, settlement of payments, and a medium to invest in share markets, banks are also acting as investors for various systematically important Nonbanking Companies. The list of secondary functions of banks is as follows:
Transfer Of Funds: This occurs from one bank branch to the other or during any transactions.
Periodic Accumulation: Gathering remunerations, wages, pensions, etc. on behalf of their associates.
Periodic Payments: Payment of rent and various other bills and expenditures on behalf of their client.
Cheque Collection: Accumulation of deposits from exchange bills via the clearing section of its members.
Portfolio Management: Buying and selling of associate shares or debt instruments and hence portfolio debiting or crediting.
Other Functions: These include basic roles such as trustee, administrator, advisor, etc.
Issuing letters of credit, traveler’s cheques, etc.
Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers.
Providing customers with facilities for foreign exchange dealings
Underwriting of shares and debentures
Dealing in foreign exchanges
Social Welfare programs
Standing guarantee on behalf of its customers, etc.
The list of essential functions of banks is as follows:
The following are the functions of Indian banks:
Acceptance of deposits from the public
Provide demand withdrawal facility
Transfer of funds
Issue of drafts
Provide customers with locker facilities
Dealing with foreign exchange
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Let's have a look at the most important and basic concept of banks that is often asked in the exams. The money in the economy can be categorized as Narrow Money and Broad money here are concepts related to them:
Reserve Money = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities
M1 = Currency with the public + Demand deposits with the banking system + ‘Other’ deposits with the RBI.
M2 = M1 + Savings deposits of post office savings banks
M3 = M1+ Time deposits with the banking system
M4 = M3 + All deposits with post office savings banks (excluding National Savings Certificates)
Money Multiplier is equal to M0 divided by M3.
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What are the 5 functions of banks?
- Accepting Deposits:
- Advancing Loans:
- Discounting Bills of Exchange or Hundies:
- Transfer of Money:
- Miscellaneous Functions:
What are the types of banks?
- Central Bank.
- Cooperative Banks.
- Commercial Banks.
- Regional Rural Banks (RRB)
- Local Area Banks (LAB)
- Specialized Banks.
- Small Finance Banks.
- Payments Banks.