Functions of Banks

Functions of Banks

Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks can be seen from the following figure:

Accepting Deposits

The most important function of commercial banks is to accept deposits from public. This is the primary functions of a commercial bank. Banks receives the idle savings of people in the form of deposits and finances the temporary needs of commercial and industrial firms.

A commercial bank accept deposit from public on various account, important deposit account generally kept by bank are:

  • Saving Bank Deposits: This type of deposits suit to those who just want to keep their small savings in a bank and might need to withdraw them occasionally. One or two withdrawals upto a certain limit of total deposits are allowed in a week.

    The rate of interest allowed on saving bank deposits is less than that on fixed deposits. Depositor is given a pass book and a cheque book. Withdrawals are allowed by cheques and withdrawal form.

  • Current Deposits: This type of account are generally kept by businessmen and industrialists and those people who meet a large number of monetary transactions in their routine. These deposits are known as short term deposits or demand deposits.

    They are payable demand without notice. Usually no interest is paid on these deposits because the bank cannot utilize these deposits and keep almost cent per cent reserve against them. Overdraft facilities are also available on current account.

  • Fixed Deposits: These are also known as time deposits. In this account a fixed amount is deposited for a fixed period of time. Deposits are payable after the expiry of the stipulated period. Customers keep their money in fixed deposits with the bank in order of earn interest.

    The banks pay higher interest on fixed deposits. The rates depend upon the length of the period and state of money market. Normally the withdrawals are not allowed from fixed deposits before the stipulated date. If it happens, the depositor entails an interest penalty.

  • Other Deposit: Banks also provide deposit facilities to different type of customers by opening different account. They also open. ‘Home Safe Account’ for housewife or very small savers. The other accounts are : ‘Indefinite Period Deposit a/c’; ‘Recurring Deposit’ a/c; ‘Retirement Scheme’ etc.

Advancing of Loans

The second main function of the commercial bank is to advance loans. Money is lent to businessmen and trade for short period only. These banks cannot lend money for long period because they must keep themselves ready to meet the short term deposits. The bank advances money in any one of the following forms :

  • Overdrafts : Customers of good standings are allowed to overdraw from their current account. But they have to pay interest on the extra amount they have withdrawn. The banks allow ‘overdrafts’ to their customers just to provide temporary accommodation save the extra amount withdrawn is payable within a period. The amount allowed in ‘overdraft’ varies from customer to customer depending on this financial condition.

  • Loans : Loans are granted by the banks on securities which can be easily disposed off in the market, e.g. Government securities or shares of approved concerns. When the bank has satisfied itself regarding the soundness of the party, the loan is advanced. A borrower seldom wants the whole amount of his loan in cash, so he opens the current account with the bank (and the loan amount) and thus a ‘deposit is created’ in the books of the name in the bank.

  • Cash Credit : It is an arrangement by which a bank allows his customers to borrow money upto a certain limit against certain tangible securities as Government securities or shares of approved concerns etc. In this case interest in charged on the actual amount withdrawn by the customer and not on the limit allowed to him.

  • Discounting Bills : It is another important way of giving loans. The banks purchase bills and immediately pay case for these bills after deducting the discount (interest). After the maturity of the bills, the banks get back its full value. Thus these bills are good liquid assets and moreover this investment is also very safe.

Agency Services

Modern Banks render service to the individual or to the business institutions as an agent. Banks usually charge little commission for doing these services.

These services are as follows:

  • A bank collects cheques, bills and promissory notes and receives their payments.

  • A bank collects dividend or interest on stock and shares. It also collects subscriptions and insurance premium.

  • A bank also buys and sells securities on behalf of its customers. It also not charges anything from the customers for this but gets some commission from the stock broker.

  • A bank acts as trustee or an executor on behalf of its customers in the administration of a will or of settlement.

  • Lastly a bank helps in the transfer of funds from one bank or branch to another.

Other Services

A modern bank now a days serves its customers in many other ways:

  • A bank issues personal and commercial letters of credit. Through these letters of credit customers are able to benefit themselves out of the superior credit of the bank.

  • A bank also helps in the transaction of foreign exchange business.

  • A bank has ‘Safe Deposit Vaults’. It undertakes the safe custody of valuables and important documents. The bank acts as bailee of these goods or documents.

  • A few banks also undertake to underwrite loans raised by Government, public or trading corporation.

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