A Bank is an organization that is licensed by the government or law to receive and safeguard deposits from the public, sanction loans, and to act as an intermediary in their financial transactions.
Banking institutions have been in operation since ancient history, when funds were pooled and loans were sanctioned to farmers and small traders for the overall development of economic conditions in their respective areas or kingdoms.
The modern banking system had its roots in the aftermath of the Renaissance in Europe.
Banking institutions have been in operation since ancient history, when funds were pooled and loans were sanctioned to farmers and small traders for the overall development of economic conditions in their respective areas or kingdoms.
The modern banking system had its roots in the aftermath of the Renaissance in Europe.
Thereafter, gradually, the modern banking concepts and practices developed from the 18th century onwards, resulting in the present banking system and practices.
"An establishment authorized or licensed by a government to accept/ receive deposits, pay interest on those deposits, issue loans, act as an intermediary in all financial transactions, and provide other related financial services to its customers."
Now, these functions of banks can be grouped into two distinct sub-groups.
Definition of Bank
A Bank can be defined as follows:"An establishment authorized or licensed by a government to accept/ receive deposits, pay interest on those deposits, issue loans, act as an intermediary in all financial transactions, and provide other related financial services to its customers."
Functions of Banks
From the above-cited definition, it is evident that Banks perform all types of financial transactions like receiving deposits from their customers, maintaining their accounts, safeguarding those deposits and allow withdrawals or payments from those deposits, pay interest on those deposits, collection or payment of cheques and bills on their behalf, provide debit or credit cards based on those accounts to enable easy transactions of funds from any corner of the world, etc.Now, these functions of banks can be grouped into two distinct sub-groups.
They are primary functions and secondary functions. Let us discuss both these types of functions in detail.
The primary functions are also known as the main banking functions. Banks (mainly commercial banks) perform many banking functions, such as accepting deposits and lending loans and advances in various forms.
i) Current Account Deposits:
These accounts are mainly suitable for business people who need to make daily transactions, including depositing cash or checks and withdrawing cash or making bill payments by check or draft.
Primary Functions of Banks
The primary functions are also known as the main banking functions. Banks (mainly commercial banks) perform many banking functions, such as accepting deposits and lending loans and advances in various forms.
A) Accepting Deposits
i) Current Account Deposits:
These accounts are mainly suitable for business people who need to make daily transactions, including depositing cash or checks and withdrawing cash or making bill payments by check or draft.
These accounts are also known as Demand Accounts, as banks should pay these amounts immediately on demand by the depositors, without any limits or restrictions.
No interest is paid on these accounts. Some service charges are debited to the account depending on the nature and volume of transactions.
ii) Savings Deposits:
Savings deposits are aimed at creating a habit of savings among people.
ii) Savings Deposits:
Savings deposits are aimed at creating a habit of savings among people.
These deposits provide an incentive of interest to the customers (it used to be 4% to 5%, but nowadays it is only 2 or 3 per cent). The interest gets credited to their accounts quarterly. There is a ceiling on withdrawals, presently 3 times per month. Any extra withdrawal is charged with some fees.
iii) Fixed Deposits or Term Deposits:
Fixed Deposits are also known as Term Deposits because they are deposited for a particular period or term. These deposits carry higher interest rates depending upon the period of deposit and as per the prevailing interest rates of those banks.
iii) Fixed Deposits or Term Deposits:
Fixed Deposits are also known as Term Deposits because they are deposited for a particular period or term. These deposits carry higher interest rates depending upon the period of deposit and as per the prevailing interest rates of those banks.
Deposits made for shorter periods will be paid lower interest rates, and longer periods will be paid higher rates. The current applicable rates are approximately 4% to 8%, varying according to the period.
The minimum period of deposit is 7 days and the maximum period is 10 years.
If you withdraw money before the maturity period, penalty charges are imposed, and the amount is deducted from your maturity balance, calculated as of the day of withdrawal.
iv) Recurring Term Deposits:
These are known as Recurring Deposits and are generally treated as Term Deposits and carry the same interest rates and rules as governed under Fixed Deposits.
The only difference between Recurring Deposits and Fixed Term Deposits is that in Recurring Deposits, you enjoy the facility of depositing monthly denominations of the deposits instead of a lump sum deposit.
These deposits are suitable for those who want to save money but can not afford a one-time deposit.
The interest provided ranges between 4% and 7%.
The minimum deposit accepted is Rs. 1,000, and thereafter, you can deposit in denominations of Rs.100 and above every month till maturity.
The tenure of deposits ranges from 12 months to 10 years. The interest is calculated monthly or quarterly according to the denominations deposited, and the amount will be paid on maturity of the entire period.
If you are unable to deposit an installment on time, you will be charged penalty charges from the due date to the next deposit date.
v) Money-Multiplier Deposits:
This is a new scheme launched in recent years, as far as I know.
It resembles the Term Deposits. But these schemes are launched to boost fund-pooling for Government schemes, etc.
They offer higher interest rates.
The minimum deposit is 1,000, and further amounts are in denominations of thousands. It is a one-time deposit for a fixed period.
Premature closures attract penalties and charges similar to FDs and Other Deposit Schemes.
B) Lending of Loans and Advances
Banks lend various types of loans and advances to facilitate their customers.The main types of these loans and advances are classified into three categories.
i) Cash Credit:
Cash Credit is similar to a loan sanctioned generally to business people against their stocks, shares, bonds, and other securities.
i) Cash Credit:
Cash Credit is similar to a loan sanctioned generally to business people against their stocks, shares, bonds, and other securities.
It is allowed upon opening a dedicated loan account, irrespective of their other accounts. A fixed amount of credit limit is sanctioned after evaluating the security provided.
Interest is charged on the amounts withdrawn, calculated by the number of days those particular balances are outstanding.
Customers can enhance their credit limits by providing further securities.
ii) Overdraft:
Overdraft facilities are provided to existing account holders on request up to a certain fixed limit, based on their creditworthiness.
ii) Overdraft:
Overdraft facilities are provided to existing account holders on request up to a certain fixed limit, based on their creditworthiness.
Whereas Cash Credit applies to business entities and traders, overdraft facilities can be obtained by salaried people, professionals, and even businesses also.
It is generally provided after verification of his/their creditworthiness and repayment capacity.
It can be availed for personal accounts and business accounts.
Interest is charged on the overdraft amounts.
iii) Loans and Term Loans:
Term loans, or simply loans, are sanctioned by banks to customers either for a short-term or comparatively longer periods to facilitate their various needs upon providing some security or lien.
iii) Loans and Term Loans:
Term loans, or simply loans, are sanctioned by banks to customers either for a short-term or comparatively longer periods to facilitate their various needs upon providing some security or lien.
Some of these loans are as follows, to list a few.
a) Home Loans
b) Car Loan or Vehicle Loan
c) Educational Loan
d) Personal Loan (for short-term needs of customers like meeting marriage expenses, hospital, or medical expenses, etc.)
These loans and advances are credited to their account after approval, and the customers can withdraw the money according to their needs.
Interest is calculated on the whole amount of the loan credited, and the loan amount is repayable in equal EMIs (including the interest amount), which is calculated according to the rates of interest prevailing at the time of the sanctioning of the loan.
Secondary functions of Banks are, generally, not performed by all banks. These may not be considered as essential functions of most commercial banks. So, they are known as Secondary Functions. These functions include many services provided by banks to facilitate customers and keep them around their banks.
The secondary functions of banks are classified into two types:
Secondary Functions of Banks
Secondary functions of Banks are, generally, not performed by all banks. These may not be considered as essential functions of most commercial banks. So, they are known as Secondary Functions. These functions include many services provided by banks to facilitate customers and keep them around their banks.
The secondary functions of banks are classified into two types:
Agency Functions and Utility Functions.
The Banks charge a commission or bank charges for providing each one of these secondary functions.
a) Discounting of Bills
Banks allow advances to their customers to facilitate their need for funds against bills of exchange drawn by them or of which they are the beneficiaries.
The Banks charge a commission or bank charges for providing each one of these secondary functions.
1) Agency Functions of Banks
a) Discounting of Bills
Banks allow advances to their customers to facilitate their need for funds against bills of exchange drawn by them or of which they are the beneficiaries.
The payments are made after deducting some charges. The bank will later collect the payment from the drawee of the bill or from the party that accepted the bill, by presenting it after the due date.
b) Transfer of Funds
Banks transfer funds of their customers from one account to another, from one branch to another, or to other banks both within the country and abroad at the request of customers in the form of demand drafts or mail transfers for which they charge some commission and/or bank charges.
c) Collection or Payment of Bills, etc.
Banks can also collect or pay your bills according to your instructions.
b) Transfer of Funds
Banks transfer funds of their customers from one account to another, from one branch to another, or to other banks both within the country and abroad at the request of customers in the form of demand drafts or mail transfers for which they charge some commission and/or bank charges.
c) Collection or Payment of Bills, etc.
Banks can also collect or pay your bills according to your instructions.
This includes collection and payment of salaries, pensions, utility bills, interest amounts, insurance premiums, taxes, dividends, etc.
Banks charge fees for this service.
d) Portfolio Services
The banks can also provide the services of acting as your agent in the sale and purchase of stocks, bonds, and debentures, etc.
e) Other Agency Functions
Banks can also act as trustees, executors, and income-tax consultants for your deposits, deeds, wills, and funds.
The banks also offer other public services to facilitate and woo their customers, which are known as general utility functions.
a) Locker Facilities
Lockers are available to customers for safekeeping of their valuable possessions, like gold ornaments, title deeds, or documents.
d) Portfolio Services
The banks can also provide the services of acting as your agent in the sale and purchase of stocks, bonds, and debentures, etc.
e) Other Agency Functions
Banks can also act as trustees, executors, and income-tax consultants for your deposits, deeds, wills, and funds.
2) General Utility Functions
The banks also offer other public services to facilitate and woo their customers, which are known as general utility functions.
a) Locker Facilities
Lockers are available to customers for safekeeping of their valuable possessions, like gold ornaments, title deeds, or documents.
Banks may charge some nominal fees for keeping them in the bank lockers.
b) Issue of Letter of Credit
Banks provide their customers with a letter of credit, certifying their creditworthiness, to facilitate their needs.
c) Issue of Traveller's cheques
Traveller cheques are also issued by banks to facilitate people on their journeys so that they need not carry huge cash balances with them while on a journey.
d) Underwriting of Securities
Banks undertake the function of underwriting or certifying the securities of their customers to facilitate the sales of those securities.
e) Purchase and Sale of Foreign Exchange
Banks are authorised to deal in foreign exchange transactions by RBI.
b) Issue of Letter of Credit
Banks provide their customers with a letter of credit, certifying their creditworthiness, to facilitate their needs.
c) Issue of Traveller's cheques
Traveller cheques are also issued by banks to facilitate people on their journeys so that they need not carry huge cash balances with them while on a journey.
d) Underwriting of Securities
Banks undertake the function of underwriting or certifying the securities of their customers to facilitate the sales of those securities.
e) Purchase and Sale of Foreign Exchange
Banks are authorised to deal in foreign exchange transactions by RBI.
So, they provide the services of handling the purchases and sales of foreign exchange transactions on behalf of their customers.
f) Collection of Statistics and Preparation of Project Reports
Banks collect statistics from markets on trade and commerce and can thereby provide the required information to their clients.
f) Collection of Statistics and Preparation of Project Reports
Banks collect statistics from markets on trade and commerce and can thereby provide the required information to their clients.
They also prepare project reports for their clients.
g) Social Welfare Programmes
Banks may also indulge in the activities of public awareness, public welfare, and literacy programmes as a service to the nation.
g) Social Welfare Programmes
Banks may also indulge in the activities of public awareness, public welfare, and literacy programmes as a service to the nation.
Note:
Please collect the latest information regarding the services provided and/or the interest rates from your banks.
