FUNCTIONS OF BANKS

PRIMARY FUNCTIONS OF BANKS 

The primary functions of a bank are known as banking functions. They are the main functions of a bank.  

Accepting Deposits: The bank collects deposits from the public. These deposits could be of different types such as:  

Savings deposits: boosts saving habit among the masses. The rate of interest is quite low. Withdrawals of deposits are allowed subject to certain limitations. This account is suitable for house wives, students, salary and wage earners. This account can be opened in single name or joint names.  

Fixed deposits: A lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which varies with the period of deposit and from scheme to scheme. Withdrawals are not allowed before the expiry of the period. 

Current deposits: are opened by businessmen. Withdrawals are freely allowed without restrictions. No interest is paid, however few banks have started paying interest to attract customers. There are service charges. The account holder can get the benefit of overdraft facility too. 

Recurring deposits: are operated by salaried persons and petty traders. A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid on this compared to savings and current deposits. 

 

Granting of loans and advances : The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in interest rates is the profit of banks. 

Types of bank loans and advances are: 

Overdraft: This type of advances are given to current account holders only. No separate account needs to be opened. All entries are made in the current account. A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say two months or so. Interest is charged on actual amount withdrawn. An overdraft facility is granted against a collateral security.  

Cash credits: The client is allowed cash credit upto a specific limit fixed in advance. It can be given to current account holders as well as to others who do not have an account with bank. Separate cash credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The cash credit is given against the security of tangible assets and / or guarantees. The advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.  

Loans: loans are normally for short term periods of one year or medium term of five years. Nowadays, banks do lend money for long term. Repayment of money can be in the form of installments. Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower than what is charged on overdrafts and cash credits. Loans are normally secured against tangible assets of the company.  

Discounting of Bill of exchange: The bank can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the drawer of the bill by deducting discount charges. On maturity the bill is presented to the drawee or acceptor of the bill and the amount is collected.  

SECONDARY FUNCTIONS OF BANKS 

The bank performs a number of secondary functions which are: 

Agency functions: The bank acts as an agent of its customers. The bank performs a number of agency functions which include: 

Funds transfers: The bank transfers funds from one branch to another or from one place to another. This includes both national and international transfers. 

Collection of cheques: The bank collects the money of the cheques through clearing section. The Bank also collects money of the bills of exchange. 

Periodic payments: On standing instructions of the customers, banks make payments in respect of electricity bills, telephone bills, insurance premiums, rent, etc. 

Portfolio Management: The bank also undertakes to purchase and sell the shares and debentures on behalf of the clients and accordingly debits or credits the account. This facility is called portfolio management. This function of banks is gaining importance these days. 

Periodic collections: The bank collects salary, pension, dividend and such other periodic collections on behalf of the client. This helps speedy and hassle-free work.  

Other Agency functions: They act as trustees, executors, advisors, and administrators on behalf of its clients. They act as representatives of clients to deal with other banks and institutions.  

 

GENERAL UTILITY FUNCTIONS 

The bank also performs general utility functions such as: 

Issue of drafts and Letter of credits: Banks issue drafts for transferring money from one place to another. It also issues letter of credit, especially in case of, import / export trade.  

Locker facility: The bank provides locker facility for safe custody of valuable documents, gold ornaments and other valuables. This helps customers stay relaxed at home. 

Underwriter of shares: The bank underwrites shares and debentures through its merchant banking division. This helps both the investors and firm to have safe and easy dealings. 

Dealing in foreign exchange: The commercial banks are allowed by RBI to deal in foreign exchange. This helps both the Indian and foreign clients.  

Project reports: The bank may also undertake to prepare project reports on behalf of its clients. 

Social Welfare Programs: Banks undertake social welfare programs such as adult literacy programs, public welfare campaigns, etc.