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Kalyan City is a fast emerging residential township in the Thane district of Maharashtra state, India. It is a central suburban town and resides 54 kms north-east of Mumbai. This blog regularly shares quality academic materials. Here we also document our unique experiences and vivid memories of life. Read our lucid informative articles to excel your understanding, knowledge and success.

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Articles published on Kalyan City Life blog are inspired from our work experience, field research, study of various good books and papers, seminars and consultations from subject scholars. Our unique collection of useful study notes is an outcome of a team effort and hard work of Gaurav Akrani, Prof. Mudit Katyani and Manoj Patil.

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Functions of Banks - Important Banking Functions and Services



square What are the Functions of Banks? Diagram ↓


The functions of banks are briefly highlighted in following Diagram or Chart.

functions of banks

These functions of banks are explained in following paragraphs of this article.


square A. Primary Functions of Banks ↓


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

These primary functions of banks are explained below.


1. Accepting Deposits


The bank collects deposits from the public. These deposits can be of different types, such as :-

  1. Saving Deposits
  2. Fixed Deposits
  3. Current Deposits
  4. Recurring Deposits

a. Saving Deposits


This type of deposits encourages saving habit among the public. The rate of interest is low. At present it is about 5% p.a. Withdrawals of deposits are allowed subject to certain restrictions. This account is suitable to salary and wage earners. This account can be opened in single name or in joint names.


b. Fixed Deposits


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. Withdrawals are not allowed before the expiry of the period. Those who have surplus funds go for fixed deposit.


c. Current Deposits


This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact, there are service charges. The account holders can get the benefit of overdraft facility.


d. Recurring Deposits


This type of account is 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.


2. 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 the interest rates (lending rate and the deposit rate) is its profit.

The types of bank loans and advances are :-

  1. Overdraft
  2. Cash Credits
  3. Loans
  4. Discounting of Bill of Exchange

a. Overdraft


This type of advances are given to current account holders. No separate account is maintained. 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 three months or so. Interest is charged on actual amount withdrawn. An overdraft facility is granted against a collateral security. It is sanctioned to businessman and firms.


b. 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.


c. Loans


It is normally for short term say a period of one year or medium term say a period of five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form of installments spread over a period of time or in a lumpsum amount. 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.


d. 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 or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected.


square B. Secondary Functions of Banks ↓


The bank performs a number of secondary functions, also called as non-banking functions.

These important secondary functions of banks are explained below.


1. Agency Functions


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

  1. Transfer of Funds
  2. Collection of Cheques
  3. Periodic Payments
  4. Portfolio Management
  5. Periodic Collections
  6. Other Agency Functions

a. Transfer of Funds


The bank transfer funds from one branch to another or from one place to another.


b. Collection of Cheques


The bank collects the money of the cheques through clearing section of its customers. The bank also collects money of the bills of exchange.


c. Periodic Payments


On standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent, etc.


d. Portfolio Management


The banks 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.


e. Periodic Collections


The bank collects salary, pension, dividend and such other periodic collections on behalf of the client.


f. Other Agency Functions


They act as trustees, executors, advisers and administrators on behalf of its clients. They act as representatives of clients to deal with other banks and institutions.


2. General Utility Functions


The bank also performs general utility functions, such as :-

  1. Issue of Drafts, Letter of Credits, etc.
  2. Locker Facility
  3. Underwriting of Shares
  4. Dealing in Foreign Exchange
  5. Project Reports
  6. Social Welfare Programmes
  7. Other Utility Functions

a. 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 trade. It also issues travellers' cheques.


b. Locker Facility


The bank provides a locker facility for the safe custody of valuable documents, gold ornaments and other valuables.


c. Underwriting of Shares


The bank underwrites shares and debentures through its merchant banking division.


d. Dealing in Foreign Exchange


The commercial banks are allowed by RBI to deal in foreign exchange.


e. Project Reports


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


f. Social Welfare Programmes


It undertakes social welfare programmes, such as adult literacy programmes, public welfare campaigns, etc.


g. Other Utility Functions


It acts as a referee to financial standing of customers. It collects creditworthiness information about clients of its customers. It provides market information to its customers, etc. It provides travellers' cheque facility.




squareTranslation



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3 Comments :

  1. Anonymous said...

    Thanks to the author. Really useful. Everything explained in detail. If possible can you provide the exact difference between cash credit and overdraft?

  2. Anil Kumar Varma said...

    Wow..!,
    It's Really Useful for the candidates who wants to settle themselves in the Banking Industry
    Thanks' a lot for such a wonderful material..

  3. Gaurav Akrani said...

    Difference between Cash Credit and Overdraft:

    Cash credit is a long term borrowing and on a regular basis.
    Overdraft is a temporary borrowing and is usually for a very short period.

    Cash credit needs opening of a separate account with bank, namely cash credit account.
    Overdraft facilities may be available in the same current account held with the bank.

    Cash credit is given against tangible securities like the value of stock (raw material), work in progress or finished goods.
    Overdraft is given against paper securities like Bill Receivables, Bonds, Certificates, etc.

    Rate of Interest on cash credit facility is higher.
    Rate of interest on overdraft facility is relatively lower.

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