Major Functions Of Banks

Both in the mains section of SSB, IBPS, SBI and other similar exams, we have a section
titled as the professional knowledge. In this section, the questions specific to the post that
the candidate has applied for are usually put forth. Even in the personal interview phase, the
major focus is on the banking awareness of the candidate. The functions of any bank in
India are of two types that we shall discuss further below viz – The primary Functions and
the Secondary Functions.

The Primary Functions Of A Bank

The primary functions of a bank are two:

1. Accepting Deposits: Deposits are the amount of money that a customer hands over to the
bank. This is known as making a deposit. The deposits are of a few types namely: Saving
Deposit, Fixed Deposit, Current Deposit and the Recurrent Deposit. The various deposit
schemes are based on the type of deposit and the frequency of depositing. For example, in a
fixed deposit a definite sum is handed over to the bank for a few years. The interest is only
compounded if the deposit term is complete. Providing these services of deposit is one of
the primary functions of a bank. So what happens if you need money? Shouldn’t that also be
a primary function of the bank? Well, let us see further.

Saving/ Fixed/ Current Deposit

In a saving deposit, the amount and the rate of interest are low. Withdrawals are also
allowed but only in a limited number. The account is suitable for people who want to save
on salaries and similar sources of income.

Similarly, the fixed deposit is a fixed sum that one gives to the bank for a certain agreed
time. The withdrawals are not allowed in before the completion of the time of the fixed
deposit. On the other hand, the current account or deposit, there is no interest paid by the
bank and the customer can withdraw or deposit any number of times.

Now let us see the other secondary function:

2. Granting Loans and Advances: The bank lends people money on a time-interest basis.
Each loan amount is passed by the bank after due consideration and securing the bank’s
profit. The bank also gives advances to its customers. These are also the primary functions
of the banks. The bank provides the services of overdraft, cash credits, loans, and
discounting of the bill of exchange.

The banks also take part in what we call the secondary functions of the bank.

Secondary Functions Of The Bank

The secondary functions of the Bank are either selling gold coins to the public or selling
insurance products and selling mutual fund products etc. Let us make a more formal study.
Following are the important secondary functions of the Banks:

1. Agency Functions: The bank is an agent for its customers in a way that it invests on
behalf of its customer. Acting as the agent of the customer the bank may transfer funds,
the collection of cheques, periodic payments, portfolio management, periodic collections,
and several other agency functions. All of these functions are the secondary functions of
the bank.

2. General Utility Functions: The bank also performs several utility functions. Some of
the most important utility functions of the banks may include the issue of drafts, letter of
credits etc., locker facility, underwriting of shares, dealing in foreign exchange, project
reports, social welfare programmes, other utility functions. The banks also provide several
services like the safe deposit locker facilities, safe custody facilities and demat accounts.
The opening of demat accounts allows the account holder to trade in the stock exchange or
the money market directly. The customer that holds a demat account can directly buy or
sell shares from the capital market.

Types of Banks:
The Indian Banking System consists of:
(a) The indigenous Banking System.

ADVERTISEMENTS:

(b) The Modern Banking System:

(i) Commercial Banks.

(ii) State Bank of India.

(iii) Exchange Banks.:

(iv) Central Bank.

(v) The Reserve Bank of India.

(a) The Indigenous Banking System:

The indigenous bankers are usually a family concern.

Their main functions are:

a. To advance loans against ornaments, land etc.

b. To deal in Hundies.

c. To receive deposits.

(b) The Modern Banking System:

(i) Commercial Banks:

Most of the banks in India are Commercial banks, e.g., Punjab National Bank, Allahabad
Bank, United Commercial Bank etc. Such banks deal in short-term credit. They collect
the surplus balances of the individuals and finance the temporary needs of commercial
transactions. A commercial bank borrows money from individuals by accepting deposits
on current account saving account, fixed deposits and miscellaneous deposits and then
it lends money to Industrialists and Traders.

As a principle, the commercial bank:

(a) Supplies circulation capital rather than fixed capital,

(b) Gives loans for short period only,

(c) Does not involve itself too much with one industry only, because if that industry fails,
the bank’s assets may become frozen.
(ii) The State Bank of India:
The Imperial Bank of India established on January 27,1921 was renamed as the State
Bank of India on July 1,1955 after passing of the State Bank of India Act, 1955. The State
Bank of India has its central office in Bombay and seven local head offices in Calcutta,
Madras, Bombay, Delhi, Hyderabad, Kanpur and Ahmedabad.

The main functions of the State Bank of India are:

(i) The bank borrows money from public by accepting deposits.

(ii) It lends money to industrialists, farmers and Traders for short periods.

(iii) It provides financial assistance to importers and exporters.

(iv) It undertakes foreign exchange business.

(v) It collects cheques, drafts, bill of exchange, dividends, interest, salaries and pension
on behalf of customers.

(vi) It maintains safe deposit vaults.

(iii) Exchange Banks:

Whereas commercial banks finance the internal trade of the country, the Exchange
banks finance its foreign trade. Exchange banks of our country will have their head
office located outside India.

The functions of Exchange banks are:

(ii) To supply finance for imports and exports.

(ii) To purchase and discount bills of exchange drawn by Indian exporters and also
collect on maturity the proceeds of bills drawn on Indian Importers for goods purchased
by them.

(iii) To act as referees, collecting and supplying information about the foreign
customers, etc.

A few foreign exchange banks in India are:

(i) The National and Grindlay Bank.
(ii) Lloyds Bank.

(iii) The Mercantile Bank.

If an exporter in Bangalore requires finance to move goods from Bangalore to Bombay

port and from there to New York, he may enter into agreement with an exchange bank
for financing the movement of his goods.

(iv) Central Banks:

Central Bank of a country is an apex monetary and banking institution that controls the
supply of currency in that country. Central bank is entrusted with the duty of regulating
the volume of currency and credit in the country. Central bank controls the banking
structure of country. Central bank controls and regulates the monetary, banking and
credit policies of the country.

Central bank determines the quantum of money which should be circulated in the
country. Central bank performs general banking and agency services for the
Government. All the banks keep reserves with the Central Bank and banking policies in
the country are framed by it. Whereas the object of a commercial bank is to earn profit, a
central bank stimulates growth of the country.

Whereas a commercial bank deals with public directly, a central bank deals with
commercial banks and other institutions and the government of the country. The central
bank is the custodian of the foreign exchange reserves of the country. The central bank
controls and regulates credit and currency with a view to stabilize prices in the country.
The central bank pumps in more money when the market is short of cash and pumps
out money when there is an excess of credit.

(v) The Reserve Bank of India:

Reserve Bank of India was established as the central bank of the country on April 1,1935,
though the idea existed since 1836. As the Central bank of the country, the Reserve Bank
is the banker to the banks also. The Reserve Bank regulates the entire banking system of
the country.

It regulates the issue of bank notes and the keeping of reserves with a view to secure
monetary stability in India and generally to operate the currency and credit system of
the country to its advantage. It has also been given the power to pursue on appropriate
credit policy. It has control over the cash reserves of the commercial banks. The Reserve
Bank has also been given the power to issue license to the banking companies in the
country.

The Reserve Bank is required to remove structural instability of the banking system and
to provide leadership to the money market. The Reserve Bank was nationalised with the
passing of an act in 1948. The entire share capital of the bank was acquired by the
Central Government w.e.f. Jan 1,1949 and the Reserve Bank started functioning as a
state-owned and state-controlled institution.

The affairs of Reserve Bank are controlled by the Central Board of Directors consisting
of twenty members. There are one Governor, four deputy governors, fourteen Directors
and one Government official nominated by the Central Government.

For performing its function, the Reserve Bank consists of the following
departments:
(a) Issue department. It has the sole right of note issue which must be backed by gold
and sterling securities to the extent of 40%.

(b) Banking department. It is authorized to accept money on deposit without interest, to

purchase, sell and rediscount trade bills and bills against Government securities
maturing within 90 days and bills against agricultural crops maturing within 9 months;
to purchase and sell to member banks, sterling and to regulate credit in the interest of
trade and industry.

(c) Exchange control department. It controls foreign exchange transaction and

maintains a stable rate of exchange.

(d) Department of Banking Operations and Development extends banking facilities to

semi-urban areas and keeps solving the problems of rural finance.

(e) Industrial Finance Department has been entrusted with all matters pertaining to
industrial finance including the activities of state financial corporations.

(f) Research and Statistics Department acts as an agency for the collection and
dissemination of financial information and statistics in India and abroad.
(g) Legal Department gives legal advice on various matters referred to it by other
departments of the bank.

(h) Departments of Financial Companies regulates the acceptance of deposits by non-

banking companies.

(i) Department of Accounts and Expenditure maintains and supervises Reserve Bank’s
accounts in the Issue and Banking Department.

(j) Inspection Department carries out periodic internal inspection of different offices
and departments of the Reserve Bank.

(k) Department of Administration and Personnel deals with general administration,

training of staff and employer-employee relations.

(l) Secretary’s Department deals with policy matters relating to open market operations,
floatation of Government loans and treasury bills and the Reserve Bank’s dealings with
international financial organisations.

Meaning of Banks:
A bank (German word) means a joint stock fund. A bank denotes a financial institution
dealing in money. A bank is an institution that is prepared to accept deposits of money
and repay the same on demand. The system of banking is very old and the same was
prevalent in Greece, India and Rome.

A banker (i.e., person or a corporation) deals in credit and money i.e. it accepts deposits
from those who want to commit their wealth to safety and earn interest thereon, and
lends money to the needy through cheques and advances and loans of various sorts.

Role of Banks in the Economic

Development of a Country
Article Shared by <="" div="" style="margin: 0px; padding: 0px; border: 0px; outline: 0px;

font-size: 14px; vertical-align: bottom; background: transparent; max-width: 100%;">

ADVERTISEMENTS:
In this article we will discuss about the role of banks in the economic development of a
country.

The banking system plays an important role in the modern economic world. Banks
collect the savings of the individuals and lend them out to business- people and
manufacturers. Bank loans facilitate commerce.

Manufacturers borrow from banks the money needed for the purchase of raw materials
and to meet other requirements such as working capital. It is safe to keep money in
banks. Interest is also earned thereby. Thus, the desire to save is stimulated and the
volume of savings increases. The savings can be utilised to produce new capital assets.

ADVERTISEMENTS:

Thus, the banks play an important role in the creation of new capital (or capital
formation) in a country and thus help the growth process.

Banks arrange for the sale of shares and debentures. Thus, business houses and
manufacturers can get fixed capital with the aid of banks. There are banks known as
industrial banks, which assist the formation of new companies and new industrial
enterprises and give long-term loans to manufacturers.

The banking system can create money. When business expands, more money is needed
for exchange transactions. The legal tender money of a country cannot usually be
expanded quickly. Bank money can be increased quickly and used when there is need of
more money. In a developing economy (like that of India) banks play an important part
as supplier of money.

The banking system facilitates internal and international trade. A large part of trade is
done on credit. Banks provide references and guarantees, on behalf of their customers,
on the basis of which sellers can supply goods on credit. This is particularly important in
international trade when the parties reside in different countries and are very often
unknown to one another.

ADVERTISEMENTS:
Trade is also assisted by the grant of loans by discounting bills of exchange and in other
ways. Foreign exchange transactions (the exchange of one currency for another) are also
done through banks.

Finally, banks act as advisers, counsellors and agents of business and industrial
organisations. They help the development of trade and industry.

Conclusion:
There are special types of banks which provide facilities to different kinds of economic
activities. Now-a-days in every country there is a central bank which controls the
activities of all other banks, endeavours to keep the price level steady, and controls the
rates of foreign exchange.

Top 8 Roles of Commercial Banks in a

Developing Country
The following points highlight the top eight roles of commercial banks in a
developing country.
Some of the roles are: 1. Mobilising Savings for Capital
Formation 2. Existence of a Large Non-monetized Sector 3. Financing
Industrial Sector 4. They Help in Monetary Policy and Others.
Role # 1. Mobilising Savings for Capital Formation:

People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs to individual depositors.

To mobilize dormant savings and to make them available to the entrepreneurs for
productive purposes, the development of a sound system of commercial banking is
essential.

Role # 2. Existence of a Large Non-monetized Sector:

A developing economy is characterized by the existence of a large non-monetized sector,

particularly, in the backward and inaccessible areas of the country. The existence of this
non-monetized sector is a hindrance in the economic development of the country. The
banks by opening branches in rural and backward areas can promote the process of
monetization in the economy.
Role # 3. Financing Industrial Sector:

Commercial Banks provide short-term and medium- term loans in the industry. In
India, they undertake financing of small scale industries and also provide hire-purchase
finance. These banks not only provide finance for industry but also help in developing
the capital market which is underdeveloped in such countries.

Role # 4. They Help in Monetary Policy:

The Commercial Banks help the economic development of a country by following the
monetary policy of the Central Bank. The Central Bank is dependent upon those
Commercial Banks for the success of the monetary management in keeping with
requirements of a developing economy.

Role # 5. Commercial Banks Help in Financing Internal and External Trade:

ADVERTISEMENTS:

The banks provide loans to wholesalers and retailers to stock goods in which they deal.
They also help in the movement of goods from one place to another by providing all
types of facilities such as discounting and accepting bills of exchange, providing
overdraft facilities, issuing drafts etc. They help by giving finance both exports and
imports of developing countries.

59/2
bank accused of "irresponsible lending" when it gives a loan to a student
so he can buy a motorbike
A 20-year old university student, Mr D, lived at home and worked full-time in a local supermarket
during the vacations. He had a part-time job at the same supermarket during term-time.

Mr D applied successfully to his bank for a loan of £2,500, in order to buy and insure a second-hand
motorbike. But as soon as he told his mother about the loan, she complained to the bank. She said its
decision to lend her son the money had been "ill-judged and irresponsible" and that it had taken
advantage of her son's inexperience.

Mrs D told the bank that her son had planned to go travelling for a year after he graduated. She was
concerned that the loan repayments would not only prevent him from saving money for his travels,
but also leave him short of cash. She also believed that, by lending him the money, the bank had
actively encouraged her son to buy a powerful motorbike.

Mrs D thought the bank should write-off the loan and take the motorbike in exchange. The bank
disagreed, so - with her son's knowledge and agreement - Mrs D brought the dispute to us on his
behalf.
complaint rejected
It was clear that Mrs D wanted us to take a public position on the issue of lending to young people.
We explained that we could not do that, as our role is simply to help resolve individual disputes.

When we looked into the details of this case, it was clear that the bank had made a proper assessment
of Mr D's financial position before agreeing to lend him the money. We agreed with the bank's view
that Mr D's regular employment and low outgoings meant he could easily afford the repayments.

We did not accept Mrs D's opinion that the lender had taken advantage of her son. He was an
intelligent young man who clearly understood the commitment involved in a loan. Mr D had already
decided to buy the motorbike before he approached the bank and the lender had no duty - or reason -
to discourage him. There were no grounds on which we could fairly make the lender write-off the loan
in exchange for the motorbike. We rejected the complaint.