INDEX

ACCEPTING DEPOSITS . 5-9

SAVING A/C , CURRENT A/C , FD A/C , RD A/C.

GRANTING ADVANCES. 10-22

OVERDRAFT, CASH CREDIT, LOANS, DISCOUNTING OF BILLS,
CREDIT CREATION.

AGENCY FUNTIONS . 23-26

PAYMENT & COLLECTION OF CHEQUES, BILLS & PROMISSORY
NOTES, EXECUTION OF STANDING INSTRUCTION, ACTING AS
TRUSTEE, EXECUTOR OR ATTORNEY.
GENRAL UTILITY FUNTIONS. 27-30
SAFE DEPOSIT VAULT, TRANSFER OF MONEY, LETTER OF
CREDIT, UNDERWRITING, DEALINGS IN FOREIGN EXCHANGE,
ATM FACILITY, CREDIT CARD, DEBIT CARD, PUBLISHIG
INFORMATION, REFERENCE, PROJECT REPORT, GIFT
CHEQUES & GOLD COINS, GOLD RELATED SERVICES,
MERCHANT BANKING, FACTORING SERVICE.

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 FUNCTIONS OF BANK

What is bank?
Bank is an institution that deals in
money. Banks accept deposits and
make loans and derive a profit from
the difference in the interest rates paid and charged, respectively moreover
it provides other financial services.

In India, a banking company is responsible for transacting all the

business transactions including withdrawal of cheques, payments,
investments, etc. In other words, the bank is involved in the deposit
and withdrawal of money, repayable on demand, savings, and earning
a decent amount of profits by lending money.
Banks also help to mobilize the savings of an individual, making
funds accessible to businesses and help them to start a new venture.

Section 5(b) of Banking Regulation Act, 1949 (BR Act):

According to Banking Regulation Act, 1949. “Banking means accepting,
for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdraw able by cheque,
draft, order or otherwise.”

“Banking Company” means any company which transacts the business of

banking in India. Company means any company as defined in of the Companies
Act, 2013 and includes a foreign company within the meaning of that Act.

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 Reserve Bank of India:
RBI is the Central Bank of our country. It was established on
April 1, 1935 under the RBI Act, 1934. In India, the RBI supervises
operations of all the banks.
RBI Structure: The Central Board of Directors comprises of the Governor,
4 Deputy Governors and 15 Directors nominated by the Union Government. Its
headquarter is in Mumbai. RBI has 27 regional offices. It has setup five training
establishments e.g. College of Agricultural Banking and Reserve Bank of India
Staff College– Pune, National Institute for Bank Management- Pune, Indira
Gandhi Institute for Development and Research – Mumbai, Institute for
Development and Research in Banking Technology (IDRBT) - Hyderabad.

Types of Banking:

1. Central Bank :
The central bank of India is the Reserve Bank of India (RBI) which acts
as the apex body for regulating and monitoring all other banks in the
country. It also acts as a banker to the government in certain situations.
RBI is
instrumental in laying
down the repo rate,
reverse repo rate; cash
reserve ratio, and
statutory liquidity
ratio.

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 2. Commercial Bank:
Commercial banks perform the function for the public in
terms of accepting profits or extending loans. These loans act as investments of
the commercial banks intending to earn profit. Examples of commercial banks
in India are the State Bank of India, United Bank of India, ICICI Bank, HDFC
Bank, etc.

3. Specialized Bank:
Specialized Banks are formed with the specific goals of catering to a
particular industry or sector. It may focus on export and import or provide
financial services to some specific industries. An example of a
specialized bank in India is Export-Import Bank.

4. Co-Operative Bank :
Co-Operative Banks in India are established under the State Co-Operative
Societies Act, providing easy credit to the members of the cooperative
banks. One of the core functions of cooperative banks is to provide
financial
resources to the rural
population at large.
Examples of
cooperative banks in
India are – New India
Co-Operative Bank
Limited,
Ahmedabad
Mercantile Co-
Operative Bank Ltd.

4
 Functions of Banks:

1. Primary functions.

2.Secondary Functions.

1. Primary Functions of Bank:

Accepting of deposits:
Deposits are a means through which companies generally acquire funding. The
provisions concerning deposits are covered under Sections 73 to 76 of the
Companies Act, 2013, which are generally read with the prescribed Rules. As
per the Companies Act, 2013, a deposit is any money that is received, either by
means of a deposit or a loan or any other form as may be prescribed, but does
not include certain classes of transactions. A very basic yet important function
of all the commercial banks is mobilizing public funds, providing safe custody
of savings and interest on the savings to depositors. Bank accepts different types
of deposits from the public such as:

1. Saving Account:

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A SAVING ACCOUNT is a bank account at a retail bank. Common features
include a limited number of withdrawals, a lack of cheque and linked DEBIT
CARD facilities, limited transfer options, and the inability to be overdrawn.
Traditionally, transactions on savings accounts were widely recorded in A
PASSBOOK, and were sometimes called PASSBOOK SAVING ACCOUNT,
and BANK STATEMENT were not provided; however, currently such
transactions are commonly recorded electronically and accessible online. People
deposit funds in savings account for a variety of reasons, including a safe place
to hold their cash. Savings Account normally pay interest as well. Almost all of
them accrue Compound Interest over time. Several countries require savings
accounts to be protected by deposit insurance and some countries provide a
government guarantee for at least a portion of the account balance. There are
many types of savings accounts, often serving particular purposes. These can
include accounts for young savers, accounts for retirees, Christmas
club accounts, investment accounts, and Money Market Accounts. Some
savings accounts also have other special requirements, such as a minimum
initial deposit, deposits made regularly, and notices of withdrawal.

FEATURES OF SAVING ACCOUNT:

 There is no limit to the number of times the account

holder can deposit money in this account but there is a
restriction on the number of times money can be
withdrawn from this account.
 The rate of interest that an account holder gets varies
from 3% to 5% per annum.
 There is no minimum balance that needs to be
maintained for this type of an account.
 The savings account holders can get an
ATM/Debit/Rupay Card if they want to.
 Savings bank account is further divided into two types:
Basic Savings Bank Deposit Account (BSBDA) and
the other one is Basic Saving Bank Deposit Accounts
Small Scheme (BSBDS).
 The savings bank account is mostly eligible for
Students, Pensioners and Working Professionals.

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 2. Current Account:

Current Account is opened by Businessmen. Who have a higher number of

regular transactions with the bank? It includes deposits, withdrawals, and contra
transactions. It is also known as Demand Deposit Account Current account can
be opened in Co-Operative bank and Commercial bank. In Current Account,
amount can be deposited and withdrawn at any time without giving any notice.
It is also suitable for making payments to creditors by using cheques. Cheques
received from customers can be deposited in this account for collection. In
India, current account can be opened by depositing Rs.5000 to Rs. 25,000. The
customers are allowed to withdraw the amount with cheques, and they usually
do not get any interest. Generally, Current Account holders do not get any
interest on their balance lying in current account with the bank. Current account
holder get one important advantage of Overdraft facility.

.
FEATURES OF CURRENT ACCOUNT:

 This type of bank account is mostly opened by

Businessmen, Associations, Institutions, Companies,
Religious Institutions and other business-related
works, the current account can be opened.
 There is no fixed number of times that money can
either be deposited or withdrawn from such accounts.
 Internet banking is available
 This type of bank account does not have any fixed
maturity.
 Overdraft facility is available for current bank accounts.

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  There is no Interest that is paid on such accounts.

3. Recurring Deposit Account:

The Recurring Deposit Account is an account in the Bank or in a Post office
where a depositor deposits a preset amount of money every month for a fixed
time period (generally ranging from one year to five years). This format is
meant for persons who would like to deposit a fixed amount every month, with
the purpose of getting a lump sum after a few years. The little monthly savings
in the Recurring Deposit plan allow the saver to build up an attractive sum on
maturity. Interest rate in this kind of deposit scheme is calculable on quarterly
compounded based. An average fixed deposit ensures that a person allocates a
sum and in a particular period of time, you can withdrawal this amount.
Meanwhile, you don’t have access to touch the amount of sum or maybe
complement this. The recurring deposit operates over an equivalent process.
The main difference in this kind of scheme is instead of depositing a bulk
amount you should submit a specified amount in your account, which you
decided at the time of opening of your RD account, each month. This amount
could be a small amount that can’t blank your pocket much. And at the time of
maturity you will have a big amount over your principle amount including the
interest.

FEATURES OF RECURRING DEPOSIT ACCOUNT:

 Any Individual or an Institution can open a recurring

deposit account either separately or jointly.
 Periodic or Monthly Installment that need to be added can
be as low as Rs.50/- or may vary from bank to bank.
 The range of months for which an RD account can be
opened varies from 6 months to 120 months.
 The Interest Rate varies depending upon the bank you
choose to open an account with.
 Nomination facility is also available for RC accounts.

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  Passbook is issued for this type of Bank Account.
 Premature Withdrawal of the amount is permitted,
provided a sum of amount is deducted as penalty

4. Fixed Deposit Account:

A FIXED DEPOSIT (FD) is a financial instrument provided by banks

or NBFCs which provides investors a higher rate of interest than a
regular savings account, until the given maturity date. It may or may not require
the creation of a separate account. It is known as a term deposit or time
deposit in Canada, Australia, New Zealand, India and the United States,
and as a bond in the United Kingdom and for a fixed deposit is that the
money cannot be withdrawn from the FD as compared to a recurring deposit or
a demand deposit before maturity. Some banks may offer additional services to
FD holders such as loans against FD certificates at competitive interest rates.
It's important to note that banks may offer lesser interest rates under uncertain
economic conditions. The interest rate varies between 4 and 7.50%. The tenure
of an FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as 10
years. These investments are safer than Post Office Schemes as they are
covered by the Deposit Insurance and Credit Guarantee
Corporation (DICGC). However, DICGC guarantees amount up to ₹ 500000
per depositor per bank. They also offer income tax and wealth tax benefits.

FEATURES OF FIXED DEPOSIT ACCOUNT:

 It is a one-time deposit and one time take away account.

Under this type of account, the account holder needs to
deposit a fixed amount of sum for a fixed time period.
 The amount deposited in FD account can only be
withdrawn all at once and not in installments.
 Banks pay interest on the fixed deposit account.

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10
 Granting of Loans & Advances
The basic function of a commercial bank is
to make loans and advances out of the money
which is received from the public by way of deposits. The loans are particularly
granted to businessmen and members of the public against personal security,
gold and silver and other movable and immovable assets.  Such loans and
advances are given to members of the public and to the business community at
a higher rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies depending upon the
purpose, period and the mode of repayment. The difference between the rates of
interest allowed on deposits and the rate charged on the loans is the main
source of a commercial banks income.  A loan is granted for a specific time
period. Generally, commercial banks grant short-term loans. But term loans,
that is, loan for more than a year, may also be granted. The borrower may
withdraw the entire amount in lump sum or in installments. However, interest is
charged on the full amount of loan. A loan may be repaid either in lump sum or
in installments. An advance is a credit facility provided by the bank to its
customers. It differs from loan in the sense that loans may be granted for longer
period, but advances are normally granted for a short period of time. Further the
purpose of granting advances is to meet the day to day requirements of business.
The rate of interest charged on advances varies from bank to bank. Interest is
charged only on the amount withdrawn and not on the sanctioned amount.

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 Bank offers the following types of Loans and Advances:

1. Bank Overdraft:
 This facility is for current account holders. It allows holders to withdraw
money anytime more than available in bank balance but up to the provided
limit. An overdraft facility is granted against collateral security. The interest for
overdraft is paid only on the borrowed amount for the period for which the loan
is taken.

REASONS OF OVERDRAFT:
 Intentional loan : The account holder finds themselves short of money
and knowingly makes an insufficient-funds debit. They accept the
associated fees and cover the overdraft with their next deposit.
 Failure to maintain an accurate account register: The account holder
fails to accurately account for activity on their account and overspends
through negligence.
 ATM Overdraft: Banks or ATMs may allow cash withdrawals despite
insufficient availability of funds. The account holder may or may not be
aware of this fact at the time of the withdrawal. If the ATM is unable to
communicate with the cardholder's bank, it may automatically authorize a
withdrawal based on limits preset by the authorizing network.
 Temporary deposit hold: A deposit made to the account can be placed
on hold by the bank. This may be due to Regulation CC (which governs
the placement of holds on deposited checks) or due to individual bank
policies. The funds may not be immediately available and lead to
overdraft fees.
 Unexpected electronic withdrawals: At some point in the past the
account holder may have authorized electronic withdrawals by a
business. This could occur in good faith of both parties if the electronic
withdrawal in question is made legally possible by terms of the contract,
such as the initiation of a recurring service following a free trial period.
The debit could also have been made as a result of a wage garnishment,
an offset claim for a taxing agency or a credit account or overdraft with
another account with the same bank, or a direct-deposit chargeback in
order to recover an overpayment.

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  Bank fees : The bank charges a fee unexpected to the account holder,
creating a negative balance or leaving insufficient funds for a subsequent
debit from the same account.
 Returned cheque deposit: The account holder deposits a cheque or
money order and the deposited item is returned due to non-sufficient
funds, a closed account, or being discovered to be counterfeit, stolen,
altered, or forged. As a result of the cheque chargeback and associated
fee, an overdraft results or a subsequent debit which was reliant on such
funds causes one. This could be due to a deposited item that is known to
be bad, or the customer could be a victim of a bad cheque or a counterfeit
cheque scam. If the resulting overdraft is too large or cannot be covered
in a short period of time, the bank could sue or even press criminal
charges.

2. Cash Credits:
Cash Credit is a short term loan approved by banks for businesses, financial
institutions and companies to meet their working capital requirements. The
borrowing company can take money, even without a credit balance, up to
whatever borrowing limit exists.

Cash Credit (CC) is a source of short term finance for businesses and

companies. Cash credits are also called working capital loans as they fund the
instant cash requirements of the organizations, or to purchase current assets.
Borrowing limits on the amount of cash available for credit for the company
varies between commercial banks. The interest charged is on the daily closing
balance instead of the upper borrowing limit, so the repayment is only on the
amount spent from the available limit. Because it is taken for a short term, the
repayment of the amount taken on credit is also set at 12 or less months. Cash
credit is a loan and banks demand collateral to approve it. Cash credits are
similar to overdraft facilities, though there are significant differences between
them. Cash Credit is available for a shorter period of time and at a significantly
less interest rate than overdrafts. Cash Credit is used by financial institutions
and businesses and with a collateral, which thus becomes a loan, overdraft is
approved on the basis of the relationship that the bank and customer share. Cash
Credit is a part of the Line of Credit that is allowed for individuals and
institutions by banks to draw money from the fund facility whenever required.

13
Cash Credit is a secured form of line of credit due to the demand of collateral by
the bank. Business vintage, i.e. the amount of years the business has been in
existence and operation at the time of borrowing the Cash Credit, becomes a
requirement. Where overdraft evaluates the creditworthiness of the borrower
individually, the bank evaluates creditworthiness of the business through its
past financial statements to provide Cash Credit. Overdrafts are possible to avail
from an existing account, but Cash Credit can only be provided after creating a
loan account with commitment charges.

3. Loans:

 In finance, a Loan is the lending of money by one or more individuals,

organizations, or other entities to other individuals, organizations etc. The
recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on
that debt until it is repaid as well as to repay the principal amount borrowed.
The document evidencing the debt (e.g., a promissory note) will normally
specify, among other things, the principal amount of money borrowed, the
interest rate the lender is charging, and the date of repayment. A loan entails the
reallocation of the subject assets for a period of time, between the lender and
the borrower.
The interest provides an incentive for the lender to engage in the loan. In a legal
loan, each of these obligations and restrictions is enforced by contract, which
can also place the borrower under additional restrictions known as loan
covenants. Although this article focuses on monetary loans, in practice, any
material object might be lent. Acting as a provider of loans is one of the main
activities of financial institutions such as banks and credit card companies. For
other institutions, issuing of debt contracts such as bonds is a typical source of
funding.

14
 There are two types of loan:

A)Short term loan

B) Long term loan

A. Short term loan:

A short term loan is a type of loan that is obtained to support a temporary

personal or business capital need. As it is a type of credit, it involves repaying
the principle amount with interest by a given due date, which is usually within a
year from getting the loan. A short term loan is a valuable option, especially for
small businesses or start-ups that are not yet eligible for a credit line from a
bank. The loan involves lower borrowed amounts, which may range from $100
to as much as $100,000. Short term loans are suitable not only for businesses
but also for individuals who find themselves with a temporary, sudden cash
flow issue. Short term loans are called such because of how quickly the loan
needs to be paid off. In most cases, it must be paid off within six months to a
year – at most, 18 months. Any longer loan term than that is considered a
medium term or long term loan. Long term loans can last from just over a year
to 25 years. Some short term loans don’t specify a payment schedule or a
specific due date. They simply allow the borrower to pay back the loan at their
own pace.

B. Long term loan:

A form of loan that is paid off over an extended period of time greater than 3
years is termed as a long-term loan. This time period can be anywhere between
3-30 years. Car loans, home loans and certain personal loans are examples of
long-term loans. Long term loans can be availed to meet any business need like
buying of machinery or any personal need like owning a house.
Long-term loans are the most popular form of credit in the financial industry.
With the advent of technology and easy banking, home loans and auto loans
have become a prevalent form of loan. These loans generally offer a hefty loan
amount and are thus spread over a considerable period of repayment tenure.
Features of long-term loans can vary considerably depending upon the cause for

15
which these loans are being taken. Long-term loans almost always offer pre-
payment option to customers so that people who want to pay-off their loan
earlier than the stipulated timeframe do not have to pay continuously for long
tenures. Long-term loans are sanctioned based on the regular income of an
applicant and generally require a continuous source of income as well as
collateral to be submitted with the lending bank.

Advances - Secured and Unsecured

Unsecured Loan: Unsecured loan is a loan that is granted on the basis of the
borrower’s credit worthiness, rather than on the basis of any collateral security.
An unsecured loan is one that is obtained without taking any property from the
borrower collateral for the loan. Borrowers must have high credit ratings for
getting an unsecured loan. This type of loan is also called Personal Loans.
Obviously Unsecured debt carries higher risk, and as such lenders of unsecured
money charges higher rate of interest.

Secured Loan: Loans backed or secured by collateral security to reduce the risk
associated with lending are called secured loans. A Mortgage of house is
considered collateral for a loan. Assets backing debt or a debt instrument are
also considered as security, which means they can be claimed by the lender if
default occurs.

16
 Secured Loan Unsecured Loan

Loan against collateral / Security Loan based on individual credit

ratings {like cibil score}

Interest rate are lower than unsecured Interest rate are higher than secured
loan loan

Loans are available for a long tenure Loan are available for a fixed period

Borrowing limits are higher than Borrowing limits are lower than
unsecured loan unsecured loan

Loan approval process is longer due Loan approval process is shorter due
to paper work involved
to paper work involved

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 Principles of Lending Loans :

● Safety
● Liquidity
● Profitability

Types of Charges

● Mortgage: Section 58 of the Transfer of Property Act 1882 defines

mortgage as “the transfer of an interest in specific immovable
property for the purpose of securing payment of money advanced by
way of loan”.

● Pledge: Section 172 of the Indian Contract Act defines pledge as "The
bailment of goods as a security for the payment of a debt or
performance of a promise".

● Hypothecation: Hypothecation is the practice where a debtor pledges

collateral to secure a debt or as a condition precedent to the debt, or a
third party pledges collateral for the debtor. A letter of hypothecation is
the usual instrument for carrying out the pledge.

● Lien: A Lien is the right of a person in the possession of goods to retain

them until debts due to him have been satisfied. A Lien may be general or
particular.

● Assignment: Assignment refers to the transfer of some or all property

rights and obligations associated with an asset, property, contract, etc. to
another entity through a written agreement. For example, a payee assigns
rights for collecting note payments to a bank.

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 Principles of 5 C's

There are 5 basic principles for lending known as the 5 C’s. They are:

● Character: The borrower’s willingness to repay, his honesty and

integrity.

● Capacity: Ability to successfully run the business and repay the

borrowing out of the earnings.

● Capital: How much money he has put in the business as capital and how
much he has saved from his earnings so far, i.e. his net worth.

● Collateral: The security offered to the bank as cover for the advance. If
the borrower does not pay the dues, the bank can always recover it by
selling the security. The security should have stable value and should be
easily marketable.

● Conditions: The changes that are constantly occurring in the economy

which may affect the borrower’s business.

Credit Card

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Credit Card: A card issued by a financial company giving the holder an option
to borrow funds, usually at point of sale. On credit cards, interest is charged;
they are primarily used for short-term financing. Interest usually begins one
month after a purchase is made and borrowing limits are pre-set according to
the individual’s credit rating. Credit cards have higher interest rates (around 34-
36 % per year) than most consumer loans or lines of credit. Almost every store
allows payment for goods and services through credit cards. Because of their
widespread acceptance, credit cards are one of the most popular forms of
payment for consumer goods and services in the World. A credit card is a
payment card which enable cardholder to pay for goods and services based on
the holder’s promise to pay for them. The issuer of the card creates a revolving
account and grants a line of credit to the consumer (or the user) from which the
user can borrow money for payment to a merchant or as a cash advance to the
user.

Benefits to the credit card holders: The main benefit to the customer is
convenience. Compared to debit cards and cheques, a credit card allows small
short-term loans to be quickly made to a customer who need not calculate the
balance in his account before every transaction, provided the total charges do
not exceed the maximum credit line for the card. Many credit cards offer
rewards and benefits packages, such as enhanced product warranties at no cost,
free loss/damage coverage on new purchases, various insurance protections, for
example, rental car insurance, common carrier accident protection, and travel
medical insurance. Credit cards can also offer reward points which may be
redeemed for cash, products, or airline tickets.

20
 Demerits of credit card to the card holder:

1. High interest cost: Low introductory credit card rates are limited to a fixed
term, usually between 6 and 12 months, after which a higher rate is charged. As
all credit cards charge fees and interest, some customers become so indebted to
their credit card provider that they are driven to bankruptcy. Some credit cards
often levy a rate of 30 to 36 percent after a payment is missed. In other cases a
fixed charge is levied without change to the interest rate. Complex fee structures
in the credit card industry limit customers’ ability to comparison shop, help
ensure that the industry is not price-competitive and help maximize industry
profits.

2. Inflated pricing for all consumers: Merchants that accept credit cards must
pay interchange fees and discount fees on all credit-card transactions. The result
is that merchants my charge all customers (including those who do not use
credit cards) higher prices to cover the fees on credit card transactions.

3. Weakens self-regulation: Several studies have shown that consumers are

likely to spend more money when they pay by credit card. Researchers suggest
that when people pay using credit cards, they do not experience the abstract pain
of payment. Furthermore, researchers have found that by using credit cards one
can increase unnecessary consumption.

4. Grace Period: A credit card’s grace period is the time the customer is
allowed to pay the balance before interest is charged on the outstanding balance.
Grace periods may vary, but usually range from 20 to 55 days depending on the
type of credit card and the issuing bank.

21
 Discounting Bills Of Exchange
● Bank purchase or discount the commercial bills (drawn by the sellers on
the buyers) and this provides finances. It is a widely used method of short
term financing. It is a fund based activity.

● Since, BE is a stand-alone instrument which is admissible in Court of

Law, the business community prefers to draw Bills of Exchanges on the
buyers. If the buyers fail to honor their commitments, then it would be
easy for the sellers to go to court and claim their dues/damages solely on
the strength of the dishonored Bill of Exchange.

● The seller of the goods sends the transport documents and the invoices
along with BE for the invoice amount to the buyer bank with the
instruction to deliver the documents to the buyers on accepting the will of
exchange or on making its payment.

● The endorsement by the bank acts as a valid discharge for the buyers for
having made the payment.

● The sellers obtain lines of credit from their bankers to obtain finance
against the bills thus drawn on their buyers by endorsing them in favour
of the banks, so now the banks become the holders and have a claim on
the buyers for the payment.

● At this stage, the seller seeks finance from his bank on the security of the
BEs, so that he need not block their funds till the dues from their buyers
are realized.

● The banks ‘purchase’ the bills which are payable on Demand (i.e. without
any credit period) and ‘discount’ the bills which are payable after a
stipulated credit period. In both the cases, the banks deduct the interest at
the contracted rates in advance for the period up to the due dates of
payment.

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 Credit Creation (Money Creation)

The money supply of a country consists of notes and coins. The Central bank is
the primary source of money supply in an economy through circulation of
currency. It ensures the availability of currency for meeting the transaction
needs of an economy and facilitating various economic activities, such as
production, distribution and consumption. However, for this purpose, the
Central bank needs to depend upon the reserves of commercial banks. These
reserves of commercial banks are the secondary source of money supply in an
economy. The most important function of a commercial bank is the creation of
credit. In simple terms, credit creation is the expansion of deposits. Banks can
expand their demand deposits as a multiple of their cash reserves because
demand deposits serve as the principal medium of exchange.

AGENCY FUNCTIONS OF BANK

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Agency functions of Bank: Agency functions are those services that banks
provide to their customers for which they receive some income. Thus, these
functions add to the income of banks. Another advantage is that they know the
financial position of their customers better and thus, have correct idea of their
creditworthiness. Close relations are established between the banks and the
customers. Following services are provided by the bank.

1. Payment and Collection of Cheques:

Apart from transferring money from one place to another, banks are also in the
business of collecting the client’s money from other places. For instance, if you
have received a payment by way of a cheque or DD drawn or payable at any
station other than your own, you can deposit it in your account with your local
banker, and request for collection of the amount. The bank will send the cheque
to its branch at that centre and get the amount collected for a small fee. The
amount of cheque / draft will be deposited in your account, and the fee will be
deducted separately from the account. Banks also undertake collection of bills
of exchange – both usance and demand – for their business clientele. There are
RBI norms for the time expected to be taken for collection business, and these
norms are prominently displayed in all banks. If your collection is delayed
beyond this period, the bank is expected to pay interest on the amount. Retain
the counter foil of all deposits made in the bank as this is the only proof of
deposit made till your amount is credited. If
your business involves a number of such
payments, it is advisable to open an account
with a bank which has a large network of
branches. Charges for each of these activities
differ from bank to bank. While selecting a bank
for opening an account, these charges are an
important parameter which one should keep in

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mind. Collecting cheques, drafts, bill of exchange, dividends, and interests etc.
on behalf of its customers and credit the amount in their account is one of the
most important agency services rendered by the banks. Banker accepts standing
instructions from the customers and arranges to collect dividend, interest,
pension, salaries, bills etc. on behalf of his customers.

2. Bills and Promissory Notes :

A bill of exchange is a written order by the drawer to the drawee to pay money
to the payee. The most common type of bill of exchange is the cheque. A
cheque is a term of a bill of exchange drawn on a banker and payable on
demand. Bills of exchange are written orders by one person to his bank to pay
the bearer a specific sum on a specific date may be sometime in the future.
These are primarly used in international trade. Prior to
the advent of paper currency, bills of exchange were a
significant part of trade. A promissory note is a contract
detailing the terms of a promise by one party (the
maker) to pay a sum of money to the other (the payee).
The obligation may arise from the repayment of a loan
or from another form of debt. For example, in the sale of
a business, the purchase price might be a combination of
an immediate cash payment and one or more promissory
notes for the balance. The terms of a promissory note
typically include the principal amount, the interest rate if any, and the maturity
date. Sometimes there will be provisions concerning the payee’s rights in the
event of a default, which may include foreclosure of the maker’s interest.
Demand promissory notes are notes that do not carry a specific maturity date,
but are due on demand of the lender. Usually the lender will only give the
borrower a few days’ notice before the payment is due. For loans between
individuals, writing and signing a promissory note is often considered a good
idea for tax and record-keeping reasons.

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 3. Execution of Standing Instructions :
A standing order is an instruction an account holder gives to
his bank to pay a set amount at regular intervals to another
account. The instruction is sometimes known as a
banker’s order. It is typically used to pay rent, mortgage or
other fixed re+, but there is a potential risk that
unscrupulous or inefficient beneficiaries might claim money
that is not due to them.

4. Acting as a Trustee :
Under Section 3 of the Indian Trusts Act, 1882, a trust is an obligation annexed
to the ownership of property, arising out of a confidence reposed in and
accepted by the owner or declared and accepted by him for the benefit of
another or of the owner. Banks also act as trustees for various requirements of
the corporate, government and accepted by him for the benefit of another or of
the owner. Banks also act as trustees for various requirements of the corporate,
government and the general public. For example, whenever a company wishes
to issue secured debentures, it has to appoint a financial intermediary as trustee
who takes charge of the security for the debenture and looks after the interests
of the debenture holders. Such entity necessarily has to have expertise in
financial matters, and should be of sufficient standing in the market / society to
generate confidence in the minds of potential subscribers to the debenture.
Banks are the natural choice. For general public also, the banks normally have a
facility called “safe custody” they act as
trustees. They also act as bankers to trustees
appointed under the above act. A banker has
a few special obligations in such accounts
and accordingly special care is taken in such
accounts. Banks act as executors of will,
trustees, attorneys and administrators. As an
executor it preserves the “Wills” of the
customers and executes them after their
death. As a trustee, it takes care of the funds
of the customers. As an attorney, it signs
transfer forms and documents on behalf of
the customer.

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 5. Executor Or Attorney :
The administration of a will
or a settlement requires
specialized knowledge.
A bank undertakes these
complicated duties of
such  customers who may
desire to nominate bank
in such capacities. A bank
charges a small fee for
this act or function. The
customers desire to
bank to do this on behalf of
them because banks are
impersonal and have no
personal reasons to be dishonest.

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 General Utility Services of
Commercial Banks:

Besides agency services, commercial banks perform many general utility

services also. Banks render these services not only to their customers but also to
the general public. The following are some of the important general utility
services.

Safe Deposit Vault:

Safe deposit vault facility is available to the general public to enable them to
keep their valuables, such as shares, gold, silver ornaments etc. There is a
separate section in the bank, where lockers are provided in various sizes at
payment of a fixed rent.

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 Remittance Of Funds/Transfer Of Money:

An important function performed by commercial bank is remittance of funds;

banks remit money from one place to another or even from one country to
another. This facility is more useful to traders. Remittance of funds is done by
telegraphic transfer, mail transfer, demand draft etc.

Letters Of Credit:

The commercial banks issue letters of credit to enable the traders to buy goods
on credit. A letter of credit is a document or order by a banker in one place,
authorizing some other banker in some other place, to honor the drafts or
cheques of the person whose name appears in the document. The amount is
chargeable to the issues of the letter of credit. A bank's letter of credit helps a
businessman, because of the better credit standing of a bank compared with his
personal credit.

Underwriter/Underwriting

The commercial bank also acts as an underwriter for issue of shares and
debentures of any public and private limited company. The banks guarantee the
purchase of certain proportion of shares, if not sold in the market.

Dealings In Foreign Exchange:

By keeping separate foreign exchange department, bank deals in foreign

exchange. Commercial bank offer services for converting one currency into
another. Banks make profit in foreign exchange transactions. In India, Reserve
Bank of India has a, strict control on this function.

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 ATM Facility, Credit Card, Debit Card:

It is an electronic delivery system. It is a convenient method of withdrawing

money from bank without going to the bank through automated/ automatic teller
machines. It enables people to do their banking transactions at any hour of the
day.
Credit card is a plastic card issued by bank to its customers. It facilitates the
card holders to use it for purchase on credit or draw cash.
Debit card can be used for the purchase of goods and services. The amount gets
debited from the debit card holder’s account automatically.

Compilation Of Statistics/Publishing Information:

Some banks publish business and financial information relating to trade,

commerce and industry. Some banks also publish bulletins or journals on
research, on economic and commercial matter.

Reference/Status Report:

Banks collects the information regarding financial, economical, and statistical

of trade and commerce and gives it to the customers on request of them. Now,
Banks using information technology for this.

Project Reports:

A bank may prepare project reports and feasibility studies on behalf of the
clients.
Project reports enable the business firm to obtain funds from the market and to
obtain clearance from government authorities.

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 Gift Cheques and Gold Coins:

Banks issue gift cheques and gold coins to account holders as well as to non-
account holders.
The gift cheques/ coins can be used by the clients for the purpose of gifting on
occasions like weddings, birthdays etc.

Gold related Services:

Now a day’s many banks are providing gold services to its customers.
Banks are commercially buying and selling gold or gold ornaments from
customers on large scale basis. Some bank also provides advisory services to its
customers in terms of gold funds, gold ETF etc.

Merchant Banking

The commercial banks provide valuable services through their merchant

banking divisions or through their subsidiaries to the traders. This is the
function of underwriting of securities. They underwrite a portion of the Public
issue of shares, Debentures and Bonds of Joint Stock Companies.
Such underwriting ensures the expected minimum subscription and also convey
to the investing public about the quality of the company issuing the securities.
Currently, this type of services can be provided only by separate subsidiaries,
known as Merchant Bankers as per SEBI regulations.

Factoring Service

Today the commercial banks provide factoring service to their customers. It is

very much helpful in the development of trade and industry as immediate cash
flow and administration of debtors' accounts are taken care of by factors. This
service is again provided only by a separate subsidiary as per RBI regulations.
Balance sheet is a statement of assets and liabilities on a given date. In India,

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banks have to publish their balance sheets according to the performance i.e.,
'Form A' given in the III schedule of the Banking Regulation Act, 1949. The
study of the balance sheet along with its profit and loss account reveals its
financial soundness. A customer has to carefully study these statements to
choose his banks. The combined balance sheet of all banks in the country
reveals certain economic trends.

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