k ? )a Bank _ age, Banking cons ce long time but there 4 f economic growth. The term Ban foundation stone of economic gro. te de conception regarding its peat Acontng ‘ si chi or Banacheri, because ; i ders were known as Banechi or Bana ae Says iin mone gel busines, called Banchl Origin of the word ‘ type of ae vrtuord Banque, Both these words refer to some kind of bank the word Banchi orto the te iniated from the German word Banck meaning Joint Fund, to another viewpoint, bank orgi be established in 1148. The first public bank was Bank of | rding to ' = ae a er i . mr bank refers to an institution that deals in. money, Trig aes ariey eri 1 bd ies Joans to those who are in need. Besides dealingin ic an : ; banks these days Bee ac cut functions, such as credit creation, agency job and general perfor . ¢ | en, therefore, is such an institution which accepts deposits from the people, gives loans, er credit and undertakes agency work reales in the words of T.G.Hart, ‘A Banker is one who, in the ordinary course of his business, receives money which he pays by honoring cheques of persons from whom or on whose account he receives it. “* — According to Whitehead, “A Bankis defined as an institution which collects surplus-funds from the public, safeguards them, and makes them butalso lends sums not required by their true owner Provide security, ) — Kinley is of the opinion that, “A bank is an establishment which makes to individuals such ‘advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use.”” —— According to Walter Leaf, ‘A | Teceive from the public, deposits - available to the true owner when required to those who are in need of funds andcan Banker is a person or Cor Payable on demand on cl king Companies Act, “Banking company is one which "poration which holds itself out to heque.””‘Definition and Functions In short, a bank is an institu 3 ition which , and advances for the purpose of earning profita Poss wihdrawable by cheque 3. Functions of Commercial Banks Funetions of commercial banks can be divided into three parts : (a) Primary Functions (2) Secondary Functions 3.1 Primary Functions Commercial Banks perform two primary functions : (1) Accepting of Deposits and (2) Advancingof Loans. (1) Accepting of Deposits A bank accepts deposits from the public. People can deposit their cash balances in either of the following accounts as per their convenience: (i) Fixed or Time Deposit Account: Cash is deposited in this account for a fixed period) The depositor gets receipts for the amount deposited. Itis called Fixed Deposit Receipt. Itcomprises the name | of the depositor, amount of the-deposit, rate of interest and the period of deposit. This receipt is not \ transferable. If the depositor stands in need of the amount before the expiry of the fixed period, he can _withdraw the same after paying the discount to the bank. This type of deposit attracts high rate of interest. Longer the period of deposit higher is the rate of interest. It is so because bank can use this amount fora longer period. It is also called Time Liability of the bank. 2 (ii) Current or Demand Deposit Account: A depositor can dey times he likes and can also withdraw the same any number of times he wishes. Ordinarily, deposit their funds in this account. Generally, no interest is paid by the bank on the dema account, Rather the bank demands some charges from the depositors ifthe amount lying in falls below the minimum limit. The amount from this account is withdrawn through cheque account is also called Demand Liability. In America, itis called Chequing Account. = (iii) Saving Deposit Account: This account is meant for encoura rictions are imposed by the bankon the ‘amountto be withdrawn by the deposi \depositor. Interest paid on this account is less t! (©) Recurring Deposit Account: Under this account a specified amount is deposited ¢ month fora specific period, say, 12, 24, 36 or 60 months. This amount cannot be withdrawn cosas expiry of the given period except under exceptional circumstances.’ Interest on the amount capo ~ also credited to the account of the depositor: Like time-deposit account, interest paid on this account | EBLE SC, higher than other accounts. Q (2) Advancing of Loans Another primary function of the commercial banks is to advance loans. A certain part of the cash received by the banks as deposits is kept in the reserve and the rest is given as loan. Banks advance loans mostly for productive purposes, on approved security. The amount of loan is generally less than the value of the security. Banks advance following types of loans: (i) Cash Credit: The debtor is allowed to withdraw a certain amount on a given security. The debtor withdraws the amount within this limit, as per his requirementand also repays it. Interest is charged by the bank on the amount actually withdrawn. (ii) Over-Draft: Clients who have current account with the bank get the sanction to withdraw “more money than is lyingin the said account. Its called over draft. This facility is available for short-term toreliable persons. Supposing a person has Rs. 10,000 lying in current account. If the bank allows him to issue cheques upto Rs. 12,000, then the amount of Rs. 2,000 wil be called over- draft. (iii) Loans and Advances: These loans are given in the form ofa fixed amount. Bank enters the amount of loan in the account books of the debtor. The latter can withdraw it any time2The interest is chargeable on the whole amount from the day the loanis sanctioned irrespective of the fact that the 7 withdraws the whole amount or part of it. is another method of giving advance by the banks. (iv) Discounting of the Bill of Exchange: Under this method, banks give advance to their clients on the b: maturity of such bills! A deduction is made out of the face value oft This deduction is called discounting of the bill. The banks discount only th discounted at the market rate of interest. On the expiry of the maturity period, the bill is collected from the party concerned by the bank. sis of their bills of exchange before the _ fhe bill for the period the billis yetto™un: trade bills. The bills are the amount mentioned inDefinition and Functic Bank- it ‘unctions 297 tment i ) event ably oats Securities: Purchasing of government securities by the banks fantamounts to advancing loans by them to the government, Banks prefer to buy government securities as these are considered to be the safest investment. (3) Credit Creation: One of the main functions of banks these days is to create credit. Banks create credit by giving more loans than their primary deposits. 8 3.2 Secondary Functions Besides the above primary functions, banks also perform many secondary functions such as agency functions, general utility and social functions. 2 O (1) Agency Functions 4 Banks act as agents to their customers in different ways: (i) Collection and Payment of Various Items: Banks collect cheques, rent, interest etc. on: behalf of their customers and also make payment of taxes, insurance premia etc. on their behalf (ii) Purchase and Sale of Securities: Banks normally are more knowledgeable with regard to stock and share business. As such they buy, sell and keep in safe custody, the securities on behalf of their customers. (iii) Trustee and Executor: Banks also act as trustees and executors of the property of their customers on their advice. e A (iv) Remitting of Money: Banks also remit money from one place to the other through bank drafis. () Purchase and Sale of Foreign Exchange: Banks buy and sell foreign exchange and thus promote international trade. This function is mainly discharged by Foreign Exchange Banks. (vi) Letter of References: Banks also give information about economic position of their: customers to domestic and foreign traders and likewise provide information about economic position of domestic and foreign traders to their customers. O (2) General Utility Services a Commercial banks also provide certain services of geteral utility to the society: 7 j () Locker Facilities: Banks provide locker facilities to their customers, People can keep theie1) Help in Transportation of Goods: Big businessmen or industrialists after consigning goods sit etailers send the Railway Receipt (Consignment Note) to the bank, The retailers get this Receipt the bank on payment of the value of the consignment fo it. Having obtained the Railway Receipt tom the bank they get delivery of the consignment from the Railway Goods Office. In this way banks help inthe transportation of goods from the production centres to the consumption centres. 3.3 Social Functions In modern times, banks also perform following significant functions relating to economic development and social welfare of the country: (1) Banks collect ide savings of the people and invest the same in productive activities. Thus, they help in accelerating the rate of capital formation. (2) Banks are also taking pert in capital market. They have been giving long-term advances to industry, agriculture, small-scale industry, traders, transporters ete. They also finance export trade. {@) Banks give loans to weaker sections of the society on low rate of interest. Small artisans, Jandless agricultural labourers and poor classes get cheap loans from the banks (4) Commercial banks have opened their branches in rural areas and small towns to provide banking facilities to the people living therein. {6) Since banks do not give loans for speculative and unproductive activities, bank credit can be used productively. (6) Banks also give credit at low rate of interest to finance such programmes as are meant for rural development and removal of unemployment. (7) The commercial banks either of their own or through their subsidiaries, perform several financial functions, These include mutual funds, Merchant banking, Housing Finance, Factory Leasing factoring, Stock Investment etc. Inshort, a modern bank performs several functions which are of great significance to the economic growth of a country. A bank is no longer an institution required to accept deposits and advance loans. It plays a significant role in the economic development and social welfare of a country. 6 4. Role of Commercial Bank in Economic Development Commercial banks play a significant role in economic development of less developed countries like India. Commercial Banks are a nerve-cenire of the country's capital market, industrial as well a trading activity. In the words of Thirlwalll, “Banks can encourage thrift and allocate savings more Cece than otherwise by offering a return on savings to be used outside the sector in which they may operate. Banks can help to breakdown sectoral bottlenecks and to maintain uniformity interest rates’. Following ‘observations highlight the role of commercial banks in economic development:onkDefintion and Functions (1) Helpful in Mobilisation of Savings and C. fecilties of deposits, and that too on lucrative terms, This at aa into organised capital market of the: country, By eee entrepreneurs, banks convert savings into capital form: ‘and development of less developed countries, tion; Commercial banks offer well as attracts idle savi extending credit facility to the investors ta ation which is an instrumental variable of growth (2) Helpful in Innovations: Also, commercial i eter of growth and develo, ial banks are helpful in innovations, yet another vital param ; pment. Innovations stimulate the process of growth through new technology, discovery of new markets for the existing products as well as new products for the existing mathelsInnovations are the off-shoots of Research and Development Divisions of different producing units in the country. And these divisions are lucratively financed by the commercial banks. But for the patronization by commercial banks of the country, research and development activity would remain tobe afar cry. Offering judicious financial assistance, banks facilitate the percolation of new technology across different sectors of the economy. (3) Helpful in the Effective Implementation of Monetary Policy: But for active cooperation of commercial banks, it would n be possible to carry out effective implementation of any monetary policy in the country. In fact commercial banks constitute the centre-stage of any monetary programme of the Governmentor the Central Bank of the country: An organised system of commercial bankingis almost apre-condition-forany monetary discipline sought to be achieved through any type of monetary policy. Greater the intensive expansion of commercial banking system of a nation, savings broadens thebase of deposits and accordingly greater is the responsiveness of Banking System of 2 country to the various instruments of monetary policy. This facilitates control of credit in assonance with credit needs of diverse sectors of the economy. (4) Banks Influence Interest Rates: Banks influence the rate of interest as well as structure of the banks influence the volume and pattern of interest rates by means of credit creation. Accordingly, Jopment in|ess developed countries like India. investment, so very vital in the context of growth and devel (5) Helpful in the Development of Priority Sectors: Commercial Banks contribute their mite inthe development of priority sectors of the economy. The banks help achieve this objective by means of itsselective-credit policy. Banks in less developed countries are often engaged in fostering the enterprising interés of farmers and small scale industrialists with a view to improving the rate of production, attaining self-sufficiency in foodgrain production and achieving equitable distribution of income and property: (6) Helpful in Productive activities and Exports: Commercial Banks are helpful in stimulating economic activity and expanding exports in less developed countries _Activiy—both in agricultural as well as industrial sectors of these economy—can be St y when credit needs of the sectors are judiciously fulfilled at reasonably low ra cta OME Scce cay bd Cxpanvtec Sl when exporters are offered easy finance facili ‘Por Pi ly Pi fered easy finance facilty Commerca banks are expected to play a constructive role in this context. (7) Agriculture Finance: Agriculture is the back bone of most of the underdeveloped economies. Availability of credit at low rate of interest at appropriate time and in ad hy tulmost improtance for the development of agriculture. By meeting the need for agriculture finance, in adequate measure, commercial banks help develop agriculture. (8) Provision of Consumer Credit: In this age of consumerism, people of underdve Countries remain deprived of the consumption of consumer durables. Their standard of living reiaing low. Commercial banks help lift their standard of living by providing them consumer credit in ample measure, (9) Employment: In underdeveloped countries commercial banks finance seltemployment Projects. To the younger generation, banks provide cheap credit for running their own industry and trade. As a result, employment opportunities increase in. the country, (10) Promotion of Banking Habit: Most of the people in underdeveloped countries are not Bank-minded. By providing diverse facilities to the small depositors banking habits are promoted among them. Thus, they serve as bridge between savers and investors Thus, commercial banks play a crucial role in the context of growth and development—in less developed countries by offering a well organised credit market catering to all the financial needs of various sectors of the economy. QUESTIONS I. Essay Type Questions 1. Define a Bank and explain its functions. ey 2 2. What are Commercial Banks? What are the advantages of Commercial Banks? Or Bank is foundation stone of modern commerce and industry. Explain. (K.U. 1994, 1997) Beis. y . hat are the main functions of the Bank? How can the banks be helpful in economic development country? ; an establishment which receives deposits and repay them on demand. Elucidate this BDH oN og wees! » ‘ph: