Banks functions are two types they are namely: 1. Primary functions 2. Secondary functions.
1. Primary Functions of Banks
1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of different types such as:
a. Saving Deposits: This type of deposits encourages saving habit among the public. The rate of interest is low. At present it is about 4% 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 types of bank loans and advances are:
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 A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say three months or so. Interest is charged on actual amount withdrawn.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 Interest is charged on the amount withdrawn in excess of limit.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.
Secondary Functions of Banks
1. Agency Functions
The bank acts as an agent of its customers. The bank performs a number of agency functions which includes:
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:
- Issue of Drafts, Letter of Credits
- Locker Facility
- Underwriting of Shares
- Dealing in Foreign Exchange
- Project Reports
- Social Welfare Programmes
- Other Utility Functions