Functions of Banks in India (2021)

In competitive exams, the subject ‘Functions Of Banks In India’ is an integral part of the question paper, and understanding it is critical to scoring well.

Candidates taking various bank tests such as the IBPS Exam, SBI Exam, or RBI Exam would almost certainly encounter questions about important banking functions in the paper or during the interview.

Credit, Bank, Money, Finance, Payment, Economy, Cash, Functions Of Banks In India
Functions Of Banks In India

Questions about “Functions Of Banks In India” are asked in other graduate-level government exams, such as the SSC examination. As a result, this article will guide you through key “Functions Of Banks In India”, their classifications, and more.

Basically What is Bank?

Functions Of Banks In India
Functions Of Banks In India

A bank is a type of financial institution where people can save or borrow money. Banks also lend capital in order to increase their cash reserves. Banks will make loans to customers with the understanding that the money will be paid back to the bank with interest at a later date.

Banks accept deposits from the public as well as the business community and provide depositors with two guarantees:

  • Deposit protection
  • Withdrawal of deposits when necessary

Banks pay interest on deposits, which increases the initial deposit balance and provides a significant benefit to the depositor. This encourages people to save money. 

Banks also make loans dependent on deposits, contributing to the country’s economic growth and the general public’s well-being. With this level of responsibility, it is important to recognize the main functions of a bank.

Functions of Banks in India (2021)

Banks perform two types of functions:

  • Primary Functions
  • Secondary Functions
Functions Of Banks In India

Both types of Functions Of Banks In India are explained in detail below:

Primary Functions

Primary functions are sometimes referred to as banking functions. All banks must carry out two main primary functions. These primary roles of banks are discussed further below.

  • Accepting of deposits
  • Granting of loans and advances

1. Accepting of Deposits

Deposits are taken from the general public by the bank. These deposits may be of various forms, such as:

  • Saving Deposits
  • Fixed Deposits
  • Current Deposits
  • Recurring Deposits
A. Saving Deposits:

This type of deposit motivates the general public to increase their saving habits. The interest rate is poor. There are no limits on the number or volume of withdrawals. The saving deposit account may be opened under either a single or joint name. 

Depositors only need to keep a minimum balance, which varies between banks. In addition, the bank offers ATM and debit card services, a check book, and Internet banking. 

B. Fixed Deposits:

Term deposits are another name for them. Money is stored for a set period of time. During this time, no money can be withdrawn. Banks charge a penalty for full repayment if depositors withdraw before maturity. Because a lump sum is deposited all at once over a set period of time, the interest rate is high but varies depending on the length of the deposit.

C. Current Deposits:

In contrast, there is no interest charged by the bank on the current account or deposit, and the customer can withdraw or deposit as many times as they want. Businessmen are the ones who open them. On this account, account holders have access to an overdraft facility. These deposits act as short-term loans to meet immediate needs.

D. Recurring Deposits:

At regular intervals, a certain amount of money is deposited in the bank. Money can only be withdrawn after a certain time period has passed.

For recurring deposits, a higher rate of interest is charged because it offers the value of compounded interest and allows depositors to receive a large amount of money. Salaried people and petty traders use this sort of account.

2. Granting of Loans & Advances

Banks use public deposits to make loans to companies and individuals in order to help them deal with uncertainty. The interest rate on loans and advances is higher than the interest rate on savings. Bank benefit is calculated as the difference between the loan interest rate and the deposit interest rate.

The following Loans and Advances are available from the bank:

  • Bank Overdraft.
  • Loans.
  • Cash Credits.
  • Discounting the Bill of Exchange.
A. Bank Overdraft:

Current account holders receive this form of an advance. There isn’t a different account. The current account is where all transactions take place. A certain amount is approved as an overdraft, which can be withdrawn within a certain time frame, say three months.

On the amount withdrawn, interest is paid. Leverage protection is used to secure an overdraft facility. It is approved for business owners and corporations.

B. Loans:

It is usually for a short period of time, such as a year, or a medium period of time, such as five years. Banks now lend money for long periods of time. Money can be repaid in the form of payments spread out over time or as a lump sum.

Interest is paid on the actual amount sanctioned, whether or not it is revoked. The interest rate could be marginally lower than the interest rate paid on overdrafts and cash credits. Loans are typically backed by the company’s tangible assets.

C. Cash Credits:

A short-term lending facility with a predetermined cap. Banks allow customers to borrow against a mortgage on a specific property. Cash Credit is extended to all types of account holders as well as those who do not have a bank account.

The sum withdrawn in excess of the cap is subject to interest charges. Cash credit allows for a greater loan sum to be granted than overdraft for a longer period of time.

Also Read: How Do Banks Works In India?

D. Discounting the Bill of Exchange:

It is a form of short-term loan in which the seller reduces the bill from the bank in exchange for certain fees. The bank lends money by discounting or buying bills of exchange.

It pays the bill sum to the drawer (seller) on the drawee’s (buyer’s) behalf after deducting the normal discount charges. When the bill matures, the bank hands it over to the drawee or acceptor to recover the bill sum.

Secondary Functions

A variety of secondary functions, also known as non-banking functions. These are carried out by the bank.

These vital secondary functions of banks are discussed further below.

  • Agency Functions
  • Utility Functions

Agency Functions:

Banks act as agents for their customers, so they must execute the following agency functions:

  • Transfer of Funds
  • Collection of Cheques
  • Periodic Payments
  • Portfolio Management
  • Periodic Collections
  • Other Agency Functions
A. Transfer of Funds:

The bank moves money from one branch to another or from one location to another.

B. Collection of Cheques:

The bank receives money from cheques through the clearing portion of its clients, just as it makes money from bills of exchange.

C. Periodic Payments:

The bank makes periodic payments in respect of electricity costs, rent, and so on, based on the client’s standing instructions.

D. Portfolio Management:

Banks handle their clients’ portfolios. It purchases and sells the clients’ shares and debentures, debiting or crediting the account.

E. Periodic Collections:

The bank receives the client’s income, pension, dividend, and all other annual payments.

F. Other Agency Functions:

This bank acts as a client agent for other institutions. It serves as the client’s executor, trustee, managers, advisers, and so on.

Utility Functions of Bank

The bank also provides general utility services such as:

  • Locker Facility
  • Dealing in Foreign Exchange
  • Project Reports
  • Issue of Drafts, Letter of Credits, etc.
  • Underwriting of Shares
  • Social Welfare Programmes
  • Other Utility Functions
A. Locker Facility

The bank offers lockers for the secure storage of precious papers, gold ornaments, and other valuables to their customers.

B. Dealing in Foreign Exchange

The RBI allows commercial banks to trade in foreign exchange.

C. Project Reports

The bank may also agree to prepare project reports for its clients.

D. Issues of Drafts, letter of Credits, etc.

Banks issue drafts to move funds from one location to another. It also issues letters of credit, especially for import trade. It even prints travelers’ checks.

E. Underwriting of Shares.

Via its merchant banking division, the bank underwrites shares and debentures.

F. Social Welfare Programmes

It carries out social welfare programs such as adult literacy programs, public welfare projects, and so on.

G. Other Utility Functions

It serves as a check on the financial status of customers. It gathers creditworthiness information on its customers’ clients. It offers industry intelligence to its clients, among other things. It accepts travelers’ checks.

So these are the basic Functions Of Banks In India. Thanks for Reading.

FAQ

What are the functions of commercial banks?

A commercial bank’s primary functions are to accept deposits and to lend money. Savings, current, and time deposits are both types of deposits. A commercial bank also lends money to its customers in the form of loans and advances, cash credit, overdrafts, and bill discounting, among other things.

What are the main functions of RBI?

The RBI’s key functions include being a banker’s bank, a caretaker of foreign reserves, a credit controller, and managing the printing and supply of currency notes in the country.

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