Banks play an important role in maintaining financial stability in the country. They offer numerous services to help you manage your finances better. These institutions thus form a vital part of any society.
Functions of Banks
The functions of banks have broadly been classified into two categories. These are the primary functions and the secondary functions. Here is a look at these in detail:
Primary functions are the main functions of the banks. These include accepting deposits and providing loans. Here is a brief look at these functions:
- Accepting Deposits
These deposits are basically of four different types:
Saving Deposits: These deposits encourage public to save money. The money can easily be withdrawn and deposited in the saving account without much restriction. The interest rate here is however quite low.
Current Deposits: This account is especially for the businessmen. These accounts offer facilities such as overdraft that are beneficial for the businesses. No interest is paid in this account.
Fixed Deposits: In a fixed deposit a considerable big amount is deposited in the account for a fixed period of time. The rate of interest is high in such deposits.
Recurring Deposits: A certain amount is deposited at regular intervals in such an account. The rate of interest is high. However, the amount cannot be withdrawn before a certain period.
- Providing Loans
Here are the types of loans and advances offered by the banks:
Loans: Loans are offered for both short term and long term period. The rate of interest charged on the same varies based on the type and duration of loan. It can be repaid in instalments.
Cash Credits: The customers have the facility to take cash credit up to a certain amount which is fixed in advanced. A separate cash credit account needs to be maintained for this.
Overdraft: This facility is for businessmen. It is thus provided to the current account holders. They do not require maintaining a separate account to avail this facility.
Secondary functions, also known as non-banking functions, are of two types. These are agency functions and general utility functions. Here is a brief look at both these types of functions:
- Agency Functions
The bank also acts as an agent for its customers. A number of agency functions are performed by this institution. These include collection of cheques, periodic payments, portfolio management, periodic collections and transfer of funds. Banks also act as executors, administrators, advisors and trustees for their customers. They help their customers deal with other institutions.
- General Utility Functions
Banks also perform general utility functions that include providing locker facility, underwriting of shares, dealing in foreign exchange, issuance of drafts and letter of credits, drafting project reports, undertaking social welfare programmes such as public welfare campaigns and adult literacy programmes.
Discounting of bill of exchange is another service provided under this.
While initially the functions of banks only included accepting deposits and providing loans; they have started providing various other services now. All these facilities are aimed at helping the customers with their finances.