INTRODUCTION OF BANKING PART 2

 -------BANKING AWARENESS BY DINESH DAYMA & B.K SHARMA-------

FUNCTIONS OF COMMERCIAL BANKS--
The functions of commercial banks can be broadly categorized into

1) Primary functions 2) Secondary functions.

1)Primary Functions

Following are the primary functions rendered by banks.

a) Accepting of Deposits 

The primary function of commercial banks is to accept money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. For these deposits, the banks pay a rate of interest, which is called as interest expenditure. Thus, banks act as a custodian of depositors’ funds. 

The deposits may be of various types such as savings deposits, current deposits, fixed deposits and recurring deposits.

 Savings deposits encourage customers to save money and promote banking habit among the public. Savings Bank accounts provide a low rate of interest and they have restrictions on the number of withdrawals by the customers. The SB accounts can be opened in single or joint names. People who prefer these savings bank accounts include salary and wage earners. Now, all the banks allow customers to open a savings bank account with nil balance.

Current Deposit accounts are opened by business people. These accounts have no restrictions on the number of withdrawals and are subject to service changes. There is no interest payment but current account holders can also avail the benefits such as overdraft and cash credit facilities.

Fixed deposits accounts can be opened by any person who wants to deposit a lump sum funds at one time for a specific time period. These accounts provide higher rate of interest depending on the time period for which it is deposited. These accounts do not allow withdrawal before the expiry of the period.

Recurring deposit accounts are normally opened and operated by persons who get regular income such as salary class and petty shop owners. A specific amount of money is deposited periodically, say, monthly for a specific period, say, one year. These accounts provide higher rate of interest and do not allow withdrawal before the expiry of the period.

 -------BANKING AWARENESS BY DINESH DAYMA & B.K SHARMA-------

b) Lending Loans and Advances The second primary function of commerce bank is to lend loans and advances to the corporate sector and households. Normally, the rate of interest levied on these loans and advances is higher than what it pays on deposits. The interest income is the major source of income for commercial banks. The difference in the interest rates (Interest Received and Interest Paid) is called Interest Spread, which contributes to its profitability. Apart from leading, the banks usually keep some portion of funds to meet the demands of depositors and running expenses.

The various types of loans and advances include overdraft, cash credit, loans, discounting of bills of

exchange.

Over Draft (OD) is a facility extended by banks to the current accounttheir accounts than what they maintain as balance. Under this facility, banks honour the cheques drawn by the customers of the current account even if sufficient money is not available in their account. This overdrawing limit will be fixed by the banks for a certain period, based on the credit quality of the current account holders and their history of dealing with the bank.

The amount overdrawn will be considered as loan and interest will be charged on the actual amount withdrawn.

Cash Credit (CC) is a facility extended by banks to current account holders and other who do not have account. In this facility, banks sanction a credit limit to a borrower for a certain period (usually for a longer period than overdraft) after verifying the credit worthiness, history of bank dealings and the track record of business. Normally banks expect security of tangible assets (such as stock of inventory) and/or guarantees for sanction cash credit facility. Interest will be charged on the portion of amount withdrawn from the cash credit account but not on the entire amount sanctioned to the borrower.

 -------BANKING AWARENESS BY DINESH DAYMA & B.K SHARMA-------

2) Secondary Functions Following are the secondary functions performed by the banks Besides the primary functions of accepting deposits and lending loans and advances, banks perform various other functions, which are called secondary functions.

They include

Agency functions and utility functions.

a) Agency Functions The banks act as agent of their customers and perform a number of agency functions which include transfer of funds, collection of cheques, periodic payment, periodic collections, portfolio management and other agency functions. Transfer of Funds is made by banks from one branch to another or from one place to another for customers. At present, banks use technology and telecommunication systems to facilitate these transfers.

Example: Electronic fund transfers (EFT). For this service, banks collect service charges. Collection of Cheques is facilitated by banks through clearing section. Thus, the cheques deposited or presented for collection are credited to the customers’ account once they collect the same through clearing process. This includes the cheques of the same bank or other banks and within the station and outstation. For providing this service, they charge collection charges which are very nominal.

Periodic Payments such as payment of public utility bills, rent, interest, etc. are made by banks on behalf of the customers based on their standing instructions. A specific example: Payment of housing loan interest from salary account.Periodic Collections such as receipt of salary, pension, dividend, interest, rent, etc. are made by banks on behalf of the customers based on their standing instructions.

A specific example: Receipt of dividend from investments.

Portfolio Management services are offered by banks to guide the customers or clients on their investment decisions to buy or sell the securities (shares and debentures) to achieve optimal portfolio for getting maximum returns.

Other Agency Functions like acting as trustee, administrator, adviser, executor, etc. on behalf of the customer or client are provided by banks.General Utility Functions/Financial Services.

 -------BANKING AWARENESS BY DINESH DAYMA & B.K SHARMA-------

b)Utility functions

The banks performs general utility functions such as issue of drafts, letter of credits, locker facility, underwriting of shares, dealing in foreign exchange, project counseling, social responsibility programmes and other utility functions. Issue of Drafts, Traveller Cheques and Letter of Credits are done by banks for facilitating the transfer of money from one place to another and for giving guarantee for import trade. Travellers’cheques is also issued by banks.


Safety Locker Facility is provided to customers for safe keeping their valuables such as documents, gold, silver articles and other values.
 -------BANKING AWARENESS BY DINESH DAYMA & B.K SHARMA-------