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Functions Of Bank

Functions Of Bank

The different types of bank accounts have been discussed at length in this article. The details and benefits of each type of bank account constitute an important part of the General Awareness syllabus for major Government exams conducted in the country.

One major aspect of the banking industry is the provision of bank accounts. There are various types of bank accounts which can be opened in any Public or Private sector banks.

This topic essentially forms a very important part of the financial and banking awareness section of the various bank exams. 

In competitive exams, the topic functions of the bank form an important part of the question paper and its knowledge is crucial to score good marks. 

Especially, candidates appearing for various bank exams such as IBPS Exam, SBI Exam or RBI exam definitely encounter questions related to important banking functions in the paper or at the time of interview. 

For other graduate-level government examinations such as the SSC exam, the questions related to bank functions are asked under professional knowledge heading. Therefore, this article will walk you through important banking functions, their categories and more.

Candidates preparing for any competitive or government exams can check the following links for their preparation:

What Is a Bank?

A bank is a lawful organisation that accepts deposits which can be withdrawn on demand. Banks are institutions that help the public in the management of their finances, public deposit their savings in banks with the assurance to withdraw money from the deposits whenever required.

Banks accept deposits from the general public and from the business community as well and give two assurances to the depositors –

  1. Safety of deposit
  2. Withdrawal of deposit, whenever needed

Banks give interest on deposits which adds to the original deposit amount and is a great incentive to the depositor. This promotes saving habits among the public. Bank also grants loans based on the deposits thereby adding to the economic development of the country and well being of the general public. With this stature, it becomes important to understand the major functions of a bank. 

Important Functions Of Bank

There are two types of functions of banks:

  1. Primary functions – being primary are also called banking functions.
  2. Secondary Functions

Both the types of functions of bank are explained below in detail:

Primary Functions of Bank

All banks have to perform two major primary functions namely:

  1. Accepting of deposits
  2. Granting of loans and advances

Accepting of Deposits

A very basic yet important function of all the commercial banks is mobilising public funds, providing safe custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from the public such as:

  1. Saving Deposits:  encourages saving habits among the public. It is suitable for salary and wage earners. The rate of interest is low. There is no restriction on the number and amount of withdrawals. The account for saving deposits can be opened in a single name or in joint names. The depositors just need to maintain minimum balance which varies across different banks. Also, Bank provides ATM cum debit card, cheque book, and Internet banking facility. Candidates can know about the Types of Cheques in the linked page.
  2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal money during this period allowed. In case depositors withdraw before maturity, banks levy a penalty for premature withdrawal. As a lump-sum amount is paid at one time for a specific period, the rate of interest is high but varies with the period of deposit.
  3. Current Deposits: are opened by businessmen. The account holders get overdraft facility on this account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-interest rate along with the charges for overdraft facility in order to maintain a reserve for unknown demands for the overdraft.
  4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval. Money can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring deposits as it provides a benefit of compounded rate of interest and enables depositors to collect a big sum of money. This type of account is operated by salaried persons and petty traders.

Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans to the businesses and individuals to meet their uncertainties. Bank charges a higher rate of interest on loans and advances than what it pays on deposits. The difference between the lending interest rate and interest rate for deposits is bank profit.

Bank offers the following types of Loans and Advances:

  1. Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money anytime more than available in bank balance but up to the provided limit. An overdraft facility is granted against collateral security. The interest for overdraft is paid only on the borrowed amount for the period for which the loan is taken.
  2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks allow the customer to take a loan against a mortgage of certain property (tangible assets and / guarantees). Cash credit is given to any type of account holders and also to those who do not have an account with a bank. Interest is charged on the amount withdrawn in excess of the limit. Through cash credit, a larger amount of loan is sanctioned than that of overdraft for a longer period.
  3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5 years against tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the money either in a lump-sum amount or in the form of instalments spread over a pre-decided time period. Bank charges interest on the actual amount of loan sanctioned, whether withdrawn or not. The interest rate is lower than overdrafts and cash credits facilities.
  4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller discounts the bill from the bank for some fees. The bank advances money by discounting or purchasing the bills of exchange. It pays the bill amount to the drawer(seller) on behalf of the drawee (buyer) by deducting usual discount charges. On maturity, the bank presents the bill to the drawee or acceptor to collect the bill amount.

Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:

  1. Agency functions
  2. Utility Functions

Agency Functions of Bank

Banks are the agents for its customers, hence it has to perform various agency functions as mentioned below:

Transfer of Funds: Transfering of funds from one branch/place to another. 

Periodic Collections: collecting dividend, salary, pension, and similar periodic collections on the clients’ behalf. 

Periodic Payments: making periodic payments of rents, electricity bills, etc on behalf of the client.

Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the cheques through the clearing section of its customers.

Portfolio Management: banks manage the portfolio of their clients. It undertakes the activity to purchase and sell the shares and debentures of the clients and debits or credits the account.

Other Agency Functions: under this bank act as a representative of its clients for other institutions. It acts as an executor, trustee, administrators, advisers etc. of the client.

Utility Functions of Bank

  • Issuing letters of credit, traveller’s cheque, etc.
  • Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers.
  • Providing customers with facilities of foreign exchange dealings
  • Underwriting of shares and debentures
  • Dealing in foreign exchanges
  • Social Welfare programmes
  • Project reports
  • Standing guarantee on behalf of its customers, etc.
  • Sample Questions on Functions of Banks

    A part of the General Awareness section is also dedicated to Banking Awareness, especially for banking sector exams. So preparing topics like this are important from the competitive examination point of view as well.

    Thus, to help aspirants understand the type of questions which may be asked or the pattern in which they may be asked, given below are a few sample questions based on the functions of the bank.

    Q 1. What is the ratio between the total assets maintained by the bank to the total cash in hand called?

    1. Statutory Liquid Ratio
    2. Cash Reserve Ratio
    3. Balance Reserve Ratio
    4. Debit-Credit Ratio
    5. None of the above

    Answer: (1) Statutory Liquid Ratio

    Q 2. Which of these is not a function of Public Sector Banks?

    1. Transferring Money
    2. Opening Bank Accounts
    3. Lending Money to people in the form of Loan
    4. Letting customers open up lockers
    5. Issuing currency

    Answer: (5) Issuing Currency

    Solution: Only the Reserve Bank of India controls the issue and flow of currency

    Q 3. Which among the following is not a function of Regional Rural Banks?

    1. RRBs have been set up for better banking facilities to rural people
    2. Disbursement of wages of MGNREGA workers
    3. Provide banking assistance to semi-urban areas
    4. All of the above
    5. None of the above

    Answer: None of the above

    Q 4. Which body is responsible to regulate the functioning of all Banks in India?

    1. Government of India
    2. State Bank of India
    3. Reserve Bank of India
    4. Ministry of Finance
    5. Bank Unions

    Answer: (3) Reserve Bank of India

    Q 5. Which was the first bank to be established in India?

    1. Bank of Bharat
    2. Indian National Bank
    3. Central Bank
    4. State Bank of India
    5. Bank of Hindustan

    Answer: (5) Bank of Hindustan