Chapter 4 Lesson B - Functions of Commercial Banks
Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.
About the ClassWe bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.
Chapter 4 Lesson B - Functions Of Commercial Banks
A bank plays a very vital role in the economic development of a country. Banks are the backbone of the commerce and industry of a country. Although the modern commercial banks have greatly enhanced and diversified their activities there are a few key functions that every commercial bank performs.
PRIMARY FUNTIONS OF COMMERCIAL BANKS
The basic functions of commercial banks are the accepting of deposits of money from the public for the purpose of lending or investment. These deposits are repayable on demand. Commercial banks receive deposits from the public by way of term deposits and demand deposits. The banks pay interest at the rate prescribed by the Reserve Bank of India, and also charge interest for the loans given. The difference between the two is the gross profit.
DEPOSITS
TIME DEPOSITS:
Time or Term Deposits are those deposits that are made by the public for a particular period of time. These deposits are for a certain period and therefore generally cannot be withdrawn within such time.
FIXED DEPOSITS:
Fixed deposit is a type of term deposit. Here, a customer deposits a particular sum of money for a fixed period. These deposits can range from 15 days to 5 years or more. The interest for the deposit varies from period to period .The longer the duration of the deposit, the greater will be the interest. The depositor agrees not to withdraw the amount before the period of maturity. But, foreclosure of the deposit is allowed. In such a case the interest will vary from the interest agreed upon.
RECURRING DEPOSITS:
In this type of deposit, a specified amount of money is deposited every month for a fixed period or number of years ranging from 12 to 120 months. This amount is repayable on the expiry of the period along with interest. This deposit makes small savings easier.
OTHER DEPOSITS:
To mobilise the savings of the customers, banks have introduced many types of savings schemes to cater to the needs of the various segments.
Janata Deposits:
This is a type of small savings that encourages daily savings. Here authorised agents collect the amount at the place of the depositor itself. Here too, the depositor can withdraw before the stipulated date.
Insurance Linked Deposits:
In cooperation with the Life Insurance Corporation of India, commercial banks have come out with the scheme of insurance linked deposits. The commercial banks undertake to pay the premium at 1.25 % of the deposit. The customer is required to deposit a minimum amount for this purpose.
Minor's savings:
Here young children of 12 years and above are allowed to open and operate this account. This teaches children to save from a young age.
Annuity/Retiring scheme:
Here the customers deposit a certain amount of money for a predetermined period. At the end of such period they will be paid either as a lump sum or in monthly instalments.
Monthly Income Plan:
This scheme is designed for pensioners and interest is paid according to the specified rates.
Cash Certificate Scheme:
These are long term deposits, where the principal and interest will be repayable on maturity. Where the depositor requires a loan, he can get one on the basis of this deposit. He can also encash his deposit at a discount.
In addition to the above there are other schemes like the Housing Deposit Scheme, Amudha Surabhi Deposit scheme for children and Daily Savings Scheme.
DEMAND DEPOSITS
Savings Bank Account:
A savings Bank account is opened to save for contingencies. It bears interest.
These accounts are opened only in the name of individuals. Nomination
facility is available on this account.
Current Account:
Businessmen generally open a current account. A letter of introduction
is a must in the case of a current account. Under this account overdraft
facilities are provided for. A current account does not bear interest
but where the customer overdraws he has to pay interest to the banker.
Cash Credit facility is also available here.
GRANTING OF LOANS
The funds that are deposited in the banks should be gainfully employed,
as lending is the main source of income for the banker. An efficient banker
should prudently employ his funds bearing in mind, safety, liquidity and
profitability.
Types of lending:
Overdraft:
Overdraft facility is available on a current account, where the banker
allows the customer to draw over and above the balance in his account.
Interest will be charged on a daily basis.
Cash Credit:
Cash credit is similar to that of an overdraft with an exception that
the cash credit is given only on the basis of some security.
Discounting of Bills of Exchange:
These are common methods of granting short-term credit to businessmen.
In the case of a credit sale, the buyer or his bank accepts the bill and
the holder or seller may discount the bill before that date. Where the
acceptor fails to pay, the customer's account will be debited.
Loans and Advances:
Loans and advances are granted against movable and immovable goods as
security. Book debts too may be hypothecated by a letter of hypothecation.
In case of immovable properties these may be mortgaged.
AGENCY SERVICES:
Banks provide a few services to their customers based on the standing
instructions given by them.
- The banker acts as an agent to the customer. The banker collects cheques, bills etc on behalf of the customer. They are paid a commission for this.
- The banker pays monthly payments like rent, insurance, subscription, telephone bills, etc as per instructions.
- The bank collects dividend warrants and interest warrants.
- They buy and sell foreign currencies and discount the foreign exchange bills.
- Banks also undertake collection of funds on behalf of customers.
- Banks also issue credit cards to customers.
GENERAL UTILITY SERVICES:
Safe Custody Deposits:
Banks provide safe custody of documents and valuables. They charge a fee for this. These items are deposited in the bankers' locker.
Safe Deposit Locker:
Here the customer is given a locker where he deposits his valuables. The bank charges a fee for this.
Transfer of Money:
Banks enable transfer of money from one place to another through drafts.
Mail and telegraphic transfer:
The customer can transfer funds from one place to another through mail or telegraphic transfer.
Traveller's Cheque:
Traveller's cheques are of great help while travelling from one place to another. It is a printed cheque of a particular denomination.
Merchant Banking:
Merchant banking divisions assist new industries and plan their promotional activities like underwriting shares and debentures.
Teller system:
The teller system has been instituted to reduce the waiting time at banks.
Automatic Teller System:
ATM's help the customers to withdraw money or deposit money at any time during day or night.
Green Card:
These cards are given to farmers to provide them with credit facility.
Questions on Chapter 4 Lesson A
1.What is banking?
2.How are banks classified?