State the primary functions of banks.
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Accepting deposits and Advancing loans can be termed as Primary functions of bank, while the secondary functions of the bank include (1) Agency Services and (2) General Utility Services. As we mentioned, one of the most important function of the Commercial Banks is to accept deposits.
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Commercial Banks: Primary and Secondary Functions of Commercial Banks!
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.
ADVERTISEMENTS:
They accept deposits in several forms according to requirements of different sections of the society.
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks on demand:
ADVERTISEMENTS:
1. Such deposits are generally maintained by businessmen with the intention of making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.
Basis
Demand Deposits
Fixed Deposits
Cheque facility
They are chequeable deposits.
They are non-chequeable deposits.
Interest payments
They do not carry any interest.
They carry interest which varies directly with the period of time.
Number of transactions
The depositor can make any number of transactions for deposit or with drawl of money.
Depositor generally makes only two transactions: (i) Deposit of Money in the beginning;
(ii) Withdrawal of money on maturity.
(iii) Saving Deposits:
These deposits combine features of both current account deposits and fixed deposits:
1. The depositors are given cheque facility to withdraw money from their account. But, some restrictions are imposed on number and amount of withdrawals, in order to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed deposits. It must be noted that Current Account deposits and saving deposits are chequable deposits, whereas, fixed deposit is a non-chequable deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount within his credit limit and interest is charged on the amount actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the bank at any time. The entire sum of demand loan is credited to the account and interest is payable on the entire sum.
(iii) Short-term Loans:
They are given as personal loans against some collateral security. The money is credited to the account of borrower and the borrower can withdraw money from his account and interest is payable on the entire sum of loan granted.
(2) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current account upto an agreed limit. This facility is generally given to respectable and reliable customers for a short period. Customers have to pay interest to the bank on the amount overdrawn by them.
2. Discounting Bills of Exchange:
It refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity. After deducting the commission, bank pays the balance to the holder. On maturity, bank gets its payment from the party which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For these services, banks charge some commission from their clients.
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.
ADVERTISEMENTS:
They accept deposits in several forms according to requirements of different sections of the society.
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks on demand:
ADVERTISEMENTS:
1. Such deposits are generally maintained by businessmen with the intention of making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.
Basis
Demand Deposits
Fixed Deposits
Cheque facility
They are chequeable deposits.
They are non-chequeable deposits.
Interest payments
They do not carry any interest.
They carry interest which varies directly with the period of time.
Number of transactions
The depositor can make any number of transactions for deposit or with drawl of money.
Depositor generally makes only two transactions: (i) Deposit of Money in the beginning;
(ii) Withdrawal of money on maturity.
(iii) Saving Deposits:
These deposits combine features of both current account deposits and fixed deposits:
1. The depositors are given cheque facility to withdraw money from their account. But, some restrictions are imposed on number and amount of withdrawals, in order to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed deposits. It must be noted that Current Account deposits and saving deposits are chequable deposits, whereas, fixed deposit is a non-chequable deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount within his credit limit and interest is charged on the amount actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the bank at any time. The entire sum of demand loan is credited to the account and interest is payable on the entire sum.
(iii) Short-term Loans:
They are given as personal loans against some collateral security. The money is credited to the account of borrower and the borrower can withdraw money from his account and interest is payable on the entire sum of loan granted.
(2) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current account upto an agreed limit. This facility is generally given to respectable and reliable customers for a short period. Customers have to pay interest to the bank on the amount overdrawn by them.
2. Discounting Bills of Exchange:
It refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity. After deducting the commission, bank pays the balance to the holder. On maturity, bank gets its payment from the party which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For these services, banks charge some commission from their clients.
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