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Functions of a bank

Banks perform four major functions which are explained below.
  • Receipt of deposits: The main source of finance for a bank is deposits. Banks collect these deposits from individuals, firms and institutions. The deposits received are of the following types:
    • …Demand deposits: These deposits can be withdrawn at any time without notice. Usually, no interest is payable on these deposits. The most important feature is the cheque system through which the account holders can make / receive payments. These deposits are kept by businessmen and industrialists. They are also called current deposits.
    • …Fixed or time deposits: These deposits are made for a fixed period of time, say for 15 days, 3 months, one year, etc. A high rate of interest is paid on these deposits. Usually, these deposits are not withdraw able before the expiry of the term, but, if they are withdrawn, the holder has to forego the interests.
    • …Savings deposits: These deposits are made by people with fixed salaries, for holding their short term savings. Like current deposits, these deposits are also payable on demand. But there are restrictions to the maximum number of withdrawals that can be made.
  • Advancing of loans / lending of money: Banks lend loans for industrial and commercial purposes. Loans are advanced against personal security, like, stock of assets, gold, silver etc. Loans are granted in the form of:
    • …Overdrafts: The bank allows the borrower to overdraw his current account.
    • …Discounting of bills of exchange: If the person holding a bill of exchange requires money immediately, he can get the bills discounted with a bank and receive money before the bill matures.
    • …Direct loans and advances: Banks give loans for short and medium periods on which interest is charged from the borrowers. The interest charged on the advanced amount is dependent of the amount, time period, the standing of the borrower, the nature of the loan, its social priority, etc.
  • Agency services: Banks render various services as an agent, on behalf of their customers, like collection of bills and promissory notes, collection of dividends, interest, premiums, purchase and sale of shares and securities, payments of insurance premium, etc.
  • General services: Apart from the above services, banks also serve the public by
    • Issue of letter of credit, traveller’s cheques, bank drafts, etc
    • Safe keeping of valuables
    • Supplying trade information and statistics
    • Preparation of feasibility studies, project reports, conducting economic surveys, etc

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