Functions of Bank

What are the functions of bank?

The main functions of bank are explained below:

  1. Primary Functions of bank 
  2. Secondary Functions of bank 

Primary Functions of Bank:

The primary function is the key function of a bank. A bank earns money by using these functions.

Types Of Primary Functions of bank:

  1. Acceptance of Deposits
  2. Granting loans and advances

A ) Acceptance Of Deposits :

The most important activity of a bank is to mobilize deposits from the public.

People who have more income and savings, find it easy to deposit the amount with banks in different types of deposits account which is as follows :

I) Savings Account Deposit: This type of account is generally maintained by the households or business individual.

The depositor can deposit or withdraw money under this account only for a limited number of times.

This account also attracts a nominal rate of interest to the account holders.

This account as the name suggests is meant for promotion of savings. A person having a regular and fixed income can deposit their savings in this account.

II) Current Account Deposit : This type of account is generally maintained by the business entities and money under this deposit is payable on demand of the depositor.

The depositor is free to deposit or withdraw money from their account any number of times without any restrictions.

III) Fixed Deposits Account: A fixed account is deposited for a fixed period of time.

It is also known as a term deposit. The fixed period of time might be from 30 days to 5 years or more.

The rate of interest on these accounts is higher than savings and current account deposits because the amount accepted is invested elsewhere for the long term by the bank. The depositor can get a loan against this account.

IV) Recurring Deposit Account: In this type of deposits, a depositor deposits a fixed amount of money every month for a fixed period of time.

The amount is deposited on a monthly basis. This money can not be withdrawn before the expiry of a fixed-term except in certain conditions.

This account attracts higher interest in comparison to other accounts except for fixed deposits.

V)) Multiple option deposit account: It is a type of savings deposit account in which deposits in excess of a particular limit gets automatically transferred into fixed deposits.

On the other hand, in case the adequate fund is not available in our savings bank account so as to honor a cheque that we have issued, the requirements account gets automatically transferred from a fixed deposit to a savings deposit account.

Functions of bank

VI) Granting Loans And Advances

This is another important function of a bank. This is the main source of income of any bank.

Banks grant loans and advances out of surplus money after keeping a certain percentage of their total deposit are:

Types of loans and advances granted by a bank :

  1. Loans
  2. Cash Credit
  3. Overdraft
  4. Purchasing and discounting of a bill of exchange

1. Loans: Sanctioning of a specified lump sum amount by the banker to the customer is called a loan.

In case of a loan, a specified amount of money is sanctioned by the banker to the customer for a specific purpose.

The customer can obtain a loan from the bank with or without any tangible securities.

The entire loan amount is paid to the borrower either in cash or by sending it to his account.

A loan is given for a certain fixed period of time at an agreed rate of interest.

The borrower is required to paid interest on the entire amount of the loan from the date of sanction.

2. Cash Credit: Cash credit is an important and frequently used mode of borrowing from the banks.

Cash credit is an arrangement by which a customer can borrow money from the bank through his current account up to a certain limit.

The banker sanction cash credit against some tangible securities which are charged with the bank.

The borrower is authorized to withdraw money from his credit limit according to his needs and he can also deposit any surplus amount with him in the account.

The cash credit account is thus an active and running account to which withdrawals and deposits may be effected frequently.

The interest in the case of cash credit is charged on the actual amount utilized by the borrower and for the period of actual utilization.

3. Overdraft: Overdraft means am arrangement with a bank by which a current account holder is allowed to withdraw more than the balance standing to his credit up to a certain limit.

Overdraft account can either be clean overdraft, partly secured or fully secured.

The borrower is allowed to withdraw the amount as and when he needs and repay it by means of deposits in his account as and when it is feasible for him.

Interest on overdraft credit is higher than on loans but is lower as compared to cash credit.

Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilization.

4. Purchasing and Discounting of bills: Purchasing and discounting of bills is the most important form in which a bank lends without any collateral securities.

A customer having bills can obtain immediate cash from the bank and do not have to wait until the bank collects the payments of the bills.

The bills which are used by the customer to borrow from banks may be demand bills or time bills.

Demand bills are payable on demand while time bills after the expiry of a definite period of time.

Secondary Functions of bank :

The  secondary functions of bank are explained  following:

A) Agency Functions of bank:

Banks receives and collects different kinds of payments on behalf of their Clint’s through the instructions of cheques, drafts, bills, and promissory note and also buy and sell gold, silver, and other securities on behalf of their customers.

Types Of Agency Function :

  1. Transfer of money
  2. Sale and purchase of foreign exchange
  3. Collection of cheques
  4. Periodic collection

1. Transfer of money: The bank provides facilities of funds transfer to its customers through the instructions of cheques, demand draft or electronic fund transfer from one place to another place or one person to another person.

2. Sale And purchase of foreign exchange : This is another important functions of a bank which has increased tremendously with increasing the volume of international trade particularly in the era of globalization .

3. Collection of Cheques: The bank collects the money of the cheques as per the customer’s want.

4. Periodic Collection: The bank also collects periodic payment like pension, salary and other periodic payments on behalf of the customer.

B) General Utility Services :

In modern days the bank also performs some very useful functions for the benefits of their customers.

Types of Utility Services:

  • Collection and publication of data
  • Advisory functions
  • Issue of locker facility
  • Under the writing of shares and debentures
  • Issuing of letter of credit

1. Collection and publication of data : A bank collects and published data on behalf of their customers satisfaction.

2. Advisory functions : A bank also perform advisory functions for their customer.

3. Issuing of locker facility : A bank provides locker facilities to their customers for keeping valuable things like gold and silver etc.

4. Underwriting of shares and debentures : A bank underwrite the shares and debentures through their merchant banking.

5. Issuing of letter of credit : A bank also issuing letter of credit for their customer.

Frequently Questions And Answers: 

1. What are the main functions of a bank?

Ans: The main functions of a bank is:

  • Primary Functions
  • Secondary Functions

2. What are the four functions of a bank?

Ans: The four functions of a bank are explained below:

  • Accepting Deposits
  • Granting Loans and Advances
  • General Utility Functions
  • Agency Functions

3. What Is Bank and function of bank?

Ans: A bank is a financial institution which accepts deposits from public and provide loans and advances.

The main functions of a bank are already explained above.

4. What is the use of banks?

Ans: The uses of banks are explain in above paragraph.

5. What are 3 functions of a bank?

Ans:

  • Accepting Deposits
  • Granting Loans and Advances
  • General Utility Functions
  • Agency Functions

6. What is the main objective of banks?

Ans: The main objective of banks are explain above.

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