Functions of banks: Banks provide basic facilities such as deposits, withdrawals, loans, etc, along with various other facilities such as online banking, mobile banking, credit card offers, investment options, insurance, etc. Banks are often required to make payments and it is very convenient to handle a large sum of money safely and securely. In this article, we will learn about some of the major functions of banks in India.
What is a Bank?
A bank is a financial institution that provides deposits and credit facilities whenever needed. Nowadays, banks provide various other facilities such as wealth management, currency exchanges, offers and cashback, investments, insurance options, etc. Banks are an important part of the economy and affect our country’s economy.Â
Everyone keeps a bank account after a certain age to keep their money safe and prevent themselves from carrying a lot of cash together.Â
Recommended For Private Bank Jobs – BFSI Course
Functions of Banks: Classification of Banks
There are two major classifications of banks mentioned below.
1. Scheduled Banks
Scheduled banks are listed under the second schedule of the Reserve Bank of India Act 1934. They must have a minimum capital reserve of INR 25 Lakh. Some of the major types of scheduled banks are Commercial banks, cooperative banks, Public Sector banks, Private Sector banks, Foreign banks, Regional Rural Banks (RRBs), etc. They can ask for loans from the Reserve Bank of India.
2. Non-Scheduled Banks
These banks are not listed under the second schedule of the Reserve Bank of India Act 1934. They have to maintain a capital reserve of up to INR 5 Lakhs or more. They can apply for loans only on emergency conditions from RBI.
Functions of Bank: Private and Public Sector Banks
Private banks are the most common types of banks in India where the major stakeholders are individuals or groups of people. They have to work under the rules and regulations imposed by the Reserve Bank of India. Their interest rates are however higher than the government sector banks. Check some popular private sector banks below.
| Private Sector Banks in India |
|
In public sector banks, the government is the major stakeholder of the bank and provides various services under the government. They are considered more reliable and safe. They also provide various schemes and services. They play a major role in developing trust and keeping their money safe. Their main objective is to provide reliable banking services to the customers.
| Public Sector Banks |
|
Primary Functions of Bank
Banks provide various financial services. Some major primary functions of banks are given in detail below.
1. Deposits
The banks accept deposits from customers and keep them safe. Savings accounts also provide interest on the saved money to provide constant growth over the saved money. Customers can also make multiple frequent payments with the help of current accounts. Customers can withdraw the money whenever required using ATMs, Online banking, mobile banking, etc.
- Saving deposits: These deposits help people save and grow their money with monthly interest. However, the withdrawal limits in these savings accounts are limited.
- Current Deposits: These deposits are generally carried out by businessmen who need frequent withdrawals. These accounts do not have any withdrawal limits.
- Fixed Deposits: These deposits are made for a fixed period of time and a higher rate of interest is paid on the deposit.
- Recurring Deposits: These deposits are generally used in trades where a fixed sum of money is deposited into the account periodically. Also, a higher interest rate is paid to the customers.Â
2. Loans and AdvancesÂ
Banks provide loans to their customers when in need. These loans come with a fixed tenure and interest on the principal amount. However, nowadays there are many no-cost EMI options provided by many banks. Banks provide loans to businesses, individuals, government, agriculturalists, etc.
1. Cash Credits
This advanced service is frequently used by new startups, businesses or clients to meet their capital requirements. It is a short-term loan for a company.
2. Overdraft
An overdraft is an extra fee or fine imposed when you don’t have enough money in your bank account for a transaction. However, the bank completes the payment but issues an overdraft which must be cleared by the cheque payee within a limited time interval.
3. Loans
The loans are offered for the short term with a fixed rate of interest monthly. Clients can make repayments in instalments based on the plans available. The rate of interest on loans is slightly lower as compared to an overdraft or cash credit.
4. Notification and alerts
Banks need to provide periodic alerts for any important periodic bills. Also, banks provide transaction alerts on deposits or withdrawals. These notifications are important to verify the transactions or receipts and also help to prevent fraud or unauthorised access.
Secondary Functions of Banks
Banks also provide various other services apart from the primary one. Some major secondary functions of banks are mentioned below.Â
1. Transfer of Funds
Banks are responsible for the transfer of funds using cheques, net banking, mobile banking, UPI, or other methods when required. Cheques and ATMs are offline modes of fund transfer. The transfer of payment takes place from the account of the payee account to the recipient bank account irrespective of bank.
2. Periodic Payments
Banks now can take care of your monthly periodic payments such as electricity bills, rent, mobile recharge bills, etc.Â
3. Collection of Cheques
The bank collects the money from cheques issued on the given bank. They also collect bills of exchange.
4. Portfolio Management
The banks also help clients to manage their profiles such as making purchases and selling of shares on the approval of clients.Â
5. Periodic Collections
The banks also provide collection services such as collection of salaries, pensions, and other collections on behalf of the bank.
General Utility Functions of BanksÂ
Nowadays with the advancement of technologies, banks are easily accessible with various services available on net banking and mobile applications. Some of the general utility functions provided by banks are mentioned below.
- Locker Facility: Banks provide their clients with locker facilities to store their money, documents, ornaments, or other essentials safely.
- Issue of drafts: Banks also issue drafts, which are used to transfer money from one place to another.Â
- Foreign Exchange: Foreign exchange is the conversion of currency from one country to another. RBI allows commercial banks to provide foreign exchange services.Â
- Social Welfare Programmes: Banks also participate in and provide various social welfare programs through the government or its organisations.
- Project Reports: The bank can also help clients prepare their reports on approval of clients on their behalf.
Others: Banks also provide other general facilities to their customers, such as cheque facilities, credit information, notification alerts, market information, etc.
Functions of Banks FAQs
What is a bank?
A bank is a financial institution that provides deposits and credit facilities whenever needed. Nowadays, banks provide various other facilities such as wealth management, currency exchanges, offers and cashback, investments, insurance options, etc.
What are the various functions of banks?
Some of the various functions of banks are deposits, loans, cash credits, loans, funds, periodic payments, collection of cheques, portfolio management, etc.
What are the major primary functions of a bank?
Some of the major primary functions of banks are deposits, cash credits, overdrafts, loans, alerts, etc.
