CBSE Class 11 - Business Studies - Banks and Functions Of Commercial Banks (#cbseNotes)

Banks and Functions Of Commercial Banks

Banks
Banks occupy an important position in the modern business world. No country can make commercial and industrial progress without a well organised banking system. Banks encourage the habit of saving among the public. They mobilise
small savings and chennelise them into productive uses.


Q: How will you define bank?

Answer: A bank is an institution which deals in money and credit. It collects deposits from the public and supplies credit, thereby facilitating exchange. It also performs many other function like credit creation, agency functions, general services etc Hence a Bank is an organisation which accepts deposits, lends money and perform other agency functions.




Q: What are commercial banks?

Answer: These are governed by Indian banking regulation Act 1949 . A commercial bank is an institution which performs the functions of accepting deposits, granting loans and making investments with the motive of earning profits.


Q: What are the functions of commercial banks?

Answer:

Primary Functions :
1. Accepting Deposits 
Accepting deposits is the main function of commercial banks. Banks offer diffrent types of Bank accounts to suit the requirements and needs of different customers. Different types of Bank accounts are as follows:
A. Fixed Deposit 
Account Money is deposited in the account for a fixed period. After expiry of specified period person can claim his money from the bank. Usually the rate of interest is maximum in this account. The longer the period of deposit, the higher will be the rate of interest on deposit.

B. Current Deposit Account 
Current deposit Accounts are opened by businessman. The account holder can deposit and withdraw money whenever desired. As the deposit is repayable on demand, it is also known as demand deposit Withdrawals are always made by cheque. No interest is paid on current accounts. Rather charges are taken by bank for services rendered by it.

C. Saving Deposit Account
The aim of a saving account is to mobilise savings of the public. A person can open this a/c by depositing a small sum of money. He can withdraw money from his account and make additional deposits at will. Account holder also gets interest on his deposit in this account though the rate of interest is lower than the rate of interest on fixed deposit account.

D. Recurring Deposit Account 
The aim of recurring deposit is to encourage regular savings by the people. A depositer can deposit a fixed amount, say Rs. 100 every month for a fixed period. The amount together with interest is repaid on maturity. The interest rate on this account is higher than that on saving deposits.

E. Multiple Option Deposit Account 
It is a type of saving Bank A/c in which deposit in excess of a particular limit gets automatically transferred into Fixed Deposit. On the other hand, in case adequate fund is not available in our saving Bank Account so as to honour a cheque that we have issued the required amount gets automatically transferred from fixed deposit to the saving bank account. Therefore, the account holder has twin benefits from this amount
(i) he can earn more interest and
(ii) It lowers the risk of dishonouring a cheque.

2. Lending Money 
With the help of money collected through various types of deposits, commercial banks lend finance to businessman, farmers, and others. The main ways of lending money are as follows:

A. Term Loans 
These loans are provided by the banks to their customers for a fixed period to purchases Machinery, Truck, Scooter, House etc. The borrowers repay there loans in Monthly/Quarterly/Half Yearly/ Annual instalments.

B. Bank Overdraft 
The customer who maintains a current account with the bank, takes permission from the bank to withdraw more money than deposited in his account. The extra amount withdrawn is called overdraft. This facility is available to trustworthy customers for a small period. This facility is usually given against the security of some assets or on the personal security of the customer. Interest is charged on the actual amount overdrawn by the customer.

C. Cash Credit 
Under this arrangement, the bank advances cash loan up to a specified limit against current assets and other securities. The bank opens an account in the name of the borrower and allows him to withdraw the borrowed money from time to time subject to the sanctioned limit. Interest is charged on the amount actually withdraw.

D. Discounting of Bill of Exchange 
Under this, a bank gives money to its customers on the security of a bill of exchange before the expiry of the bill in case a customers needs it. For this service bank charges discount for the remaining period of the bill.

Secondary Functions
The secondary functions of commercial banks are as under :
1. Ageny Functions
As an agent of its customers, a commercial bank provides the following services :
(a) Collecting bills of exchanges, promissory notes and cheques
(b) Collecting dividends, interest, rent etc.
(c) Buying and selling shares, debentures and other securities
(d) Payment of interest, insurance premium, etc
(e) Transferring funds from one branch to another and from one place to another
(f) Acting as an agent or representative while dealing with other banks and financial institutions.

A commercial bank performs the above functions on behalf of and as per the instructions of its customers.

2. General Utility Functions
Commercial banks also perform the following miscellaneous functions.
(a) Providing lockers for safe custody of jewellery and others valuables of customers.
(b) Giving references about the financial position of customers.
(c) Providing information to a customer about the credit worthiness of other customers.
(d) Supplying various types of trade information useful to customers.
(e) Issuing letter of credit, pay orders, bank draft, credit cards, traveller's cheques to customers.
(f) Underwriting issues of shares and debentures.
(g) Providing foreign exchange to importers and travellers going abroad.

3. Remittance of funds 
Commercial banks provide facilities of transfer of funds from one place to another through bank drafts, pay orders etc. The bank issues a draft for the amount on its branches at other places. There mode of payment is convenient   as well as economical.

4. Allied services
Banks also provide extra services such as bill payments, locker facility, buying and selling of shares, paying of insurance premium etc.

Q: What is E-banking?

Answer: It means banking using electronic media .It is a service provided by many banks that allows a customer to conduct banking transactions such as managing, savings, checking accounts, paying bills over the internet using a personal computer or laptop or mobile phones.

Different ways of e-banking are as follows:

(1) ATM (Automated Teller Machine)
(2) Credit cards
(3) Debit cards
(4) Internet banking
(5) Mobile banking


Q: What are the benefits of E-banking?

Answer:

1. Benefits to banks

(a) E banking provides competitive advantage to the banks add value to the banking relationship.

(b) It provides unlimited network to the bank and is not limited to the number of branches.

(c) load on branches can be reduced by establishing centralised database.

(d) It lowers the transaction cost.


2. Benefits to customers

(a) It provides 24 hrs. a day and 365 days a year services to the customers.

(b) Customers can make transactions from office or house or while travelling via mobile phones.

(c) There is greater customer satisfaction through e- banking as it offers unlimited excess and greater security as they can avoid travelling with cash.

(d) It indicates a sense of a financial discipline by recording each and every transaction.