Explain the functions of banks.
Explain the functions of banks.
The functions of a commercial banks are divided into two categories:
(i) Primary functions, and
(ii) Secondary functions including agency functions
The primary functions of a commercial bank include:
(a) Accepting deposits:
The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit funds with the banks. Depending on the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned.
(b) Grant of loans and advances:
The second important function of a commercial bank is to grant loans. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the loans is the main source of a bank's income.
Besides the primary functions, banks perform a number of other functions which are called secondary functions.
a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange
d) Transferring money from one place to another, and from one branch to another branch of the bank
e) Issuing demand drafts and pay orders; and,
f) Providing reports on the creditworthiness of customers.
The functions of a commercial banks are divided into two categories:
(i) Primary functions, and
(ii) Secondary functions including agency functions
The primary functions of a commercial bank include:
(a) Accepting deposits:
The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit funds with the banks. Depending on the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned.
(b) Grant of loans and advances:
The second important function of a commercial bank is to grant loans. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the loans is the main source of a bank's income.
Besides the primary functions, banks perform a number of other functions which are called secondary functions.
a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange
d) Transferring money from one place to another, and from one branch to another branch of the bank
e) Issuing demand drafts and pay orders; and,
f) Providing reports on the creditworthiness of customers.
