Question

Give reasons or explain the following statements:

1. Commercial banks provide agency functions to earn profits.
2. Overdraft facility is provided to current account holders.
3. Saving account deposits are usually opened by salaried class.
4. Rate of interest on fixed deposit is high.

Answer 1

1. Commercial banks provide agency functions to earn profits.

Explanation:
Commercial banks provide several agency functions to their customers besides the major functions of acceptance of deposits and granting of loans. These functions may include:

1) Easy and cheap flow of funds from one place to another via mail transfers, demand drafts etc.
2) Collection and payment of funds on behalf of their customers through bills, cheques etc.
3) Purchase and sale of securities and foreign exchange.
4) Providing the facility of underwriting the sale of new shares.

These services are provided by the bank in return for some fee. Hence, the bank earns profits through these services.

2. Overdraft facility is provided to current account holders.

Explanation:
Overdraft facility is one of the primary functions of commercial banks. Overdraft facility is generally given to current account holders. Under this facility, commercial banks allow their customers to withdraw the amount from a bank in excess of their balance. The bank specifies the maximum limit of overdraft. Rate of interest is charged on the amount overdrawn.

3. Saving account deposits are usually opened by salaried class.

Explanation:
Savings account is generally opened by salaried people. This account can be opened with a small amount and it helps the people to save their extra income. The amount from this account can be withdrawn anytime subject to some limitation. Banks also provide some interest on these deposits.

4. Rate of interest on fixed deposit is high.

Explanation:
Under the fixed deposit system, one has to save money for a fixed period of time. Till the maturity of the period, the customer promises not to demand that money from the bank unless necessary. So, banks are more liberal in loaning out that fund to the seekers from such deposits. As the they are deposited for a comparatively long period of time, the rate of interest offered on such deposits is very high.