Answer the following questions in short: State the primary functions of banks.

Answer the following questions in short:
State the primary functions of banks.

ANSWER:

The following are the primary functions of commercial banks:

a. Accepting deposits - Banks accept various types of deposits from the public such as savings account deposits, current account deposits and fixed account deposits and pay interest on them. They are indebted to repay the depositor the amount deposited by him or her. The following are some of the types of deposits accepted by these banks:

i. Savings account deposits - This type of account promotes the habit of saving in people having a fixed income. These deposits are chequeable deposits.

ii. Fixed account deposits - Fixed account deposits (also known as time deposits) refer to the deposits that are held for a fixed (specific) period of time (called maturity).

iii. Current account deposits - Current account deposits (also known as demand deposits) refer to the deposits that provide the depositor the liberty to withdraw money at any point in time.

b. Granting loans and advances - Banks grant loans and advances on the basis of the total deposits available with them. The interests charged on these loans are a major source of profits for banks. The following are the different types of loans and advances offered by commercial banks:

i. Cash credit - Under this system, the bank first estimates the value of the assets held by the borrower. Based on this estimation, the bank decides the credit limit of the borrower. The borrower is liable to pay interest on the amount he/she actually withdraws.

ii. Overdraft - This facility is provided to current account holders wherein they can withdraw amount in excess of the credit balance in the account. The bank charges interest on the amount overdrawn.

iii. Discounted bills - A bill of discount is a negotiable instrument where the payment is made by the bank on behalf of the customer to the vendor before the due date.

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