The Banks has two primary functions , They are acceptance of deposits and advancing loans, More about them is given below.
1. Acceptance of Deposits:
Accepting deposits is the primary function of a
commercial bank mobilise savings of the household sector. Banks generally
accept three types of deposits viz.,
(a) Current
Deposits (b) Savings Deposits, and (c) Fixed Deposits.
(a) Current
Deposits:
These deposits are also known as demand deposits. These deposits can
be withdrawn at any time. Generally, no interest is allowed on current
deposits, and in case, the customer is required to leave a minimum balance
undrawn with the bank. Cheques are used to withdraw the amount. These deposits
are kept by businessmen and industrialists .
(b) Savings
Deposits:
This is meant mainly for professional men and middle class people to
help them deposit their small savings. It can be opened without any
introduction. Money can be deposited at any time but the maximum cannot go
beyond a certain limit. There is a restriction on the amount that can be
withdrawn at a particular time or during a week. If the customer wishes to
withdraw more than the specified amount at any one time, he has to give prior
notice. Interest is allowed on the credit balance of this account. The rate of
interest is greater than the rate of interest on the current deposits and less
than that on fixed deposit. This system greatly encourages the habit of thrift
or savings.
(c) Fixed
Deposits:
These deposits are also known as time deposits. These deposits cannot
be withdrawn before the expiry of the period for which they are deposited or
without giving a prior notice for withdrawal. If the depositor is in need of
money, he has to borrow on the security of this account and pay a slightly
higher rate of interest to the bank. They are attracted by the payment of
interest which is usually higher for longer period. Fixed deposits are liked by
depositors both for their safety and as well as for their interest. In India,
they are accepted between three months and ten years.
2. Advancing
Loans:
The second primary function of a commercial bank is to make loans and
advances to all types of persons, particularly to businessmen and
entrepreneurs. Loans are made against personal security, gold and silver,
stocks of goods and other assets. The most common way of lending is by:
(a)
Overdraft Facilities:
In this case, the depositor in a current account is
allowed to draw over and above his account up to a previously agreed limit.
Suppose a businessman has only Rs. 30,000/- in his current account in a bank
but requires Rs. 60,000/- to meet his expenses. He may approach his bank and
borrow the additional amount of Rs. 30,000/-. The bank allows the customer to
overdraw his account through cheques. The bank, however, charges interest only
on the amount overdrawn from the account. This type of loan is very popular
with the Indian businessmen.
(b) Cash
Credit:
Under this account, the bank gives loans to the borrowers against
certain security. But the entire loan is not given at one particular time,
instead the amount is credited into his account in the bank; but under emergency
cash will be given. The borrower is required to pay interest only on the amount
of credit availed to him. He will be allowed to withdraw small sums of money
according to his requirements through cheques, but he cannot exceed the credit
limit allowed to him. Besides, the bank can also give specified loan to a
person, for a firm against some collateral security. The bank can recall such
loans at its option.
(c)
Discounting Bills of Exchange:
This is another type of lending which is very
popular with the modern banks. The holder of a bill can get it discounted by
the bank, when he is in need of money. After deducting its commission.
(d) Money at
Call:
Bank also grant loans for a very short period, generally not exceeding 7
days to the borrowers, usually dealers or brokers in stock exchange markets
against collateral securities like stock or equity shares, debentures, etc.,
offered by them. Such advances are repayable immediately at short notice hence,
they are described as money at call or call money.
(e) Term
Loans:
Banks give term loans to traders, industrialists and now to agriculturists
also against some collateral securities. Term loans are so-called because their
maturity period varies between 1 to 10 years. Term loans, as such provide
intermediate or working capital funds to the borrowers. Sometimes, two or more
banks may jointly provide large term loans to the borrower against a common
security. Such loans are called participation loans or consortium finance.
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