BANKING FUNCTIONS AND SERVICES

Commercial banks have emerged as a single most important source of

institutional credit. They are performing multifarious functions, some of
which, truly speaking are not commercial in nature. So much so that in the
light of services rendered by them even the name Commercial Bank is
being considered a wrong nomenclature for modern commercial banks. Such
is the variety of functions performed and services rendered by the banks that
they can be described as departmental stores of financial services.
The banking functions are broadly divided into two categories:
1. Primary functions
2. Secondary functions
These are highlighted in the following diagram and explained in detail below:

FUNCTIONS
OF A BANK

PRIMARY
FUNCTIONS

Accepting
Deposits

SECONDARY
FUNCTIONS

Granting of
loans

Agency
Functions

Utility
Functions

PRIMARY FUNCTIONS
The primary functions are also termed as ACID TEST Functions. These are
called so because, unless an establishment satisfies the test of these two
functions, it simply cannot be a bank or a banker.

1. ACCEPTING OF DEPOSITS: The bank collects deposits from the

public. Although bank accepts non-chequable deposits also, it must
accept chequable deposits from the public. It is these deposits i.e.
deposits withdrawable by cheque which distinguish a commercial bank
from other non-banking institutions. For example: public ltd. co. also
accepts deposits but they do not accept chequable deposits.
The deposits must be of money and not of other assets. Secondly, the
deposits are accepted from the public at large and not merely
members or shareholders. Also acceptance of chequable deposits is a
necessary but not sufficient condition for example post office saving
banks are not commercial banks, even if some of them accept
chequable accounts.
The bank accepts deposits of different types:
Saving deposits: This type of deposits encourages saving habit
among the public. The rate of interest is low. This account is
suitable of salary and wage earners.
Fixed deposits: Lump sum amount is deposited at one time for
a specified period. Higher rate of interest is paid which varies
with the period of deposits. Withdrawals are not allowed before
the expiry of the period.
Current deposits: This type of account is operated by
businessmen. Withdrawals are freely allowed. No interest is paid.
In fact there are service charges. The account holders can get
the benefit of overdraft facility.
Recurring deposits: This type of account is operated by
salaried persons and petty traders. A certain sum of money is
periodically deposited into the bank. Withdrawals are permitted
only after the expiry of certain period. A higher rate of interest is
paid.
Miscellaneous deposits: Banks have introduced several
deposit schemes to attract deposits from different types of
people like Home construction deposit scheme, sickness benefit
deposit scheme, Children Gift Plan, Old age pension scheme, Mini
Deposit scheme etc.
2. LENDING OR ADVANCING OR GRANTING OF LOANS: A commercial
bank must lend the deposits or make advances to the public directly or
indirectly. However mere lending will not make and establishment a
bank. In fact all other institutions like LIC, UTI, SFCs etc also lend
money or advance loans but are not called commercial banks.
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Lending must be on the basis of the funds raised through

acceptance of deposits. The usual methods adopted for advancing
are as follows:
Overdraft: An overdraft is an advance given by allowing a
customer to overdraw his current account up to an agreed
amount. Under this interest is charged only on the credit actually
utilized i.e. to the extent account is overdrawn. Also there is no
restriction on number of withdrawals. An overdraft facility is
granted against a collateral security. It is sanctioned to
businessman and firms.
Cash credits: The client is allowed cash credit upto a specific
limit fixed in advance. It can be given to a current account holder
as well to others who do not have an account with bank.
Separate cash credit account is maintained. Interest is charged
on the amount withdrawn in excess of limit. The cash credit is
given against the security of tangible assets and / or guarantees.
The advance is given for a longer period and a larger amount of
loan is sanctioned than that of overdraft.
Loans: It is normally for short term say a period of one year or
medium term say a period of five years. Now-a-days, banks do
lend money for long term. Repayment of money can be in the
form installments spread over a period of time or in a lump sum
amount. Interest is charged on the actual amount sanctioned,
whether withdrawn or not. The rate of interest may be slightly
lower than what is charged on overdrafts and cash credits. Loans
are normally secured against tangible assets of a company.
Discounting of bills: The bank can advance money by
discounting or by purchasing bills of exchange both domestic
and foreign bills. The bank pays the bill amount to the drawer
or the beneficiary of the bill by deducting usual discount charges.
On the maturity, the bill is presented to the drawee or acceptor
of the bill and the amount is collected.
Money at call: It is money lent for very short period, generally
varying from 1-14 days. Such advances are usually made to
other banks and financial institutions only. It ensures liquidity.
The amount invested and the interest earned depends upon the
conditions prevailing in the money market.
Credit to government: The commercial provide indirect credit
to the central govt. and state govt. by investing in their
securities. Investment in securities forms an important part of
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the portfolio of the bank. It enables it to meet the requirements

of SLR.

3. OTHER FUNCTIONS:
Credit creation: It is another distinct function of commercial
bank. Banks are able to create credit because the demand
deposits i.e. a claim against the bank is accepted by the public
in settlement of their debts. Thus, when a bank advances a loan
or credit, it does not lend cash but opens an account in favour of
the customer and credits the amount to the account. It creates a
claim against itself which is acceptable by public for settlement
of debts, thus it is an important constituent of money supply. In
this process bank creates money.
Cheque system of payment of funds: A cheque, a
negotiable instrument, which in fact is a bill of exchange drawn
upon a banker. Through a cheque the customer/depositor directs
the banker to make payment to the payee.

SECONDARY FUNCTIONS
The bank performs a number of secondary functions, also called as nonbanking functions. These are explained below:
1. AGENCY FUNCTIONS OR SERVICES: Banks, apart from performing
the primary or acid test functions of acceptance of deposits and
lending, render a number of useful services to the customer. In
rendering these services sometimes the bank acts as agent of the
customer. Such services are called agency services and are explained
below:

Collection and payment of credit and other instruments:

The banks collect and pay the various negotiable instruments
like cheque, bills of exchange, dividend warrants etc.. They also
pay subscriptions, rents, income tax, insurance premium etc., on
the behalf of the customer.
Sale and purchase of stock exchange securities or
Portfolio Management: The modern commercial banks also
undertake the purchase and sale of various securities like shares,
stocks, bonds and debentures etc. on the behalf of the customer,
but do not advice regarding the suitability of a security.
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Administration of wills and trusteeship: Through expert staff

and specialized departments banks undertake administration of
wills and trusteeship.
Remittance of funds: The commercial banks on the behalf of
clients from one place to another through cheques, drafts, mail
transfers etc.
Representation and correspondence: Sometimes
commercial bank act as representatives and/or correspondents of
the clients especially in handling various applications. For
instance travel tickets and passports etc.
Bullion trading: Commercial banks also involve in trade of
bullions like gold and silver.

2. GENERAL UTILITY FUNCTIONS OR SERVICES: In addition to agency

services, banks render many more utility services to the public. These
are as follows:

Issue of drafts and Letter of credits: Banks issue drafts for

transferring money from one place to another. It also issues
letter of credit, especially in case of import trade.
Locker facility: The banks provide a locker facility for safe
custody of valuable documents, gold ornaments, and other
valuables. For this they have evolved a locker system, under
which lockers are rented out to the public.
Underwriting of shares: The bank underwrites shares and
debentures for a commission through its merchant banking
division.
Dealing in foreign exchange: The commercial banks are
allowed by RBI to deal in foreign exchange.
Project reports: The commercial banks may also undertake to
prepare project reports on the behalf of its clients.
Social welfare programmes: It also undertakes social welfare
programs such as public welfare programmes etc.
Acting as Information banks: Commercial banks act as
information banks as they collect the financial, economic and
statistical data relating to industry, trade and commerce. The
information is made available to various interested parties.
Issuing of travellers cheques and credit cards: Banks have
been rendering great services by issuing travellers cheque which
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enable a person to travel without fear of theft or loss of money.

Banks also issue credit cards which allow the holder to avail
credit without any additional cost or effort.
Issuing of gift cheques: Certain banks issue gift cheques of
various denomination e.g. Rs. 51, 101, 1100 etc. They are
generally issued free of charge.
Merchant banking services: Banks also perform merchant
banking services. They help in availing loans from non-banking
institutions.
Loans for consumer durables: Banks provide loans for
consumer durables also like car, refrigerator, air conditioners etc.
Core banking: Core banking is a service provided by a group of
networked bank branches where customers may access their
bank account and perform basic transactions from any of the
member branch offices. It is provided by multiple channels like
ATMs, Internet banking, mobile banking and branches.

3. RESULTATIVE FUNCTIONS: As a result of the performance of abovementioned functions, the commercial banks perform other functions
like:

Mobilization of savings of the people

Channelizing savings into productive channels
Extension of financial services to rural areas
Making credit available to weaker section of society.

CONCLUSION
Thus it can be concluded that the modern commercial banks can be rightly
called as the departmental store of services customized to serve the
customers.