Chapter Five
Chapter Five
Chapter Five
BANK SERVICES
5.1. Introduction
When we talk about bank services, we as a customer make it a hallmark if the basic services are
provided conveniently and in a good manner by a genuine banker. Though there is a wide range
of services which a bank offers, that defining each one is difficult but some of the basic and
traditional services are illustrated here:
For investment of surplus funds or to create a fund for future needs like children’s’ education and
marriage, construction of house, business, etc one can find plenty of opportunities to deposit
money banks under various deposit schemes. Now a day’s almost all banks are computerized,
core banking/ network banking system is introduced which helps the people to deposit money at
their own convenient locations.
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5.2.1. Types of Deposits
The following are some of the deposit schemes available in banks:
1. Current Account
2. Savings Account
3. Term Deposit/Fixed Deposit/ Recurring Deposit Account
4. Multi Option Deposit Account
The first three accounts were already discussed in chapter three and the last type is discussed
below:
Multi Option Deposit Scheme is a term deposit which is not fixed at all and comes with a unique
break-up facility which provides full liquidity as well as benefit of higher rate of interest, through
the savings bank account. One can also keep that deposit intact by availing an overdraft facility,
to meet occasional temporary funds requirements. Individual banks have their own deposit
schemes to suit the current as well as future needs of the people. You may visit nearby branches
of the banks and collect information about different types of deposit accounts to ascertain the
comparative advantages and limitations of the different types of deposit schemes.
5.3. Advancing of Loans
Every business is run with an objective of earning profits. Even the banks are profit oriented and
they also invest their funds to earn profits. Advances are credit provided by banks to their
customers, traders, businessmen and industrialists against security of assets or on the basis of
personal security of the borrower. Advances can be broadly classified into two heads.
I. Unsecured Advances;
Unsecured Advances or loans mean a loan or advances not secured.
In such kind of advances the customer is not required to offer bank any tangible
security.
These advances are given to those customers who have sound financial backing,
high business reputation and capacity to manage business, because general
capacity of such customers acts as a security itself for the bank. To be on a safer
side and avoid unsecured creditors and default by the customers bankers provides
these advances by taking guarantee of one or more person.
The bankers should have confidence in the customers and to judge this
confidence he/she has to consider 3C’s.
A. Character: The best asset of a man is his character. A person who carries qualities like
honesty, promptness reputation, responsibility and goodwill is consider a man of
character and bank can extent advance to such a man without hesitation.
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B. Capacity: When we talk about capacity of an entrepreneur, it refers to his ability to
manage his business. How often he takes initiatives, his interest in his business, his
experience and managerial abilities adds to the success of the business. A man with all
these skills can be granted advances by banks. Now-a-day nationalized banks judge the
capacity of the borrower not only by these skills but also on the basis of economic
viability of the project when a project manufacturers goods at lower cost and leaves
sufficient profits to meet commitment of loan the project is considered as economically
viable.
C. Capital: Capital is the amount invested by a proprietor in his business. With the help of
capital of a proprietor purchases goods and machinery and plant. A banks fulfills the
working capital requirement of a business.
Dr. C.B. Memoria has evolved a formula for banks to judge soundness of man before lending
advances.
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5.3.1. Forms of Advances
i. Loan: When a banker provides a lump sum amount for a certain period of time at an
agreed rate of interest, it is term as loan. The ensure amount is given by bank in cash or
by credit in account of the concerned person and the person has to repay this loan in
installment with the predefined rate of interest.
Loan can be of two types:
A. Demand Loan: - It is for a short period of time and usually granted to meet working
capital needs of the borrower.
B. Terms Loans: - These are for medium term or long term and are for purchase of vehicle
and meet capital expenditures respectively.
ii. Cash Credit: It is an arrangement by which the customer is allowed to borrow money
upto a certain limit on a permanent basis. Customer need not to draw the whole amount at
once instead he/she can withdraw the amount according to his requirement as and when
he need. He/she also has liberty of putting back the excess amount. The interest is
charged on the amount withdrawn. Cash credit provides an elastic form of borrowing
since the limit fluctuates accordingly to the need of the business.
iii. Overdraft: Unlike cash credit, overdraft is a facility provides by a banker to his/her
customer on a temporary basis. In this a customer can withdraw over and above the credit
balance of his/her current Account. The interest is charges only on the withdrawn
amount.
iv. Bill Purchase and Discounted: In this form of advances; bank grants advances by
discounting bills of exchange or promote. The amount after deducting the interest from
the amount of the instrument is credited in the account of the customer. In such a
situation banks receives interest in advance. Bills which are accompanied by documents
of title to goods such as bills of lading or railways receipts are purchased by bankers
instead of the discounting
5.3.2. Types of Loans
Following are some of the popular loan schemes offered by banks:
A) Housing Loans: Finance is provided for purchase of a new House. Loan is also given for the
purchase of land and constructions of house on the same. The rates of interest to be charged
depends on two factors firstly the amount of loan and secondly the time period for which the
loan is required. The rate of interest may be fixed or fluctuating. In case of fixed rate of interest
the interest rate remain the fixed throughout the period of loan in spite of the fact that the current
rate of interest may be different the rate at which the loan was obtained. In case of fluctuating
rate of interest the rate of interest changes according to the current rate in the market.
B) Personal Loan: Finance is provided to meet out all personal needs like renovating the house,
purchasing a computer, marriage or medical expenses etc.
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C) Travel Loan: Finance is provided to meet out the travel cost of the customers either domestic
or for international visits.
D) Car Loan/Vehicle Loan: Finance is provided for purchase of car or other vehicles either for
personal or business purposes.
D) Education Loan: Finance is provided to meet out the education cost of children of the
customers.
E) Festival Loans: Finance is also given to meet out the festival expenses.
5.4. Investments
Now a day’s bank also participates in the activities of investment at national or international
level of investment banks. They help companies and government to raise money by issuing and
selling securities in the capital markets. They provide necessary financial guidance to its
customers for effective investments in Stock and Mutual Funds. Some banks also have
specialized offices for this purpose.
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goals and coverage of risk. It helps one’s family remain protected from circumstances such as
loss of income due to critical illness, retirement and even after the death of the policyholder.
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5.8. Money Transfer services/remittance services
Money can be transferred either through online or drafts or telegraphically or by wire transfer or
Cheques. E-Transfer is completely online, paperless money transfer service which enables the
customer to send money directly from one bank account in foreign country to Ethiopia. Drafts in
Ethiopian Birr can be purchased from exchange companies of one country and mailed to the
branch of another country where the customer has the account. Telegraphic or wire transfers can
be made through branch to branch. Cheques can be deposited for credit of the customer’s
accounts and the Cheques will be collected and credited to their accounts.
Money sent home by migrants constitutes the second largest financial inflow to many developing
countries, exceeding international aid. Remittances contribute to economic growth and to the
livelihoods of people worldwide. Moreover, remittance transfers can also promote access to
financial services for the sender and recipient, thereby increasing financial and social inclusion.
Remittances also foster, in the receiving countries, a further economic dependence on the global
economy instead of building sustainable, local economies.
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Most banks offer Internet banking for corporate too. Corporate can empower officers identified
by them to operate online one or more of their accounts at one or more networked branches of
the Bank. The company appoints a ‘regulator’ or ‘super-boss’ for corporate Internet banking.
The powers are defined and their limits are specified for transaction.
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5.13. SME Services
SME means Small and Medium Enterprises. The Bank finances for Small Business activities
which are of special significance to a large number of people as many of these activities can be
started with relatively lower investment and with no special skills on the part of the
entrepreneurs. This includes loan to traders to meet normal business requirements. Large number
of small and medium enterprises are working in our country. These enterprises are a source of
employment to the local people. Such enterprises mainly adopt labor intensive techniques even
than finances are required by them to meet long term as well as short-term credit requirements.
Banks provide a variety of facilities through the SME Service.