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August 08, 2014

Functions of Banks

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Banks perform many functions in modern times. They are enumerated below.
  1. Collection of the savings of the community : Nowadays people do not keep their savings at home. They deposit in banks. Thereby the risk of loss (from theft, etc.) is avoided and also some interest is earned. There are different kinds of deposits. Some deposits are withdrawable on demand. They are known as demand deposits or current accounts. The interest paid on such deposits is very small. Some times no interest is paid. Some deposits are withdrawable after a fixed period (one year, two years etc.) Such deposits are called time deposits. There are different names for the different varieties of time deposits, e.g., fixed deposits, savings deposits, etc. Time deposits earn higher rates of interest.
  2. Loans and Investment : Banks lend money to traders, industrialists and other persons. Lending is done through a variety of methods. Sometimes the money is paid out directly to the borrower. Sometimes an account is opened in the name of the borrower and he is allowed to draw cheques on it. A man having an account may be given the right to draw more money than what he has in the account. This is known as 'Overdraft facilities'. A bank may also lend money by discounting a bill of exchange or a Hundi.
    • Banks invest money on shares and debentures of companies and on Government Promissory Notes. They lend money to industrial concerns against the security of Government Promissory Notes, shares, debentures, gold, goods in course of manufacture, etc. Loans are also given to private individuals against G. P. Notes, shares, debentures, life insurance policies and gold.
  3. Creation of Money : Formerly banks could print and issue notes payable by them on demand. The notes were used as a medium of exchange. Nowadays only the central bank of the country (RBI in our case) can issue notes. Banks, however, can give loans in excess of the money deposited with them. Cheques can be drawn against such loans and the cheques can be used as media of exchange. Hence, banks can create money.
  4. Other Functions : Banks perform many miscellaneous functions. For example, they keep valuables in safe custody; act as agents of their customers in the purchase and sale of shares, debentures, G. P. Notes, etc., and for the payment of insurance premiums, bills, etc., act as executors and trustees of wills; and, exchange currencies of different countries for one another. Apart from these, now a days banks have been providing various facilities like debit, credit cards and online transactions etc.

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