Primary Functions of Banks
Accepting Deposits and lending loans and advances two are the Primary Functions of Banks explained in detailed below:
1. Accepting Deposits
The banks accept deposits from their customers, who can withdraw their funds at will. Customers can deposit money and leave their funds with the bank in any type of bank account – savings account, current account, or fixed deposit account.
A savings bank also pays interest to their customers on the deposits. Such banks are very popular with small savers. A current account is a running account that can be operated multiple times during a working day. Whereas, a fixed deposit account is responsible for holding deposits for a fixed period and a higher rate of interest is paid on such accounts.
2. Lending Loans & Advances
A bank lends funds to needy people at a certain rate of interest. Banks provide loans mainly to agriculturists, industrialists, and businessmen who intend to invest in their ventures for their own profit and to contribute to the economic development of the country.
3. Issue of Notes/ Drafts
A bank is also responsible for issuing notes and creating other inexpensive modes of exchange in the form of drafts or cheques. In India, the RBI is responsible for issuing notes and coins.
The banks create and enable the transfer of credit instruments such as bank notes, bank drafts, letters of credit, cheques, and so on. These instruments are very helpful in economizing the use of metallic money and making the transfer of funds cheap and convenient.
4. Credit Deposits
The bank may create deposits by providing loans to its customers. In such cases, the borrower is credited with a withdrawable deposit amount when needed. The customers usually deposit the money borrowed from the bank in the same bank either when the bank insists on doing so or to reap the benefits of the current deposit account. Such deposits are also known as Credit Deposits.
Other Functions of Banks Include:
- Collecting of cheques drawn on other banks
- Accepting and collecting bills of exchange
- Dealing in foreign exchange to assist in the settlement of overseas debts
- Safe deposit facilities
- Stock exchange trustee
- Assisting the RBI in keeping the note issue in a safe and good condition
