What is a Bank ?
Bank:
A bank is a financial institution that accepts deposits of money from the public, withdrawable by cheque or otherwise and uses the money so collected for lending to the households, the firms and the government.
Types of Banks:
1. Central Banks
2. Commercial Banks
3. Co – operative Banks
4. Regional Rural Banks
5. Land Development Banks
6. Exchange Banks
7.Exim Banks
8. Development Banks
1. Central Banks :
- The Central bank is the apex institution in the banking and financial structure of the country.
- It is the central bank which issues currency in the country.
- It controls and regulates the banking and financial structure of the country.
- In India, the Reserve Bank of India is the central bank of the country.
2. Commercial Banks:
- They are the most important types of bank in a country.
- They accept deposits from public, and give short period loans to individuals, traders and business institutions.
- In the process of accepting deposits and extending loans, commercial banks create ‘deposit money’ or ‘credit money’.
- Commercial banks operate largely for earning profits.
- Example, State Bank of India (SBI), Union Bank of India, Bank of Baroda, Punjab National Bank (PNB) etc.
3. Co – operative Bank:
- Co operative banks were originally started in rural areas in the form of cooperative societies for the purpose of granting easy credit to the farmers.
- Cooperative banks have now been established in the urban areas as well.
4. Regional Rural Bank:
- They are also known as small man’s bank.
- They have been set up in rural areas to meet the needs of the weaker sections of the rural people like – small farmers, rural artisans etc.
5. Land Development Banks :
- Land development banks are also known as Land Mortgage banks.
- They have been established to provide long term credit to the farmers for the purpose like – improvement of the land, purchase of agricultural equipments like – tractors, construction of wells fencing etc.
- They provide loans at concessional rates.
6. Exchange Banks:
- They help people engaged in foreign trade.
- They finance foreign trade by purchasing, selling, discounting and accepting bills of exchange arising out of foreign trade.
7. Exim Bank :
- Exim banks are popularly known as ‘Export – Import Banks’.
- They have been established to provide long term finance to exporters and importers to meet their financial needs related to international trade.
8. Development Banks :
- These banks are established to promote development in industrial activities.
- These banks are popularly known as ‘New Generation’s Tech Savy Banks’.
- They grant long – term loans and provide Various types of development services such as underwriting the new issues, provision of technical advice, market information, etc. to the private sector industries.
- Example, Industrial Financial Corporation of India (IFCI ), Industrial Credit and Investment Corporation of India (ICICI), and Small Industries Development Bank of India (SIDBI) are some of the important types of development financial institutions.
Features of Commercial Banks:
1. Accepts deposits from public –
Banks accept both demand deposits and time deposits, repayable on demand, withdrawable by cheques or otherwise.
2. Banks uses these deposits for lending purpose and investment in securities.
3. Credit Creation –
Their debts circulate in the economy as money. Banks have power to create lending activities.
Functions of Commercial Banks:
Commercial banks perform a variety of functions and provide a number of services to their customers. Apart from performing their traditional functions like accepting deposit from the public and providing loans to different sectors of economy, modern banks have also started to provide a number of services to their customers that is why they are regarded as departmental store bank. The functions of commercial banks can be classified into two categories namely: primary functions and secondary functions.
A. Primary Functions
1. Accepting Deposits
2. Advancing Loans
B. Secondary Functions
1. Overdraft Facility
2. Discounting Bills of Exchange
3. Facilitation of payments through cheques
4. Agency Functions
5. General Utility Functions
6. Credit Creation
A. Primary Functions:
Accepting deposits and Advancing of loans are the two primary functions performed by commercial banks.
1. Accepting Deposits:
Banks accept deposits from individuals, firms and other institutions.
People like to deposit their money with banks for earning interest, for safe keeping or for convenience.
Banks mainly accept two types of deposits:
1. Demand Deposits:
a. Current Account Deposit
b. Saving Account Deposit
2. Term Deposits:
a. Recurring Deposit
b. Fixed Deposit
1. Demand Deposit :
- The deposits which are repayable on demand are known as demand deposit.
- These deposits can be withdrawn at any time by cheques without any restriction on the amount or number of withdrawals made.
- These accounts are mostly held by traders and business man who use these for making business payments and for receiving payments through cheques.
- They include current and saving accounts.
- Banks do not pay any interest for current account and a nominal interest for saving accounts.
a. Current Account:
- Current accounts are payable on demand.
- These deposits can be withdrawn by cheques without any restriction on the amount or number of withdrawals made.
- Banks do not pay any interest for these deposits.
- There is no minimum balance had to be maintain in current account.
b. Saving Account:
- Saving Accounts are also payable on demand.
- They can be withdrawn by cheques but there is a limit on the amount and number of withdrawals made, during a particular period.
- Banks pay a very less interest for saving deposits.
- A certain minimum balance has to be maintain in saving account for availing cheque facility.
2. Term Deposit or Time Deposit:
- These are the deposits which are payable after certain period or it can be said that withdrawals can be made only after the maturity period.
- These deposits are not payable on demand.
- They do not enjoy cheque facilities, cheques can not be issued against these deposits for making payments.
- Interest on these deposits is higher than on saving deposits.
- They are of two types –
a. Fixed deposit
b. Recurring deposit
a. Fixed Deposit:
- Fixed deposits are not payable on demand, but they are payable after the completion of maturity period.
- Fixed deposit can only be withdrawn after maturity period, no cheque facility is available during the period.
- Banks pay higher interest rate for fixed deposit, which may varies with the length of time for which deposit has been made.
- Depositer deposit a fixed lump sum amount for a fixed period of time and after that gets principal amount plus interest on the maturity.
b. Recurring Deposit:
- Recurring deposits are not payable on demand but payable after the maturity period.
- There is no cheque facility available, and can be withdrawn after certain maturity period.
- Banks pay interest lesser than fixed deposit for recurring deposits.
- Depositer deposits a fixed amount regularly for a pre- decided period of time. After maturity they will get principal plus interest.
2. Advancing Of Loans:
Commercial banks are not allowed to keep the amount deposited with them,idle. Therefore, commercial banks have to keep some amount of the total deposits as cash reserves and lend the rest of the balance, out to the public against the collateral securities.
The loans are not given in cash, a current account on the name of the borrower is opened and the loan amount is credit to the account,from where the borrower can use the fund as required.
a. Cash Credit
b. Demand Loans
c. Short – term Loans
a. Cash Credit:
- Cash credit is a type of loan, given to the borrower against his current asset like – shares, bonds, stock of goods etc.
- In this facility, the entire loan sanctioned by the bank is not given to the borrower at a particular time.
- The bank opens an account in the name of the borrower and allow him to withdraw the borrowed amount within the sanctioned limit.
- The borrower is allowed to withdraw the borrowed amount as and when he needs it.
- The bank charges the interest not on entire amount of loan sanctioned, but only on the actual amount withdrawn from the bank.
- Cash credit is very popular with the Indian business men.
b. Demand Loans:
- The loans given by the banks which they can recall at any time on demand are known as demand loans.
- There is no stated maturity.
- The entire amount of loan is credited in lump sum to the borrower’s current account.
- The borrower has to pay interest on the entire amount of loan sanctioned, no matter how much is actually used by the borrower.
- Those like security brokers whose credit needs fluctuate generally take such loans on personal security and financial assets.
c. Short – term Loans:
- Personal loans given to borrowers against some collateral security are known as short – term loans.
- The amount taken as a loan is credited to the account of the borrower, and he can withdraw that money from his account.
- The interest is charged on the entire sum of the loan granted.
- The entire amount is repaid either in one installment or in a number of installments over the period of loan.
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