Major Functions Of Banks

In any banking exam, the knowledge of the structure and the major functions of banks is very crucial for a good score. Banking is an extremely important part of our economics too. Banks are those organizations that collect money from “customers” for the purpose of investments while providing the customers with an interest rate. In banking exams like the IBPS PO, SO and other graduate-level exams like the SSC exams, this section comes under the heading of the professional knowledge. However, in the section below, we will be only discussing the major functions of the bank. Let us start.

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Major Functions Of Banks

Both in the mains section of SSB, IBPS, SBI, and other similar exams, we have a section titled as professional knowledge. In this section, the questions specific to the post that the candidate has applied for are usually put forth. Even in the personal interview phase, the major focus is on the banking awareness of the candidate. The functions of any bank in India are of two types that we shall discuss further below viz – The primary Functions and the Secondary Functions.

The Primary Functions Of A Bank

The primary functions of a bank are two:

1. Accepting Deposits: Deposits are the amount of money that a customer hands over to the bank. This is known as making a deposit. The deposits are of a few types namely: Saving Deposit, Fixed Deposit, Current Deposit, and the Recurrent Deposit. The various deposit schemes are based on the type of deposit and the frequency of depositing. For example, in a fixed deposit a definite sum is handed over to the bank for a few years. The interest is only compounded if the deposit term is complete. Providing these services of the deposit is one of the primary functions of a bank. So what happens if you need money? Shouldn’t that also be a primary function of the bank? Well, let us see further.

Saving/ Fixed/ Current Deposit

In a saving deposit, the amount and the rate of interest are low. Withdrawals are also allowed but only in a limited number. The account is suitable for people who want to save on salaries and similar sources of income.

Similarly, the fixed deposit is a fixed sum that one gives to the bank for a certain agreed time. The withdrawals are not allowed before the completion of the time of the fixed deposit. On the other hand, the current account or deposit, there is no interest paid by the bank and the customer can withdraw or deposit any number of times.

Now let us see the other secondary function:

2. Granting Loans and Advances: The bank lends people money on a time-interest basis. Each loan amount is passed by the bank after due consideration and securing the bank’s profit. The bank also gives advances to its customers. These are also the primary functions of the banks. The bank provides the services of an overdraft, cash credits, loans, and discounting of the bill of exchange.

The banks also take part in what we call the secondary functions of the bank.

Secondary Functions Of The Bank

The secondary functions of the Bank are either selling gold coins to the public or selling insurance products and selling mutual fund products etc. Let us make a more formal study. Following are the important secondary functions of the Banks:

1. Agency Functions: The bank is an agent for its customers in a way that it invests on behalf of its customers. Acting as the agent of the customer the bank may transfer funds, the collection of cheques, periodic payments, portfolio management, periodic collections, and several other agency functions. All of these functions are the secondary functions of the bank.
2. General Utility Functions: The bank also performs several utility functions. Some of the most important utility functions of the banks may include the issue of drafts, letter of credits, etc., locker facility, underwriting of shares, dealing in foreign exchange, project reports, social welfare programs, other utility functions. The banks also provide several services like the safe deposit locker facilities, safe custody facilities, and Demat accounts. The opening of Demat accounts allows the account holder to trade in the stock exchange or the money market directly. The customer that holds a Demat account can directly buy or sell shares from the capital market.

The General Utility Functions are also called as Social development functions. In some areas, the banks will help you with all the transactions that you will have to do during a course of time. For example, you will be able to pay your phone, electricity and other utility bills from a center that is run by the banks. This sums up the functions of the banks.

Practice Questions

Q 1: You take your mom’s jewelry to the local bank and ask them to keep it safe for you. With reference to this act, choose the incorrect statement from the following:

A) This will come with the primary functions of the bank and you will not be charged for the services.

B) Providing safety deposit boxes is a secondary function of the bank and thus you must be charged.

C) The act constitutes a secondary service that the bank offers.

D) Both B) and C).

Ans: A) This will come with the primary functions of the bank and you will not be charged for the services.