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Functions of a Bank

Published on Monday, July 27, 2020
 Functions of a Bank

Primary Functions

Accepting deposits

Most important function of a bank is to mobilize public funds. Bank provides safe custody as well as interest to the money of the depositors. There are various types of deposits a customer can hold in a bank. They are as follows:

Savings deposit

Savings deposit account meant for those people who wants to save for future needs and uncertainties. There is no restriction on number and amount of withdrawals. Bank provides cheque book, ATM cum debit card and Internet banking facility. Depositors need to maintain minimum balance which varies across different banks.
The interest for Savings bank account is approximately 3.5 %. Some banks fix their own interest rates.

Current account

Current accounts are normally opened by businessmen. The basic facilities like amount of each withdrawal and chequebook usage are more than that of savings account.
Banks provide overdraft facility for these accounts by which account holder can withdraw more money than available bank balance. This acts as a short term loan to meet urgent needs. Bank charges high rate on interest and charges for overdraft facility because bank needs to maintain a reserve for unknown demands for overdraft.

Fixed deposit or Term deposit

In fixed deposit account, money is deposited for a fixed tenure. Banks issue a deposit certificate which contains name, address, deposit amount, withdrawal date, depositor's signature and other important information.
Banks provide a higher rate of interest than that of the Savings bank deposit.
Depositor can't withdraw money before this mentioned period. In case the depositor wants to withdraw before maturity, banks levy pre-mature withdrawal penalty.

Recurring deposit

In this type of account depositors deposit certain sum of money at regular period of time. Benefit of recurring account is that it provides benefit of compounded rate of interest and enables depositors to collect big sum of money.
Presently, there are flexible deposit schemes, where the deposit need not deposit the mentioned amount every month but can vary the amount according to his convenience.

Difference Between Fixed Deposit and Recurring Deposit

Granting Loans and advances

Cash credit

It is a short term loan facility under which banks allows its customers to take loan up to a certain limit, normally bank grants this loan against mortgage of certain property.
Cash Credit (CC) is granted against hypothecation of stock such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

Difference Between Overdraft and Cash Credit

Bank overdraft

Bank provides this facility to current account holders. Account holder can withdraw money anytime up to the provided limit. He needs to pay interest only on borrowed amount for the period for which he took loan.
The overdraft utilised determines the interest that will be payable by the customer. The overdraft rate is linked to the Bank's Prime Lending Rate and is charged to the account at the month end.


Banks provide loans for various kinds of short term as well as long term needs. Borrower pay back the loan in instalments. The rate of interest is decided by the bank.
Various types of loans include:
  • Personal Loans 
  • Vehicle Loans 
  • Business Loans 
  • Home Loans 
  • Gold Loan 
Difference Between Overdraft and Loan

Discounting bills

In normal day to day business, sellers sends bills to buyer whenever they sell their products and it is mentioned in bill to make payment in stipulated time. Let's take it 30 days. In such conditions seller may discount the bill from the bank for some fees. In such situation bill discounting acts as short term loan. In case the buyer or the drawer defaults, bank send the bill back to seller to drawer so that he may take legal action against drawee or buyer.
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.
Under certain circumstances, the Bank may discount a bill of exchange instead of negotiating them. The amount the Bank advances to you also depends on your past record and reputation of the drawee.

Secondary functions

Agency functions

Funds transfer

Banks transfer money according to the request of the customer. At present there are three types of transfers through electronic mode.

  • NEFT - National Electronic Fund transfer
  • RTGS - Real Time Gross Settlement
  • IMPS - Immediate payment service
Fast Facts on NEFT, RGTS, AEPS and MTSS

Difference between NEFT and RTGS

Collection of cheques:

Local cheques are payable within the jurisdiction of the clearing house and will be presented through the clearing system prevailing at the centre. Credit arising out of local cheques shall be given to the customer’s account as indicated in the Cheque Collection Policy (CCP) of the concerned collecting bank.
Under grid-based Cheque Truncation System clearing, all cheques drawn on bank branches falling within in the grid jurisdiction are treated and cleared as local cheques.

Utility functions

Issue of draft, letter of credit etc :

Letter of credit is a letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions.
It acts as an assurance that in case the borrower defaults in making the payment, bank will make the payment up to the amount mentioned in letter of credit

Locker facility

Safe Deposit Locker facility is one of the value added services provided by the Bank to its customers. Bank provides specially designed lockers purchased from reputed manufactures which are kept at specially built strong rooms at branches for keeping the valuable of hirers.Rent for Safe Deposit Lockers is charged annually.

Dealing in foreign exchanges

Banks provide Travel cards which can be loaded with international currencies. Online Remittance Services enable customers to transfer money in a very short time.
These Forex services help the students who study abroad and businessmen who work abroad to carry out their transactions.

Digital Initiatives:

There are many services provided by the bank through digital technology:
  • Internet Banking
  • Mobile Banking
  • SMS Banking
  • Service through phone application
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Ramandeep Singh, your guide to banking and insurance exams. With 14 years of experience and 5000+ selections, Ramandeep understands the path to success, having transitioned himself from Dena Bank and SBI. He's passionate about helping you achieve your banking and insurance dreams.

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