Understanding Banking Functions and Importance
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DEVAM JAISWALUnderstanding Banking Functions and Importance
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DEVAM JAISWALDEFINITION OF BANK
Bankingisconsideredtobethenervecenteroftrade,commerceandbusinessinacountry.Itplaysa
vital role in distributing the money for the development of trade, industry and commerce.
Now-a-days, banking sector acts as the backbone of modern business. Thereforewemaysaythat
banking is the lifeblood of modern commerce. Bankers are not only dealers in money but also
leaders in economic development of a country.Developmentofanycountrymainlydependsupon
the banking system.
The term bank is either derived from Old ItalianwordbancaorfromaFrenchwordbanqueboth
mean a Bench or money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countriesinbigheaps(quantity)onbenchesor
tables for the purpose of lending orexchanging.Abankisafinancialinstitutionwhichdealswith
depositsandadvancesandotherrelatedservices.Itreceivesmoneyfromthosewhowanttosavein
the form of deposits and it lends money to those who need it.
FUNCTIONS OF BANK:
- Dealing in Money
Bank is a financial institution which deals with other people's money i.e. money given by depositors.
- Acceptance of Deposit
A bank accepts money from the people in the form of deposits which are usually repayable on
demand or after the expiry of a fixed period. It gives safety to the deposits of its
- Giving Advances
A bank lends out money in the form of loans to those who require it for different purposes.
- Payment and Withdrawal
A bankprovideseasypaymentandwithdrawalfacilitytoitscustomersintheformofchequesand
drafts. It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.
- Agency and Utility Services
Abankprovidesvariousbankingfacilitiestoitscustomers.Theyincludegeneralutilityservicesand
agency services.
- Ever increasing Functions
Bankingisanevolutionaryconcept.Thereiscontinuousexpansionanddiversificationasregardsthe
functions, services and activities of a bank. Like machinery for transmission of various
[Link].
- Connecting Link
Bankactsasaconnectinglinkbetweenborrowersandlendersofmoney.Bankscollectmoneyfrom
those who have surplus money and give the same to those who are in need of money.
Importance of Banking System
Before the banking system originated, banking activities were performed by merchants, money
lender,andindividuals.Thiswascertainlynotthebestwaytohandlecurrencyandpeople’spersonal
wealth. The system lacked regulations and standardization making general public vulnerable to
debauchery and fraud. Therefore, there was an urgent need of organized banking sector that will
enable smooth functioning of the economy and safe way to handle money. Additionally, a
well-organized banking system provides:
▪ Money for the economic growth of the country.
▪ It is the main pillar of the financial sector of the country.
▪ It offers a safe place to the individuals or group of individuals to deposittheirwealthand
keep it secure.
▪ It offers loans for the personal or developmentalpurposetodealers,households,smalland
large enterprises.
▪ It provides government money and power to carry out development work.
▪ To equally distribute the money to the citizens of the country and prevent the focus of
financial power in the hands of a few.
▪ It helps in implementing monetary policies.
▪ It ensures financial stability in the country.
▪ It provides financial assistance to the industrial sector of the economy.
▪ It helps in generating employment opportunity.
▪ In India, it plays a major role in providing assistance to the agricultural sector.
▪ It ensures balanced economic development of the country.
▪ It enables capital formation and promotes the habit of saving.
▪ And provides finance for trade and industries that is essential to our economic development.
List of Banking Services offered by Banks
Apart fromprimaryjobsacceptingdepositsandgrantingloans,thereareseveralotherfunctionsof
banks in the modern banking era. Consider a few services offered by the banks.
[Link] and Remittance Services:
This is another important function of banks that enables us to transfer funds fromoneaccountto
another, from one city toanother.Alongside,modernbankingsystemsallowustomakethedirect
online money transfer, pay utility bills, collection of cheques, and more. With the evolution of
technology, payments can be made and collected from any part of the world.
2. Overdraft:
Overdraftservicesallowaccountholderstowithdrawmorethanwhattheirdepositsallow.Though,
interest is charged on the overdrawn amount. This is one of the many waysbankslendmoneyto
their customers.
3. Currency Exchange:
Imagine if there were no banks where you would acquire foreign currency for travel or trading
purposes. The banks provide foreign currency exchange with local currency in an easy manner.
4. Consultancy:
Modern banks have a holistic approach and they aim to provide all kinds of services to their
customersthatinvolvetheirfinancialsituation.Modernbanksarehiringfinancialandlegalexperts
to provide advice and solutions about customers wealth, investment, and trading.
5. Online Banking:
Inthedigitalworld,everybankisstrivingtomakespaceinonlinebankingworld.Withthehelpof
theinternet,banksallowtheircustomerstoperformbankingactivitiesthroughtheirofficialwebsite.
This allows the customer to access their account 24/7 without having to visit a physical branch.
6. Mobile Banking:
Similarly,banksarealso providingmobilebankingserviceswhereincustomerscanperformbanking
activities through their smartphone apps.
7. Home Banking:
Homebankingisanotherrisingtrendwhereinbankingtransactioncanbemadefromhomedirectly.
These services require an internet connection or access to online banking.
8. Credit and Debit Cards:
Most of the banks offer credit and debit cards to their customers that can be used to purchase
productsandservices,andevenborroworwithdrawmoney.Thisisoneofthemostimportantsteps
towards a cashless society.
9. Lockers:
Banks also offer safe deposit to their clients to store their valuables safely, at minimal fees.
10. Money Transfer:
Thereareseveralwaysbanksoffertotransfermoneyfromonepartoftheworldtotheotherwiththe
help of demand drafts, money orders, cheques, online banking, and more.
11. Investment Banking:
Manybanksnowofferfinancialservicestotheircustomers.Theyhelpthemmakethebestoftheir
wealth by offering several investment products.
[Link] Management:
Wealth Management is one of the many investment services offered by banks. It allows the
customers to plan their finances to grow long-term wealth.
Apart from all this, banks also offer several auxiliary services to the customers such as solvency
certificates, mutual funds, insurance services, gold coins, and more.
Today, we have a fairly well-organized and highly sophisticated banking system that includes
new-generationbanksalongwithtraditionalbanks.InthebankingindustryofIndia,therehasbeen
extraordinary growth that has replaced traditional banking methods with simplified, accurate, and
fast banking methods. Indian banks are subject to tremendous change andareexpectedtoexpand
invariably.
CLASSIFICATION OF BANKS:
Thebankinginstitutionsformanindispensablepartinamoderndevelopingsociety.They
performvariedfunctionstomeetthedemandsofvarioussectionsofthesociety.Onthebasisof
the functions performed and its ownership, the banks can be classified into the following types:
A.On the Basis of Functions:
1. Commercial Banks
2. Industrial Banks
3. RRBs
4. Exchange banks
5. Central Bank
B.On the Basis of Ownership:
1. Public Sector Banks
2. Private Sector Banks
3. Co - operative Banks
C.On the Basis of Schedules of RBI:
1. Scheduled Bank
2. Non - Scheduled Bank
On the basis of Functions:
- Commercial Bank:
Banks, which help for the development of trade andcommerce,arecalledCommercial
Banks.Thecommercialbanksmaybeownedbygovernmentorownedbyprivatesector.Foreg:
Canara Bank,PunjabNationalBank,LakshmiVilasBank,KarurVisyaBanketc.,arecalledas
commercial banks.
- Industrial Bank:
These banks assist to promote industrial development by providing medium and long-
termloans,underwritesthesharesanddebentures,assistinginthepreparationofprojectreports,
providing technical advice and managerial service to the industries. For eg: Industrial
Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India
(ICICI), are known as industrial banks.
- Regional Rural Bank:
These banksareestablishedinruralareas.Itsobjectistodeveloptheruraleconomyby
providing credit and other facilities for agriculture, trade, commerce, industry and other
productive activities in the rural areas
- Exchange bank:
Exchange banks deal in foreign exchange and specialize in foreign trade. It plays an
important role in promoting international trade. It encourages flowofforeigninvestmentsinto
India and helps in capturing international capital markets.
[Link]Central bank: (IMPORTANT TOPIC)
very country has a central bank of its own which is called as central bank. It is the apex bank and
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the statutory institution in the money market of a country. The central bank occupies a central
position in the monetary and banking system of the country and is the superior financial authority. In
India, the Reserve Bank of India is the central bank of our country.
following are the main objectives of RBI:
- To manage and regulate foreign exchange.
- To build a sound and adequate banking and credit structure.
- To promote specialized institutions to increase the term finance to industry.
- o give support to government and planning authorities for the economic development of the
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country.
- ocontrolandmanagethebankingsysteminIndia.(f)Toexecutethemonetarypolicyofthe
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country.
Functions of RBI:
1.Issue of currency note:
RBI is the sole authority for the issueofcurrencynotesinIndiaexceptonerupeecoin,onerupee
note and subsidiary coins. These notes are printed and issued by the issue department.
2.Banker to the Government:
RBI acts as the banker and agent of the government. It gives the following services:
a) It maintains and operates the government cash balances.
b) It receives and makes payments on behalf of the government.
c) It buys and sells government securities in the market.
d) It sells treasury bills on behalf of the government.
e) I t advises the government on all banking andfinancialmatterssuchasfinancingof
five year plans, balance of payments etc.,
f) ItactsastheagentofthegovernmentindealingswithInternationalMonetaryFund,
World Bank International finance Corporations, EXIM Banks etc.
3.Bankers’ Bank:
s per the Banking Regulation Act 1949, every bank has to keep certain minimum cash balance
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with RBI. This is called as Cash Reserve ratio. The scheduled banks can borrow money from the
reserve bank of India on eligible securities and by rediscounting bills of exchange. Thus it acts as
bankers’ bank.
4.Controller of Credit:
BI controls money supply and credit to maintain price stability in the country. It controls credit by
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using the following methods:
Different methods of credit control:
a.Quantitative Credit Control Methods:
I n this method the central bank controls the quantity of credit given by commercial banks by using
the following weapons.
i)Bank Rate:
I t is the rate at which bills are discounted and rediscounted by the banks with the central bank.
During inflation, the bank rate is increased and during deflation, bank rate is decreased.
ii) Open Market Operation:
irect buying and selling of government securities by the central bank in the open market is called
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as open market operations. During inflation the securities are sold in the market by the Central Bank.
During the deflation period, the central bank buys the bills from the market and pays cash to
commercial banks.
iii) Variable reserve ratio:
very commercial bank has to keep a minimum cash reserve with the Reserve Bank of India
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depending on the deposits of the commercial bank. During inflation this ratio is increased and during
deflation the ratio is decreased.
b.Qualitative Methods:
his is also called as selective credit control methods. The following weapons are used under this
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method:
i)Fixation of Margin:
anker lends money against price of securities. The amount of loan depends upon the margin
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requirements of the banker. The word margin here it means the difference between the loan value
and market value of securities. The central bank has the power to change the margins, which limits
the amount of loan to be sanctioned by the commercial banks. During inflation higher margin would
be fixed and during deflation lower margin would be fixed.
ii) Regulation of consumer credit:
ustomer gets this type of foreign exchange reserves and exchange value of the rupee in relation to
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other country’s currencies. Currencies should be exchanged only with RBI or its authorized banks.
iii) Direct action:
o regulate the volume of bank loans the central bank may issue directives to the commercial banks
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from time to time. The directives may be in the form of oral or written statements or appeals or
warnings. By means of these directives the RBI may decrease or increase the volume of credit.
iv) Rationing of credit:
I t is a method of regulating and controlling purpose for which credit is guaranteed by the
commercial bank. It may be of two types.
a. V ariable portfolio ceilings: In this method the central bank fixes a maximum
amount of loans and advances for every commercial bank.
b. V ariablecapitalassetsratio:Inthismethodthecentralbankfixesaratio,which
the capital of the commercial bank must beartothetotalassetsofthebank.By
changing this ratio the credit can be regulated.
v)Moral Suasion:
his is a gracious method followed by RBI. In this method the RBI gives advices and suggestions to
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the bankers to follow the instructions given by it, by sending letters and conducting meeting of the
Board of Directors.
5.Custodian of Foreign Exchange reserves:
BI controls the foreign exchange reserves and exchange value of the rupee in relation to other
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country’s currencies. Currencies should be exchanged only with RBI or its authorized banks.
6.Publication of data:
I t collects data related to all economic matters such as finance, production, balance of payments,
prices etc. and are published in the form of reports, bulletins etc.
7.Bank of Central Clearance:
he central bank of India acts as a bank of central clearance in settling the mutual accounts of
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commercial banks. If there is no RBI branch to do this service, the State Bank of India discharges
these functions.
8.Promotional and Developmental Functions:
I t provides finance for the development of Agriculture, industry and export. RBI also gives credit to
weaker sections and priority sectors at concessional rate of interest. It takes an active part in
developing organized bill market to provide rediscounting facilities to commercial banks and other
financial institutions. It helps for the development and regulation of banking system in the country.
The RBI has increased the banking facilities to the remote corners of the
c ountry through lead bank scheme. It has helped in promoting the financial institutions such as
IDBI, IFCI, ICICI, and SIDBI etc.
ON THE BASIS OF OWNERSHIP:
On the basis of ownership banks can be classified as:
- Public Sector Banks:
These types of banks are owned and controlled by the government. The nationalized
banks and regional rural banks come under this category.
- Private sector Banks:
These Banks are owned by private individuals and corporations.
- Co-operative Banks:
These banks are operated on cooperative principles. It is a voluntary association of
membersforself-helpandcaterstotheirfinancialneedsonamutualbasis.Thesebanksarealso
subject to control and inspection by ReserveBankofIndia.Themainfunctionofco-operative
banking is to link the farmers with the money markets of the country.
a) Primary Agricultural Co-operative societies (PACS):
It is the root of the credit structure. It is also called as village societies and the members
belong to the related villages.
Functions:
• It gives short-term and medium term loans to farmers.
• It helps in distribution of fertilizers and seeds.
• It helps in distribution of consumer goods to their members.
• It helps in milk, egg, sugar production in the village.
b)Central Co-operative Banks (CCB):
I t is the federation of all primary societies at the district level. Therefore it is also called as District
co-operative central bank. It supervises, controls and finances the primary credit societies.
Functions:
• It gives finances to primary credit societies.
• It gives credit to individual customers on the basis of security.
• It accepts deposit and pays higher rate of interest than commercial banks.
• It helps in remitting money to their customers.
• It helps in solving problems of primary co-operative societies.
• It control and supervises the working of primary co-operative societies.
STRUCTURE OF COOPERATIVE BANKS
a.State Co-operative Banks (SCBs):
State Co-operative Bank is the federation of district Co-operative central banks. Each
state has one state central co-operative bank. It is also called as Apex Bank in the three-tier
structure.
Functions:
• It co-ordinates the activities of primary and Central Co-operative Banks in the state.
• It mobilizes deposits for the benefit of co-operatives.
• It helps in maintaining a balance among Central Co-operative banks
• It also functions as a commercial bank.
b.Land Development Banks:
It was earlier called as Land Mortgage Banks. Its structure is not uniform in all the states.
In some states it is separate, in some states it is federal. And in some state it is mixed.
Functions:
• I t gives long-term loans to agriculturalists for making improvements on the land,
repaying old debts etc., loans.
• It gives loan to free the mortgaged land and to buy new land
• It also grants loans to cottage and small industries in rural areas.
ON THE BASIS OF SCHEDULES OF RBI:
- Scheduled banks:
These types of banks are included in the second schedule of the Reserve bank of India
Act 1934. The banks, which fulfill the following conditions, are classified into scheduled banks.
• Its paid up capital and reserves are at least Rs.5 Lakhs.
• Its operations are not detrimental to the interest of the depositors.
• It is a corporation or co-operative society and not a partnership or a single owner firm.
- Non-Scheduled banks:
The banks, which are not covered by the second schedule of Reserve Bank of India, are
called as non-scheduled banks.
INDIGENOUS BANKERS:
Indigenous bankers are those who do not come under the control ofRBI.Forexample
moneylenders,marvadis,chettiars,pawnbrokersareknownasindigenousbankers.Theyaccept
deposit and deal in Hundis (It is a credit instrument like promissory note.) The indigenous
bankers rely on their own resources or borrow from one another to carry on their business.
Functions of Indigenous Bankers:
The following are their functions:
a. They receive deposits for a fixed period at a higher rate of interest.
b. They advance loans against security of and, jewellery, crops, goods promissory
notes etc.
c. They write, sell and buy hundis, which are bills of exchange.
d. They finance both wholesale, and retail traders.
e. They engage in speculation of food and non-food. crops and other articles of
consumption.
f. They act as commission agents to firms.
g. Some non-professional indigenous bankers run their own manufacturing or
service firms
h. Some indigenous bankers provide long-term finance by subscribing shares and
debentures of large companies.
The borrowers find it easy to get finance from indigenous bankers because of the
following reasons:
• Less formality.
• No fixed banking hours.
• Borrowers approach them directly and informally.
• These types of bankers insist on punctuality of repayment
COMMERCIAL BANKS
Introduction:
Commercial bank is a financial institution that accepts deposits for the purpose of lending.
CommercialBankactasintermediariesbecausetheyacceptdepositsfromsaversandlendthese
funds to borrowers. In other words, commercial banks provide services such as accepting
deposits, giving business loans and also allow for variety of deposit accounts. They collect
money fromthosewhohaveittospareandlendtothosewhorequireit.Commercialbankisa
banker to the general public. Commercial banks registered under IndianCompaniesAct,1956
and are also governed by the Indian Banking Regulation Act, 1949.
Structure of Commercial Banks:
Commercial banks are basically of two types:
1. Scheduled banks
2. Non-scheduled bank
Scheduled banks are those which have been in II Schedule of RBI Act, 1934 and
following criteria should be satisfied.
• Minimum paid up capital Rs.5 lakh
• It must be a corporation as cooperative society
• Any activity of bank will not adversely affect the interest of depositors.
Scheduled banks consist of public sector banks, private sector banks, foreign banks and
regional rural banks.
Public Sector Banks:
Public sector banks are those in which 50% of their capital is provided by Central
Government,15%byconcernedStateGovernmentand35%bysponsoredcommercialbanks.In
India,thereare27publicsectorbanks.TheyincludestheStateBankofIndiaandits6associated
banks such as State Bank of Hyderabad, StateBankofMysore,etc.and19nationalisedbanks
and IDBI banks ltd.
Private Sector Banks:
Privatesectorbanksarethoseinwhichmajorityofsharecapitalkeptbybusinesshouse
andindividual.Afterthenationalization,entryofprivatesectorbanksisrestricted.Butsomeof
private banks continued to operate such as Jammu & Kashmir bank ltd. To increase the
competition spirit and improve the working of public sectorbanks,RBIpermittedtheentryof
private sector banks in July, 1993.
Foreign Banks:
Foreign banks are those which incorporated outside India and open their branches in
India. Foreign banks performed all the function like other commercial banksinIndia.Foreign
banksaresuperiorintechnologyandmanagementthanIndianbanks.Theyofferdifferenttypes
of products and servicessuchasoffshorebanking,onlinebanking,personalbanking,etc.They
provide loans for automobiles, small and large businesses. Foreign banks also provide special
types of credit card whicharenationallyandinternationallyaccepted.Thesebanksearnlotsof
profit and create new ways of investments in the country.
Regional Rural Banks:
The regional rural banks are banks set up to increase the flow of credit to smaller
borrowers in the rural areas. These banks were establishedonrealizingthatthebenefitsofthe
co-operative banking system were not reaching all the farmers in rural areas.
Functions of Commercial Bank:
Functions of a Commercial Bank can be classified into three.
I. Principal/ Primary/ Fundamental functions
II. Subsidiary/ Secondary/ Supplementary functions
III. Innovative functions.
(a)Principal functions:
Commercial banks perform many functions. They satisfy the financial needs of the
sectorssuchasagriculture,industry,trade,communication,sotheyplayverysignificantroleina
process of economic social needs. The functions performed by banks, since recently, are
becoming customer-centred and are widening their functions. Generally, the functions of
commercial banks are divided into two categories; primary functions and the secondary
functions. Two ‘acid test’ functions of commercial banks are Accepting deposits and Lending
loans.Thesefunctionsalongwithcreditcreation,promotionofchequesystemandinvestmentin
Government securities form basic functions of commercial banks. The secondary functions of
commercial banks include agency services, general utility services and innovative services.
1. Receiving deposits:
Most important function of a commercialbankistoacceptdepositfromthosewhocan
save but cannot profitably utilise this savings themselves. By making deposits in bank,savers
canearnsomethingintheformofinterestandavoidthedangeroftheft.Toattractsavingsfrom
all sorts of customers, banks maintain different types of accounts such as current account,
Savingsbankaccount,FixedDepositaccount,RecurringdepositaccountandDerivativeDeposit
account.
2. Lending of funds:
Thesecondimportantfunctionofcommercialbanksistoadvanceloanstoitscustomers.
Banks charge interest from the borrowers and this is the main sourceoftheirincome.Modern
banks give mostly secured loans for productive purposes. In other words, at the time of
advancing loans, they demand proper security or collateral. Generally, the value of securityor
collateral is equal to the amount of loan. This is done mainly with a view to recover theloan
money by selling the security in the event of non-refund of the loan.
CommercialbankslendmoneytotheneedypeopleintheformofCashcredits,Termloans,
Overdrafts (OD), Discounting of bills, Money at call or short notice etc.
(i)Cash Credit:
Inthistypeofcreditscheme,banksadvanceloanstoitscustomersonthebasisofbonds,
inventoriesandotherapprovedsecurities.Underthisscheme,banksenterintoanagreementwith
its customers to which money can be withdrawn many times during a year. Under this set up
banksopenaccountsoftheircustomersanddeposittheloanmoney.Withthistypeofloan,credit
is created.
(ii)Term loans:
A term loan is a monetary loan that is repaid in regular payments over asetperiodof
time. In other words, a loan from a bank for aspecificamountthathasaspecifiedrepayment
schedule and a floating interest rate is called Term loan. Term loans usually last between one and
ten years, but may last as long as 30 years in some cases. It may be classified as short term, medium
term and long term loans.
(iii)Over-Drafts:
It is the extension of credit from a bank when the account balance reaches zero level.
Banksadvanceloanstoitscustomer’suptoacertainamountthroughover-drafts,ifthereareno
depositsinthecurrentaccount.Forthis,banksdemandasecurityfromthecustomersandcharge
very high rate of interest. Overdraft facility will be allowed only for current account holders.
(iv)Discounting of Bills of Exchange:
This is the most prevalent and important method of advancing loans to the traders for
short-termpurposes.Underthissystem,banksadvanceloanstothetradersandbusinessfirmsby
discountingtheirbills.Whilediscountingabill,theBankbuysthebill(i.e.BillofExchangeor
Promissory Note)beforeitisdueandcreditsthevalueofthebillafteradiscountchargetothe
customer'saccount.Thetransactionispracticallyanadvanceagainstthesecurityofthebilland
thediscountrepresentstheinterestontheadvancefromthedateofpurchaseofthebilluntilitis
dueforpayment.Inthisway,businessmengetloansonthebasisoftheirbillsofexchangebefore
the time of their maturity.
(v)Money at Call and Short notice:
Money at call and short notice is a very short-term loan that does not have a set
repayment schedule, but is payable immediately andinfullupondemand.Moneyat-callloans
give banks a way to earn interest while retaining liquidity. These are generally lent to other
institutions such as discount houses, money brokers, the stock exchange, bullion brokers,
corporatecustomers,andincreasinglytootherbanks.‘Atcall’meansthemoneyisrepayableon
demandwhereas‘Atshortnotice’impliesthemoneyistoberepayableonashortnoticeupto14
days.
3. Investment of funds in securities:
Banks invest a considerable amount of their funds in government and industrial
securities. In India, commercial banks are required by statute to invest a good portion of their
fundsingovernmentandotherapprovedsecurities.Thebanksinvesttheirfundsinthreetypesof
securities—Government securities, other approved securities and other securities. Government
securities include both, central and state governments, such as treasury bills, national savings
certificate etc. Other securities include securities of state associated bodies like electricity
boards, housing boards, debentures of Land Development Banks, units of UTI, shares of
Regional Rural banks etc.
4. Credit Creation:
When a bank advances a loan, it does not lend cash but opens an account in the
borrower’s name and credits the amount of loan to this account. Thus a loan createsanequal
amount of deposit. Creation of such deposit is called creditcreation.Bankshavetheabilityto
create credit many times more than their actual deposit.
5. Promoting cheque system:
Banksalsorenderaveryusefulmediumofexchangeintheformofcheques.Througha
cheque, the depositor directsthebankertomakepaymenttothepayee.Inthemodernbusiness
transactions by cheques have become much moreconvenientmethodofsettlingdebtsthanthe
use of cash. Through promoting cheque system, the banks ensure the exchange of accounted
cash.Atpresent,CTS(ChequeTruncationSystem)chequesareusedbyIndianBankstoensure
speedy settlement of transactions in between banks. In contrast to thedecliningimportanceof
cheques, the use of electronic payment instruments at the retail level has been growing rapidly.
(b)Subsidiary functions:
1. Agency services:
Banksactasanagentonbehalfoftheindividualororganizations.Banks,asanagentcan
work for people, businesses, and otherbanks,providingavarietyofservicesdependingonthe
nature of the agreement they make with their clients. Following are the important agency
services provided by commercial banks in India.
• Commercial Banks collect cheques, drafts, Bill of Exchange, interest and dividend on
securities, rents etc. on behalf of customers and credit the proceeds to the customer’s
account.
• Pay LIC premium, rent, newspaper bills, telephone bills etc
• Buying and selling of securities
• Advise on right type of investment
• Actastrustees(undertakemanagementofmoneyandproperty),executors(carryoutthe
wishesofdeceasedcustomersaccordingtowill)&attorneys(collectinterest÷nd
and issue valid receipt) of their customers.
• Serve as correspondents and representatives of their customers. In this capacity, banks
prepare Income Tax returns of their customers,correspondwithIncomeTaxauthorities
and pay Income Tax of their customers.
2. General Utility Services:
In addition to agency services, modern banks performmanygeneralutilityservicesfor
the community. Following are the important general utility services offered by Commercial
Banks.
• Locker facility:Bank provides locker facility totheir customers. The customers can keep
their valuables such as gold, silver, important documents, securities etc. in these lockers for
safe custody.
• Issue travelers’ cheques:Banks issue traveler’s chequesto help their customers to travel
without the fear of theft or loss of money. It enables tourists to get fund in all places they
visit without carrying actual cash with them.
• Issue LetterofCredits:Banksissueletterofcreditforimporterscertifyingtheircredit
worthiness.Itisaletterissuedbyimporter’sbankerinfavourofexporterinforminghim
thatissuingbankerundertakestoacceptthebillsdrawninrespectofexportsmadetothe
importer specified therein.
• Actasreferee:Banksactasrefereesandsupplyinformationaboutthefinancialstanding
of their customers on enquiries made by other businessmen.
• C ollect information: Banks collect information about other businessmen through the
fellow bankers and supply information to their customers.
• Collection of statistics: Banks collect statistics for giving importantinformationabout
industry, trade and commerce, money and banking. They also publish journals and
bulletins containing research articles on economic and financial matters.
• Underwriting securities: Banks underwrite s ecurities issued by government, public or
private bodies.
• Merchant banking: Some bank provides merchant banking s ervices s uch as capital to
companies, advice on corporate matters, underwriting etc.
(c) Innovative Functions:
TheadoptionofInformationandCommunicationtechnologyenablesbankstoprovidemanyinnovative
s ervices to the customers such as;
1. ATM services:
AutomatedTellerMachine(ATM)isanelectronictelecommunicationsdevicethatenablestheclientsof
banks to perform financial transactions by using a plastic card. Automated Teller Machines are
established by banks to enable its customers to have anytime money. It is usedtowithdrawmoney,
checkbalance,transferfunds,getminis tatement,makepaymentsetc.Itisavailableat24hoursaday
and 7 days a week.
2. Debit card and credit card facility:
Debitcardisanelectroniccardissuedbyabankwhichallowsbankclientsaccesstotheiraccountto
withdraw cash or pay for goods and s ervices. It can be used in ATMs, Point of Sale terminals,
e-commerces itesetc.Debitcardremovestheneedforchequesasitimmediatelytransfersmoneyfrom
theclient'saccounttothebusinessaccount.Creditcardisacardissuedbyafinancialinstitutiongiving
the holder an option to borrow funds, usually at point of s ale. Credit cards charge interest and are
primarily used for short- term financing.
3. Tele-banking:
Telephonebankingisas erviceprovidedbyabankorotherfinancialinstitutionthatenablescustomers
to perform financial transactions over the telephone, without the need to visit a bank branch or
automated teller machine.
institution.Toaccessafinancialinstitution'sonlinebankingfacility,acustomermustregisterwiththe
institutionforthes ervice,ands etups omepasswordforcustomerverification.Onlinebankingcanbe
used to check balances, transfer money, shop online, pay bills etc.
4. Internet Banking:
Online banking (or Internet banking or E-banking) is a facility that allows customers of a
financial institution to conduct financial transactions on a secured website operated by the
institution. To access a financial institution's online banking facility, a customer must register
with the institution fortheservice,andsetupsomepasswordforcustomerverification.Online
banking can be used to check balances, transfer money, shop online, pay bills etc.
5. Bancassurance:
It means the delivery of insurance products through banking channels. It can be done bymakingan
arrangement in which a bank and an insurance company form a partnership s o that the insurance
company can s ell itsproductstothebank'sclientbase.Bankscanearnadditionalrevenuebys elling
the insurance products, while insurance companies are able to expand their customer base without
having to expand their sales forces.
6. Mobile Banking:
Mobile banking is a system that allows customers of a financial institution to conduct a number of
financialtransactionsthroughamobiledevices uchasamobilephoneorpersonaldigitalassistant.It
allows the customers to bank anytime anywhere through their mobile phone. Customers can access
theirbankinginformationandmaketransactionsonSavingsAccounts,DematAccounts,LoanAccounts
and Credit Cards at absolutely no cost.
7. Electronic Clearing Services:
It is a mode of electronic funds transfer from one bank account to another bank account using the
s ervicesofaClearingHouse.Thisisnormallyforbulktransfersfromoneaccounttomanyaccountsor
vice versa. This can be used both for making payments like distribution of dividend, interest,s alary,
pension, etc. by institutions or for collection of amounts for purposes s uch as payments to utility
companies like telephone, electricity, or charges such as house tax, water tax etc.
8. Electronic Fund Transfer/National Electronic Fund Transfer (NEFT):
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one
funds transfer. Under this Scheme, individuals, firms and corporate can electronically transfer funds
fromanybankbranchtoanyindividual,firmorcorporatehavinganaccountwithanyotherbankbranch
in the country participating in the Scheme. In NEFT, the funds are
transferred based onadeferrednets ettlementinwhichthereare11s ettlementsinweekdaysand5
s ettlements in Saturdays.
9. Real Time Gross Settlement System (RTGS):
Itcanbedefinedasthecontinuous(real-time)s ettlementoffundstransfersindividuallyonanorderby
orderbasis.'RealTime'meanstheprocessingofinstructionsatthetimetheyarereceivedratherthan
at some later time. It is the fastest possible money transfer system in the country.
DEPOSITS
Deposits of banks are classified into three categories:
(1)Demand deposits are repayable on customers’ demand. These comprise of:
(i) Current account deposits
(ii) Current Deposits Premium Scheme
(iii) Savings bank deposits
(iv) Premium or Savings Bank Plus Account
(v) Call deposits
(2)Termdepositsarerepayableonmaturitydatesasagreedbetweenthecustomersandthe
banker. These comprise of:
(i) Fixed deposits
(ii) Recurring deposits
(iii) Monthly-Plus Deposit Scheme / Recurring Deposit Premium account
(iv) Special Term Deposits
(3)Hybrid deposits or flexi deposits combine the features of demand and term deposits.
Thesedepositshavebeenlatelyintroducedinbys omebankstobettermeetcustomers’
financial needs and convenience and are known by different names in different banks.
The demand and time deposits of a bank constitute its demand and time liabilities that the bank
reports every week (on every Friday) to the RBI.
Demand deposits:
(i) Current account deposits:
Acurrentaccountisarunningandactiveaccountthatmaybeoperateduponanynumber
of times during a working day. There is no restriction on the number and the amount of
withdrawals from a current account. Current accounts can be opened by individuals, business
entities (firms, company), institutions, Government bodies /departments,societies,liquidators,
receivers, trusts, etc.
(ii) Current Deposits Premium Scheme:
ThisisadepositproductwhichcombinesCurrent&Shortdepositaccountwith‘sweep-
in’and‘sweep-out’facilitytotakecareofwithdrawals,ifany.Besidescontainingallfeaturesof
a current account, the product is aimed at offering current account customers convenient
opportunity to earn extra returnsonsurplusfundslyinginaccountwhichmaynotnormallybe
utilizedinthenearfutureorarelikelytoremainunutilized.Theautomatednatureoffacilityfor
“SweepInorSweepOut”ofmorethanaspecifiedlimitofbalancetobemaintainedandcreating
fixeddepositsfordesiredperiod,wouldsavelotofoperationalhasslesandadd-onvalueinsuch
accounts.Thus,withthisfacilitythecustomershallbeabletodeployhisfundswhichinordinary
current account were not attracting any interest.
(iii) Savings bank deposits:
Savings bank accounts are meant for individuals and a group of persons like Clubs,
Trusts, Associations, Self Help Groups (SHGs) to keep their savings for meeting their future
monetary needs and intend to earn income from their savings. Banks give interest on these
accounts with a view to encourage saving habits.Everyonewantstosaveforsomethinginthe
futureandtheirsavingsshouldbesafeandaccessibleanytime,anyplacetohelpmeettheirneeds.
This account helps an individual to plan and save forhisfuturefinancialrequirements.Inthis
account savings are completely liquid.
(iv) Premium or Savings Bank Plus Account:
Premium Savings Account provides an enriched version of Savings Bank account
consisting of various concessions and add-ons. It is suitable for High Net worth Individual/ Mass
Affluentcustomers.TheaccountwillbelinkedtoMultiOptionDeposit(MOD)account,forauto
sweep, for issue of Term Deposits and unitized break-up facilities. Any surplus funds in the
accountexceedingthethresholdlimit,foraminimumamountofRs.10,000/-andinmultipleof
Rs.1000/-inanyoneinstance,aretransferredasTermDepositandearnsinterestasapplicableto
Term Deposits. Theaccountisusefultothosepersonswhohavesurplusfundsforanuncertain
period and by keeping the fund in this Savings Bank account, they may get interest of term
deposit. This account provides a customer the convenience of a Savings Bank Account along
with higher return of Term Deposit.
(v) Call deposits:
Call deposits or deposit at call accounts are maintained by fellow banks with another
bank which are payable on demand only. Some banks have put restriction of giving advance
notice of a week or less than that when depositor requires payment of call deposits. These
accounts may or may not fetch interest, as per the rules framed by the RBI or Indian Banks
Association (IBA) from time- to-time.
Term deposits:
(i) Fixed deposits:
Fixed deposits are repayable on the fixed maturity date along with the principal and
agreedinterestratefortheperiodandnooperationsareallowedtobeperformedbythecustomer
against the deposit, as ispermittedindemanddeposits.Thedepositorforegoesliquidityonthe
deposit and the bank can freely deploy such funds for loans/advances and earn interest.
Hence, banks pay higher interest rates on fixed deposits as compared to savings bank
deposits fromwhichhecanwithdraw,requiringbankstokeepsomeportionofdepositsalways
at the disposal of the depositors. Another reason for banks paying higher interest on fixed
deposits is that the administrative cost in the maintenance of these accounts is very small as
compared to savings bank accounts where several transactions take place in cash, transfer or
clearing, thus increasing the administrative cost.
(ii) Recurring deposits or Cumulative Deposits:
In Recurring Deposits accounts, a certain amount of savings are required to be
compulsorily deposited at specified intervals for a specific period. These are intended to
inculcate regular and compulsory savings habitamongthelow/middleincomegroupofpeople
formeetingtheirspecificfutureneedse.g.highereducationormarriageofchildren,purchaseof
vehicles etc. The main features of these deposits are:
• The customer deposits a fixed sum in the account at pre-fixed frequency (generally
monthly/quarterly) for a specific period (12 months to 120 months).
• The interest rate payable on recurring deposit is normally the applicable rate of fixed
deposits for the same period.
• The total amount deposited is repaid along with interest on the date of maturity.
• The depositor can take advance against the deposits up to 75% of the balance in the
account as on the dateofadvanceorhavethedepositspre-paidbeforethematurity,for
meeting emergent expenses.
(iii) Monthly-Plus Deposit Scheme / Recurring Deposit Premium account:
It is a recurring deposit scheme with flexibility of“Step-upandStep-down”optionsof
monthly instalments. The scheme is available to individuals, institutions, corporate,
proprietorshiporpartnershipfirms,trusts,HUF,etc.Underthescheme,thecustomerselectsthe
“coreamount”atthetimeofopeningtheaccountanddepositsthesameinitially.Minimumcore
amountmaybeRs.100andmaximumRs.1,00,000.Periodofdepositwillbepre-decidedbythe
customer himself. The depositorcandepositinstalmentinexcessoftheminimumcoreamount
(butnotexceedingtentimesofthecoreamount)inthemultiplesofRs.100inanymonth.Like
stepping up the instalment amount, a customer can also reduce the same (Step-down) in any
subsequentmonthsbutnobelowthecoreamount.Theinterestonthisschemewillbeasperthe
term deposit rate applicable for the fixed period. Interest will be calculated on the monthly
productbasis,fortheminimumbalancebetweenthe10th andthelastdayofthemonthandwill
be credited quarterly.
(iv) Special Term Deposits:
Special Term Deposit carries all featuresofFixedDeposit.Inadditiontothese,interest
gets compounded every quarter resulting higher returnstothedepositors.Now-a-days,80%of
the term deposits in banks is under this scheme.
Persons who have attained the age of 60 years are “Senior Citizens” in regard to the
payment ofhigherinterestnotexceeding1%overandabovethenormalratesoftermdeposits.
Each bank has prepared its own scheme of term deposits for senior citizens.
- PPF (PUBLIC PROVIDENT FUND)
ublic provident fund is a popular investment scheme among investors courtesy its multiple
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investor-friendly features and associated benefits. It is a long-term investment scheme popular among
individuals who want to earn high but stable returns. Proper safekeeping of the principal amount is the
prime target of individuals opening a PPF account.
hen a PPF scheme is opened, the PPF account is scheduled for the applicant where the money is
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deposited every month and interest is compounded.
Public provident fund scheme is ideal for individuals with a low risk appetite. Since this plan is
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mandated by the government, it is backed up with guaranteed returns to protect the financial needs of
the masses in India. Further, invested funds in the PPF account are not market-linked either.
I nvestors can also undertake the public provident fund regime to diversify their financial and investment
portfolios. At times of downswing of the business cycle, PPF accounts can provide stable returns on
investment annually.
FEATURES OF PPF
Investment tenure
PPF account has a lock-in period of 15 years on investment, before which funds cannot be withdrawn
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completely. An investor can choose to extend this tenure by 5 years after the lock-in period is over if
required.
Principal amount
minimum of Rs. 500 and a maximum of Rs. 1.5 Lakh can be invested in a provident fund
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scheme annually. This investment can be undertaken on a lump sum or installment basis. However, an
individual is eligible for only 12 yearly instalment payments into a PPF account. Investment in a PPF
account has to be made every year to ensure that the account remains active.
Loan against investment
ublic provident funds provide the benefit of availing loans against the investment amount. However,
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the loan will only be granted if it is taken at any time from the beginning of 3rd year till the end of the
6th year from the date of activation of the account.
he maximum tenure of such loans against PPF is 36 months. Only 25% or less of the total amount
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available in the account can be claimed for this purpose.
Eligibility Criteria
I ndian citizens residing in the country are eligible to open a PPF account in his/her name. Minors are
also allowed to have a Public provident fund account in their name, provided it is operated by their
parents.
on-residential Indians are not permitted to open a new PPF account. However, any existing account in
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their name remains active till the completion of tenure. These accounts cannot be extended for 5 years –
a benefit available to Indian residents.
Interest on a PPF Account
he interest payable on public provident fund schemes is determined by the Central Government of
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India. It aims to provide higher interest than regular accounts maintained by various commercial banks
in the country.
I nterest rates currently payable on such accounts stand at 7.1%, and are subject to quarterly updates at
the discretion of the government.
How to Open a PPF Account?
oth offline and online procedures are available for an individual provided he/she meets requisite
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parameters mentioned in the eligibility criteria. Activating PPF online can be done by visiting the portal
of a chosen bank or post office.
he following documents have to be produced at the time of activation of a public provident fund
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account –
1. K
YC documents verifying the identity of an individual, such as Aadhaar, Voter ID, Driver’s
License, etc
2. PAN card
3. Residential address proof
4. Form for nominee declaration
5. Passport sized photograph
PPF – Tax Benefits
I ncome tax exemptions are applicable on the principal amount invested in a PPF as an account. The
entire value of investment can be claimed for tax waiver under section 80C of the Income Tax Act of
1961. However, it should be kept in mind that the total principal that can be invested in one financial
year cannot exceed Rs. 1.5 Lakh.
The total interest accrued on PPF investment is also exempt from any tax calculations.
herefore, the entire amount redeemed from a PPF account upon completion of maturity is not subject
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to taxation. This policy makes the public provident fund scheme attractive to many investors in India.
Withdrawal
here are multiple clauses that an individual must adhere to in case he/she wants to withdraw funds
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from the PPF account.
andatory lock-in of 15 years is imposed on the principal amount invested in such plans. In case of
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emergencies related to specific end-uses, partial withdrawal can be made. However, this amount can
only be extracted after the completion of 5 years of activation of the account. Up to 50% of the total
balance can be withdrawn in one transaction each financial year succeeding in the 4th year.
I nvestors should note that funds invested in a PPF account cannot be liquidated before the completion of
the maturity period. Individuals looking for long-term risk-free investment options providing stable
yields can easily opt for this government-backed instrument.
Loan Against PPF Scheme
● Between the third and fifth years of your PPF account, you can take out a loan.
● he loan amount can be no more than 25% of the second year immediately preceding the loan
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application year.
● If the first loan is entirely repaid, a second loan can be taken out before the sixth year.
NSC (NATIONAL SAVINGS CERTIFICATE)
AfixedincomeschemethatcanbeopenedatapostofficeistheNationalSavingsCertificate.The
scheme is a low-risk product and is secure.
Tenure 5 years
Rate of Interest 7.7% p.a.
Minimum Amount Rs.1,000
Tax Benefits Under Section 80C of the Income Tax Act
TheNSCschemeisavailableatall NSCpostofficesandtheIndianGovernmentpromotestheNSC
scheme.DuetothenumberofpostofficespresentinIndiaandtheeasyaccesstothesepostoffices,
the scheme has become very popular in India.
Themainaimoftheschemeisforindividualstomakesmallormediumsavings,and taxbenefitsare
providedforthesesavings.SincetheschemeisencouragedbytheIndianGovernment,therisksof
investing in the scheme are low.
Theschemewaslaunchedmainlyforindividuals,therefore,non-residentIndians(NRIs)andHindu
UndividedFamiliesarenoteligibletooptforthisscheme.OnlyIndiancitizenswillbeabletoinvest
in the NSC scheme.
NSC Eligibility
The eligibility criteria for investors to purchase the NSC are mentioned below:
● The individual must be an Indian citizen.
● There is no age limit for individuals in order to purchase a certificate.
● Non-resident Indians cannot invest in NSC.
● Investments can be made with another adult orindividualscanbuyanNSConbehalfofa
minor.
● Under NSC VIII Issue, HUFs and Trusts are not eligible to invest in the scheme.
SC Features
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The main features of the scheme are mentioned below:
● inimum investments:The minimum amount that a certificate can be purchased for is Rs.100.
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The different denominations that the certificate can be purchased for are Rs.10,000, Rs.5,000,
Rs.1,000, Rs.500, and Rs.100. Initially, small investments can be made, and individuals can
increase investments when feasible.
● Maturity tenure:Five years and ten years are thetwo maturity periods of the scheme that
individuals can choose from.
● Rate of interest:Currently, the rate of interesthas been increased from 7% to 7.7%. and it is
compounded on an annual basis. However, the interest is payable only at maturity.
● Nominations:Family members including minors can beadded as nominees by the investor. In
case the investor passes away during the tenure of the scheme, the nominee will be able to
inherit the scheme.
● Different types of NSC:Initially, the NSC IX Issueand the NSC VIII Issue were the two types
of certificates available. However, as of December 2015, the Government of India stopped the
NSC IX Issue. Therefore, only the NSC VIII Issue is available.
● Loans against NSC:The NSC can be used as a securityor collateral and can be provided to
banks to avail loans. However, the respective post master must authorise the transfer of the
certificate to the bank.
● Purchase of NSC:Upon submitting the required documents,the scheme can be purchased at
post offices.
● Transfer of certificate:Transfer of NSCis possiblefrom one post office to another. Transfer of
certificate from one individual to another is also possible. However, the certificate will remain
the same and the name of the new owner shall be written on the certificate and the name of the
old owner will be rounded.
Advantages of NSC
Given below are the main advantages of investing in the NSC:
● ne of the main advantages of investing in the NSC is the tax benefits that individuals can avail
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on the investments they have made. The returns are also guaranteed under this scheme. Many
individuals prefer the NSC scheme as it can provide a regular income once they retire.
● Except for the interest that is earned in the final year, the remaining interest that is generated is
tax-free.
● In case individuals lose the original certificate, a duplicate certificate can be obtained.
● Even after the maturity period, individuals have an option to continue investing in the scheme.
● Transfer of the certificate is allowed from one individual to another. However, it is allowed only
once during the lock-in period.
● The interest that is generated is compounded on a yearly basis and reinvested towards the
scheme. Therefore, the invested amount of the individual increases without purchasing
certificates.
Documents required to NSC
Given below are the documents that must be submitted in order to purchase an NSC:
● he N
T SC application formmust be submitted.
● Investors must submit an original identification proof such as Passport, Permanent Account
Number (PAN) Card, Voter ID, Driving licence, Senior Citizen ID, or Government ID for
verification.
The investor must submit a photograph.
●
● Investors must submit an address proof such as Passport, telephone bill, electricity bill, bank
statement along with a cheque as well as a Certificate or an ID card that has been issued by the
Post Office.
CREDIT CARDS
Introduction:
Acreditcardisasystemofpaymentnamedafterthesmallplasticissuedtousersofthe
system. A credit card is different from a debit cardinthatitdoesnotremovemoneyfromthe
user’s account aftereverytransaction.Inthecaseofcreditcards,theissuerlendsmoneytothe
customer (or the user). It is also different from achargecard(throughthisnameissometimes
used by the public to describe credit cards), which requires thebalancetobepaidinfulleach
month. In contrast, a credit card allows the consumer to ‘revolve’ their balance,atthecostof
having interest charged.Mostcreditcardsarethesameshapeandsize,asspecifiedbytheISO
7810 Standard.
Credit cards have higher interest rates (around 34-36 % per year) than most consumer
loansorlinesofcredit.Becauseoftheirwidespreadacceptance,creditcardsareoneofthemost
popular forms of payment for consumer goods and services in the world.
SPECIMEN OF CREDIT CARD
Credit Card Features:
• Fees:
Most credit cards charge fees for various things and it is important to know what these fees
are and how to avoid them.
• The annual fees:
Some creditcardcompanieschargeyouanannualfeejustforusingtheircard.Because
of stiff competition, you can often negotiate this fee awayifyoucallandspeaktoacustomer
service representative.
• Cash advance fee:
Mostcreditcardcompanieschargeyouafeeforcashadvances.Thesefeescanverybut
areusuallysomewhathefty.Notonlywilltheychargeyouaone-timefee,buttheinterestratefor
this moneywillbeataconsiderablyhigherrate.Plus,unlikearegularpurchase,whereinterest
begins accruing after somegraceperiodpassescashadvancesaccrueinterestchargesfromday
one.Manycardcompaniesarecompetingforyourbusinessandarenowofferinganintroductory
cash advance and balance transfer rates for a specific amount of time. This lower rate can be
applied to any balances you may wish totransferfromanothercard.Althoughitsoundsgood,
somecompanieswillchargeyouafeeforthetransfer.Knowwhatthefeeisbeforeyoutransfer
any balances.
• Miscellaneous Fees:
Thingslikelate-paymentfees,over-the-credit-limitfees,setupfeesandreturnitemfees
areallquitecommonthesedaysandrepresentaseriousamountofmoneyoutofyourpocketif
you get whacked for any of these fees.
• Incentives:
Sincetherearesomanycreditcardcompanies,competitionisstiff.Addingincentivesto
theiroffersisoneofthemorepopularwaystotipthescalesintheirfavour.Incentiveslikemore
rebates on purchases, frequent flyer miles on certain airlines and extended warranties on
purchases are just a few of the bonuses that card companies will now offer.
• Rewards:
Many card companies are looking to keep your business and are therefore making it
worthyourwhiletousetheircard.Justsimplybyusingtheircardyoucanaccumulatepointsthat
willinturnearnyourewards.Whatkindofrewarddependssolelyontheamountofpointsyou
accumulate.Sinceyoucan’taccumulatethesepointswithoutchargingthingsonyourcard,thisis
a classic case of ‘you have to spend money to save money’.
Types of Credit Cards:
1. Business Credit Cards:
A business credit card offers the business owner the opportunity to keep business and
personal expenses separate. The credit card may offer special business rewards and saving
opportunities that go above andbeyondwhattheindividualcreditcardownermayhave.Since
money management is essential in successfully running a business, the card may offer an
expense management servicethatwillallowyoutokeeptrackoftheoutgoingmoney.Youcan
obtainadditionalcreditcardsforemployeeswhomayneedthemfortravelexpensesandsuchas
well as have a higher credit limit than you normally would on an individual credit card.
2. Student Credit Cards:
Many credit card companieswillissuestudentcreditcardsthathavelowercreditlimits
and fewer incentives to help keep their spending in check.
3. Prepaid Debit Cards:
Prepaid debit cards are one type of credit card that has grown significantly in recent
years.Althoughtheyworklikeatraditionalcreditcardwhenmakingapurchase,thatis,where
the similaritiesend.Withprepaiddebitcards,youhaveactuallyprepaidandsetthecreditlimit
by depositing money onto the debit card.
4. Credit cards for Bad credit:
It is possible, even with bad credit to obtain a credit card. These cardswillcomewith
some restrictions not typically found on other types of credit cards. Your credit limit will be
lowerandyourinterestratehigher.Somemayrequireyoutohaveasecuredcreditcard,meaning
youhavetomaintainasavingsorsomeothertypeofaccountthatwillcovertheexpensesonthe
credit card.
5. Cash Back Credit Cards:
Many credit cards will now offer you cash back incentives forusingtheircreditcards.
Depending on how much your balance is andhowoftenyouusethecreditcard,earnbackfor
your purchases.
Introduction: DEBIT CARD
Adebitisanaccountingitemthatdiminishestheoverallvalueofanasset.Debitcardisa
plastic card which provides an alternative payment method to cash when making purchases.
Functionally,itcanbecalledanelectroniccheck,asthefundsarewithdrawndirectlyfromeither
the bank account or from the remaining balance on the card. In some cases, the cards are
designed exclusively for use on the Internet and so there is no physical card. Debit cards are
similartocreditcards,exceptdebitcardspullmoneyoutofyourcheckingorbrokerageaccount.
Debitcardsdonotcreateorincreasealoanlikecreditcardsdo.Tolettheretailerknowyou’re
using a debit card.
SPECIMEN OF DEBIT CARD
Debit Cards and Bad Credit:
For those with bad credit,debitcardsareaveryusefultool.Youcanfunctionasifyou
had a credit card, meaning you don’t havetocarrycasharoundwithyou.However,becausea
debit card pulls against moneyinthebank,youcantypicallyqualifyforoneifyourcredithas
some blemishes. However, they don’t help you build credit.
Merits of Debit Cards:
• T
hey help people to be disciplined financially, since one cannot splurge with the limited
amount of funds deposited for the card.
• A person with poor credit can obtain a debit card without too much trouble.
• Debit cards can be used to make online purchases and payments.
• They provide freedom from carrying cash and checks while travelling, thereby offering
more safety.
• Debit cards do not charge high interest rates or fees on card transactions.
Disadvantages of Debit Cards:
• Debit cards come with lesser fraud protection facilities than credit cards.
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ome transactions cannot be carried out with a debit card, such as renting a car in a
foreign country.
ATM (Automated Teller Machine)
1.10.1Introduction:
ATMservicesprovidecosteffective,highlyscalablenetworkbasedsolutionsforCarriers
and Service Providers to meet their customers’ Wide Area transmission needs. It allows
customers to tailor the service to meet specific trafficrequirementsthus,increasingbandwidth
efficiency ensure services are automatically re-routed around the primary route to the backup
path to provide optimum performance.
Provides the highest level of resilience and diversity enables carriers and service
providers to extend their global investment coverage.
Provides a single integrated network for smaller Frame Relay sites and larger ATM
locations demonstrates reaches commitment to quality and reliabilityhighestservicequalityis
maintained provides a web based network monitoring tool for customers to view and analyze
network performance data.
Operation of ATM:
For using an ATM, a customer requires an ATM card. It is made of plastic with a
magnetic stripe or a plastic smartcardwithachip.Customerhasaspecialcardnumberthatis
referredtoasaPIN(personalidentificationnumber).Thecustomerhastoinsertthecardinthe
machineandquotehis/herPIN.UponsuccessfullyentryofthePIN,thecustomermayperforma
transaction. After the completion of the transaction, a transaction record is printed, usually
stating the action taken, date, time, location, available balance.
Functions and Uses of ATMs:
• 24-hour access to cash
• Ability to view Account Balances & Mini-statements
• Order a Cheque Book / Account Statement
• Transfer Funds between accounts
• Refill your Prepaid card or prepaid phone accounts
• Pay your utility bills like Electricity bills, post-paid mobile bills
• Deposit cash or cheques
• Change your PIN
• Learn about other products
Customer Complaints Management for ATM transactions:
• AspertheRBIinstructionsbankshavebeenmandatedtoresolvecustomercomplaintsby
re-creditingthecustomer’saccountwithin7workingdaysfromthedateofcomplaintin
the case of a failed ATM transaction.
• EffectivefromJuly1,2011,bankshavetopaycustomersRs.100/-perdayaspenaltyfor
delays beyond 7 working days. If the complaint is not lodged within 30 days of
transaction,thecustomerisnotentitledforanycompensationfordelayinresolvinghis/
her complaint.
• If the bank does not redress the complaint within thestipulatedtime,thecustomercan
make a complaint to the local Banking Ombudsman.
PROCESS OF OPENING AN ACCOUNT
(1)Application Form:
The prospective customer is firstofallaskedtosignanapplicationformprescribedfor
that purposeafterfurnishingallparticulars.Differentbankershavedifferentprintedapplication
forms. They also vary with classes of customers and for kinds of deposits. These application
forms contain the rules and regulations of the bankalongwiththetermsandconditionsofthe
deposit.
S PECIMEN OF AN APPLICATION ........2018
FORM FOR OPENING AN
ACCOUNT
To
The manager
Modern Bank of India
Madurai
Dear Sir,
Please open Savings Deposit Account in my/our name(s)
(Name and Address in Block Letters)
I/we agree to comply with and to be bound by the bank’s rules for the time being for the conduct
of such accounts.
The account be operated upon*
**Date of birth 20...
Yours faithfully,
Introduced by
If in joint names, State (1) either or survivor,
(2)both or survivor,
(3)any one of us or any one of the survivors of us or the last survivor.
On the back of the application form itself, there is a provision for giving specimen signatures.
BACK PORTION OF THE APPLICATION FORM
However, the application form for opening a current account contains many conditions
which are not normally found in other cases.
(2)Specimen Signature:
Everynewcustomerisexpectedtogivethreeormorespecimensignatures.Usually,they
areobtainedoncardswhicharefilledalphabeticallyforreadyreference.Eachbankmaintainsa
signature book for this purpose. Nowadays, banks obtain specimen signatures right on the
application forms.
(3)Letter of Introduction:
Itisalwaysonthepartofabankertoallowtheprospectivecustomertoopenanaccount
onlywithaproperintroduction.Theusualpracticeforthebankeristoopenanaccountonlywith
aproperintroduction.Theusualpracticeforthebankeristodemandaletterofintroductionfrom
a responsible person known to both theparties.Failuretogetaletterofintroductionmayland
himintroubleandaffecthiscredit.Forinstance,assoonasanewpartyopensacurrentaccount
he should be supplied with a cheque book which may be misused to his best advantage if he
happenstobeanunscrupulousperson.Theresponsiblepersonwhoissuesthelettermustalsobe
cautious because if he supplies any false information about aparty,hewouldbeheldliableto
compensatefortheloss,ifany,sufferedbythebanker.Iftheintroductionturnsouttobeforged
one the account is treated as having not been introduced at all.
A letter of introduction or a letter of reference always protects a baker in the following
ways:
(a)Production against fraud:
A letter of introduction serves as a precaution against fraud. Itprotectsabakeragainst
issuing a cheque book to an undesirable and dishonest person. But for such a letter, he could
have given a cheque book to anundesirablepersonwhomighthavemadeuseofthosecheque
lavestohisbestadvantageevenintheabsenceofsufficientfunds.Insuchacasethegoodwillof
thebankwouldsuffer.Ifthecustomerisamanofgoodcharacter,hewillnotdosuchthings.The
banker can find out the character of a new party only throughthisletter.Thus,thepurposeof
introduction is to identify the depositor and to find out whether he is a genuine party or an
impersonator or a fraudulent person.
(b)Protection against inadvertent overdraft:
It may so happen that a bank clerk may misread the balance of a customer and pay a
cheque.Theresultwillbetheemergenceofanoverdraft.Thebakercanrecoverthemoneyonly
if the customer is a man of good character.
(c) Protection against an undischaged bankrupt:
Ifanewpartyhappenstobeanundischargedbankruptthefactofwhichisnotknownto
the banker and if the properties deposited by him are not acquired by him, the banker is
answerable to the Official Assignee for the transactions. A letter of introduction prevents the
occurrence of such events. Moreover, it is the duty of a banker to inform the existence of an
accountinthenameofanundischargedbankruptandgethiscurrentfortheoperationofsuchan
account.
(d)Protection against negligence under Sec. 131 of the Negotiable Instrument Act:
Ifabrokerfailstoobtainaletterofintroductionatthetimeofopeninganewaccount,it
constitutes negligence on the part of the collecting banker under Sec. 131 of the Negotiable
Instruments Act and so, he will lose the statutory protection.
(e) Protection against giving incorrect information to fellow bankers:
It is a courtesy among bankers to give reference about the financial position of their
customers to fellow bankers. In the absence of a reference letter a banker may not be able to
supply correct information.
(4)Interview:
At the time of opening of new accounts, it is always advisable to have an interview
invariably with the prospective customer so as to obviate the chances of perpetration of any
fraud at a later stage.
(5)Account in cash:
Itisacommonpracticeamongbankerstoallowanewpartytoopenanaccountonlyin
cash. In the absence of an express notice, a banker needs toworryaboutneitherthesourceof
money nor the customer’s title over the money. On the otherhandiftheaccountisopenedby
depositing a cheque, the risks are greater.
(6)Mandate in Writing:
If a new party wants its account to be operated by somebody else, the banker should
demand a mandate fromhiscustomerinwriting.Themandatecontainstheagreementbetween
thetworegardingtheoperationoftheaccount,thespecimensignaturesoftheauthorisedperson
and the powers delegated to the authorised person.
(7)Verification of Documents:
If the new party happens to be a corporate body, it is essential that the banker should
verify some of the important documents like Memorandum of Association, articles of
associations, bye-law copy etc. In other cases, the verification of certain otherdocumentslike
Trust Deed Probate, Letter of Administration, etc., may be necessary.
(8)Conversant with the Provisions of Special Acts:
Since a banker has to deal with different classes of customers,hehastobethoroughly
conversantwithcertainlawslikeIndianCompaniesAct,IndianPartnershipAct,InsolvencyAct,
the various Trust Acts, the Cooperative Societies Act, etc.
(9)Pay-in-slip Book and Pass Book:
Then, the customer is supplied with a pay-in-slip book. The pay-in-slip is a document
whichisusedfordepositingcashorchequeorbillintotheaccount.Ithasacounterfoilwhichis
returned to the customer for making necessary entries in his books.
The customer is also supplied with a cheque book which normally contains 10 to 20
blankforms.Achequeleafisusedforthepurposeofwithdrawingmoney.Ifthecustomerdoes
notliketohaveachequebook,hecanmakeuseofthewithdrawalformforwithdrawingmoney.
The first cheque book is usually branded with the rubber stamp ‘N’.
In addition to the above, a customer is also given a pass book which reflects the
customer’s account in the banker’s ledger. It usually contains the rules and regulations of the
bank andthetermsandconditionsofthedeposit.Everycustomerissupposedtohavereadand
understood the conditions. He should comply with them under all circumstances.
(10) Passport Size Photograph:
Nowadays, banks insist upon the prospective customers to affix their passport size
photographs on the application forms at the time of opening the accounts. This is to prevent
impersonation and for easy identification.
(11) Know Your Customer (KYC) Norms:
StrictnormshavebeenlaiddownbytheRBIunderSec.35AoftheBankingRegulation
Act, 1949 with regard to KYC. The main objectiveofthesenormsistoenablebankstoknow
andunderstandtheircustomersandtheirfinancialdealingscloselysothatanycriminalelements/
undesirablecustomersmaynotmisusebanksfortheirmoneylaunderingactivities.Moreover,a
better knowledge about customers would enablebankstomanagetheirrisksveryprudentlyby
avoidinganyloanassetbecomingnon-performingthroughstrictmonitoringorbyavoidingloans
to high risk category ofcustomers.Atthesametime,itisveryimportantthatanyKYCpolicy
shouldnotresultindenialofbankingservicestothegeneralpublic,especiallytothosewhoare
financially and socially disadvantaged.
ForthepurposeofthisKYCpolicy,acustomerhasbeendefinedasapersonoranyentity
thateithermaintainsanaccountwiththebankorhasanybusinessrelationshipwiththebankor
both.AsperKYCnormsitisveryessentialthatcustomersshouldbeallowedtoopenanaccount
or have any business dealing with the bank only after identifying them and verifying their
identity by using reliable documents.
Elements of KYC Norms:
Generally, every bank is expected to frame its KYC Norms by taking into account the
following elements:
(i) Customer Acceptance Policy
(ii) Customer Identification Procedures
(iii) Monitoring of Transactions
(iv) Risk Management
(i) Customer Acceptance Policy:
One of the KYC Norms policy is to lay down customer acceptance policy by every bank.
Accordingly,
(a) No account should be opened in benamic names or fictitious or anonymous names.
(b)There should be clear categorisation of customers into low, medium and high risk with
any suitable nomenclature.
(c) Necessary documentation requirements should be complied with depending upon the
above perceived risks.
(d)In case it is not possible to verify the identity or obtain necessary documents, it is
advisable not to open an account or even close an existing account.
(ii) Customer Identification Procedures:
The following documents are necessary to establish the identity of individuals:
(a) For identity-Passport, Pan Card Voter’s, Identity Card, Driving License, etc.
(b)For Permanent Address- Ration Card, Telephone Bill, Electricity Bill, Letter from
Employer, etc.
Inthecaseoflimitedcompaniesandothercorporates,documentslikeBoardResolution,
Certificate of Incorporation, ArticlesandMemorandumofAssociation,copyofPANallotment
letter, copy of any utility service bill etc.
(iii) Monitoring of Transactions:
KYC Norms also insist upon banks to ensure strict monitoring of transactions. Banks
should pay a special attention to transactions that involve large amounts of cash. Generally,
banks are expected to maintain proper record of all cash transactionsofRs.10lakhandabove
either deposits or withdrawals. Suspicious nature of transactions should be reported to the
Controlling Office/Head Office immediately.
(iv) Risk Management:
Banksmayapplymonetarylimitsbasedonthenatureandtypeoftheaccount.Clear-cut
responsibility should be fixed for strict implementation of KYC norms. The internal auditors
shouldcheckwhetherKYCnormsandproceduresarestrictlyfollowedandlapses,ifanyshould
be brought to light immediately.
All banks have been directed by the RBI to get complete identity of their customers
under‘KnowYourCustomer’Norms.Accountwithoutproperidentificationwillnotbeallowed
to be operated from April 2010 onwards.
CASHLESS BANKING
In cashless banking transactions, payments are made or accepted without the use of hard cash. This includes
payments made via credit/debit cards, cheques, DD, NEFT, RTGS or any other form of online payment that
removes the need for cash.
Advantages of a Cashless Banking
Cashless banking is a relatively newconceptinIndia;ithasemergedrecently,anddespiteinitialchallenges,it
has witnessed high acceptance. Let's look at the advantages that have helped people shift towards going
cashless.
- Transparency in the system
Digitaltransactionshaveonemajorbenefit:theybringtransparencyandaccountabilitytothemonetarysystem.
Digitizing monetary transactions helps banks recognize customers and track moneyflow.Thishelpstoreduce
financial fraud and crimes such as tax evasion and counterfeit money in the economy.
- Convenience
Theentireprocessofcashlesssystemsensureseasierpaymentsanytimeandanywhere.Forinstance,ifyouwant
to send money to your family residing in another city, youdon'thavetogothroughthehassleofvisitingthe
bank to initiate the transaction. A simple NEFT or IMPS from your phone does the job.
- Reduced cash-related crimes
One of the primary reasons the governmentdecidedondemonetizationwastorestricttheuseofcounterfeit
money. Moreover, digital transactions always help curtail black money practices that negatively impact the
country'sgrowth.Thechancesofflowofblackmoneyandillegaltransactionsarereducedwhenatransparent
and rigid digital system is established.
- Ease of international transactions
Earlier, engaging in international transactions was troublesome due to the absence of facilities such as net
banking and plastic money. Government initiatives toregulatedigitalpayments,haveeaseduptheprocessof
international transactions for people living within and outside the country.
- Reduced cost on currency production
As the country shifts to digital payments, production costs for currency reduce significantly, eliminating
additionalpayoutsrequiredbythegovernment.ThisalsoeasesstatutoryburdenforReserveBankofIndia(RBI),
as the regulatory authority.
Disadvantages of a Cashless baning
Let’s look at some disadvantages of a cashless economy:
- Cyber security
With increasing reliance on the internet, the ease of transactions has increased. However, digital payment
methodshavealsoopenedavenuesforonlinefrauds.ArecentreportbyMicrosoft revealedthatonanaverage,
anIndianconsumerlostRs.15,334byfallingpreytoonlinescamsin2021.Themostcommonpaymentchannels
for these consumers were bank transfers and credit cards.
As of now, therearenostringentlawsorlegalprocessesthatcanhelpeliminateonlinefraud.Addtothis,the
risk of data theft that banks can face,whichcanuncoverfinancialinformationofthousandsofusers,andcan
lead to massive security breaches.
- Rise in public expenditure
Theconveniencethatacashlesstransactionsystembringsmaybecomeaddictive.Peopleandenterprisestend
to overspend when making digital payments, which can lead to spending traps, especially for the younger
population. Eventually, this may also increase public expenditure rates significantly.
- Identity thefts
Lackoffinancialknowledgeiscausinganincreaseinidentitytheftsinthecountry.Thosewholeveragecashless
payment modes, but do not have enoughknowledgeinthesegment,mayloseconfidentialinformationalong
with hard-earned money.
- Illiteracy
InIndia,financialilliteracyandthehesitancetodigitizearethebiggestbarrierstowardstransitioningtocashless
payment transactions.
The internet and smartphone penetration in the country is still catching up. Most of the population intier3
towns and villages are not tech-savvy enough to easily navigate digital payment functions. Switching from a
cash-based to a digital medium can be difficult for people, whorequireadeeperfinancialunderstandingand
more time to adapt to such transactions.
Challenges in Transitioning Into a Cashless Banking
Although advantages of a cashless economy outnumber the disadvantages in the larger scheme, there are
severalchallengestoovercome,fortransitioningtoacashlesseconomy.Thecountry'spopulation,povertygraph
and other demographic factors play a key role in this journey. Wehavelistedafewchallengestounderstand
these better:
- Extreme dependency on cash
Decades ago, since the barter system faded away, people have been leveraging the cash-based system and
currencieshavecomeintothepicture.Givingupsuchastronghabitisnoteasy,evenifpeopleareconvincedof
the advantages of using digital payments.
- Flawed digital infrastructure
The increasing number of scams and frauds in cashless transactions across different channels such as banks,
ATMs, internet connectivity, and smartphones, is indicative of a vast scope of improvement in our digital
paymentsinfrastructure.Thispreventspeoplefromtrustingthegovernment'sinitiativestotransitiontoadigital
world. Therefore, a secure and well-regulated digital infrastructure is the need of the hour.
- Unconvinced population
The government runs several campaigns to educate and inform people of digitization benefits; yet a large
percentageofthepopulationlacksfaithinthecashlessfinancialsystem.Convincingthissectionofcitizenstogo
completely cashless is an uphill task.
- Fear of losing control
One of the primary reasons people don't prefer going completelydigitalisthefearthattheywilllosecontrol
overtheirfinances.Fordecades,cashtransactionshavecreatedanassuranceforbusinessesthattheyfearnot
having with virtual and cashless transactions.
- Connectivity
Eventhoughconnectivitytechnologiesinthecountryhaveimprovedsignificantly,thepenetrationofhigh-speed
broadband is still weak in many regions across the country. Most metropolitan cities also face connectivity
issues, let alone rural areas.
- Lack of digital literacy
Being literate with respect to transacting digitally, means that one is aware of the various factors and risks
involvedwithdigitalpayments.Lackofdigitalliteracymayalsobeattributedtogenerationgaps,astheyposea
major hurdle in the process of digitizing transactions in India.
Government Initiatives for Cashless Economy in India
The government is taking several steps to overcome the above challenges and establish a cashlesseconomy.
Let's understand more about these initiatives:
- Demonetization
The government implementeddemonetizationin2016tocurbthecirculationofblackmoney.Demonetization
wasoneofthemostradicalstepstakeninthisdirection.Thisinitiativesignificantlyreducedavailabilityofliquid
cash and pushed people towards optingcashlessmodesofpayments.Itledtogreateruseofpaymentmodes
like plastic money, digital wallets, and also led to a sharp spike in online sales.
- Pradhan Mantri Jan Dhan Yojana
Financial inclusion is oneoftheprimaryreasonswhyIndiaisunabletodeveloprapidly.Addressingthiscause,
the Pradhan Mantri Jan Dhan Yojana was one of the most renowned and successful initiatives by the
government,toeliminatethechallengesoffinancialinclusivityacrossthecountry.Theaimwastoofferbanking
toeachhousehold,byallowingthemaccesstoallservicessuchasbankaccounts,creditfacilities,pensions,and
more.
- Direct Benefit Transfer (DBT)
The DBT scheme was launched to provide financial benefits to individuals, such as subsidies directly in the
beneficiaries' bank accounts. This included benefitssuchasLPGsubsidies,oldagepensions,andscholarships,
helping the rural population to move towardsthedigitalsystemefficiently.Thisencouragedpeopletoentrust
banks with their money, while also addressing concerns of financial knowledge and literacy.
- Unified Payment Interface (UPI)
A Unified PaymentInterfaceisahighlyefficientsystemthatallowspeopletolinkmultiplebankaccountsviaa
singleplatformandmergesdifferentbankingfeaturesonasingleunifiedplatform.Thisfurtherhelpsindividuals
rely on a centralized, convenient measure of cashless mode of transactions.
- Aadhar Enabled Payment System (AEPS)
Another government-launched digital payment mode is the Aadhaar Enabled Payment System.Thisleverages
the Unique Identification Authority of India (UIDAI) number of individuals, to help them transfer money
seamlessly. It enables people with Aadhar Cards to easily perform financial transactions at point of sale centers.
- Financial Literacy Centres
Lastly, as part of the Pradhan Mantri Jan Dhan Yojna, financial education programs were also held in
government-led literacy centers. These centers aimed to educate more people in the country regarding the
benefits of a cashless economy for the community.
These government initiatives combined, have helped the country reach noteworthy milestones in terms of
financial digitization and the national goal of a cashless economy.
COUNTERFEIT CURRENCY:
Counterfeitingistheoldesttechniqueusedbyfraudsterstocheatunsuspectingindividualsoftheirmoney.Here,
the fraudster may handover an imitation currency in exchange forrealbanknotesundervariouspretextslike
making change or offering help.
..
ead more at:
R
[Link]
gn=cppst
Kindly refer to the above site to check methods to identify fake currency.
Common questions
Powered by AIPublic Provident Funds (PPF) and National Savings Certificates (NSC) both offer government-backed investment schemes but cater to different needs. PPF is designed for long-term savings with a 15-year lock-in period, appealing to individuals seeking stable, tax-efficient growth with low risk, making it ideal for risk-averse investors . Conversely, NSC is a fixed-income scheme with a shorter 5-year term and slightly higher interest rates at 7.7% p.a., suitable for those looking for moderate-term, secure investment options . While both offer tax benefits, NSC is more accessible for short-term needs, whereas PPF emphasizes long-term savings security .
Public Provident Funds (PPF) facilitate long-term financial planning by providing a stable, government-backed investment option that offers compounded interest over a 15-year lock-in period. The scheme supports regular investments, allowing individuals to grow their money securely and predictably, which is ideal for those with low risk appetite . PPF accounts allow partial withdrawals after 5 years, providing some liquidity even within the lock-in period. Additionally, the tax benefits under section 80C of the Income Tax Act make them attractive for tax-efficient savings . Thus, PPFs serve as a reliable cornerstone for long-term financial strategies .
The primary functions of commercial banks in India are accepting deposits and lending loans. Accepting deposits includes maintaining various account types like current, savings, and fixed deposit accounts, thus enabling individuals to save and earn interest . The lending functions involve advancing secured loans, cash credits, term loans, overdrafts, and discounting bills of exchange. These activities are the main sources of income for banks . Secondary functions include agency services such as collecting cheques and paying bills, providing general utility services like locker facilities and issuing traveler's cheques, and innovative functions leveraging technology, such as online banking .
Mobile banking significantly impacts financial inclusion in rural areas by providing access to banking services for populations that are traditionally underserved by physical bank branches. With mobile platforms, users in remote locations can open accounts, perform transactions, and access credit facilities without needing to travel long distances . This access helps individuals and small businesses participate in the formal economy, gain financing, and improve their economic stability. While the potential for mobile banking to increase financial inclusion is substantial, challenges such as internet connectivity, digital literacy, and trust in digital platforms need to be addressed to fully leverage this impact .
Banks ensure the security of valuable items entrusted to them by offering locker facilities where clients can store their valuables such as jewelry, important documents, and other assets. These lockers are housed in bank vaults, offering a high degree of security against theft and damage . Clients are provided with keys or codes specific to their lockers, adding another layer of security. Banks charge minimal fees for these services and often insure the contents against specific risks, providing clients peace of mind regarding the safety of their valuable possessions .
Credit creation by banks influences the economy by increasing the money supply, which can stimulate economic growth. When banks issue loans, instead of lending cash, they create deposits that can be used by borrowers to finance their activities, hence creating more money in the economy as deposits increase . This process allows banks to create credit many times over their actual reserves, facilitating increased investment and consumption. The created credit increases the aggregate demand and can lead to higher economic activity, but excessive credit creation may also lead to inflation if not regulated .
Investment banking services provided by banks help customers grow wealth by offering a range of products that suit different risk appetites and financial goals. These services include facilitating investments in mutual funds, stocks, and government securities, and providing advisory for optimized investment strategies . Wealth management, a specific investment service, aids customers in long-term financial planning by allocating assets and resources to achieve maximum return on investment, potentially increasing wealth over time . These services are particularly beneficial when banks leverage expertise in financial markets, thus providing customers with informed choices and minimizing financial risk .
Banks play a crucial role in promoting international trade through exchange banking by facilitating currency conversion and providing foreign exchange services necessary for global transactions. This function supports exporters and importers by enabling them to buy and sell goods in international markets with ease, managing currency exchange risks . By specializing in foreign exchange, these banks also encourage the flow of foreign investments into and out of a country, thus contributing significantly to the overall global financial ecosystem .
Overdraft facilities permit account holders to withdraw more than their account balance, providing a short-term solution to liquidity issues. For account holders, this overdraw feature can prevent returned payments and avoid late fees on bills, although it typically incurs higher interest rates . For banks, offering overdrafts serves as a revenue stream through interest and fees charged on overdrawn accounts, but it also requires careful management to mitigate the risk of defaults. Banks need to ensure they extend this facility only to creditworthy customers to minimize risk, balancing their need for profitability with prudent lending practices .
Online banking services play a significant role in modern banking by offering enhanced convenience and accessibility, enabling customers to perform transactions without visiting physical branches, thus operating 24/7 . These services allow users to transfer funds, pay bills, and manage accounts online, which has led to a reduction in the need for traditional in-person banking activities . However, traditional banking services remain essential for personal consultations, loans requiring high levels of scrutiny, and transactions involving large sums of money. Online banking has pushed traditional banks to innovate, leading to services like mobile and home banking to meet modern consumer demands .
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