SBI Junior associate exam (Functions of Banking)

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 Functions of Banking

Banks play a vital role in the financial system by acting as intermediaries between depositors and borrowers. The functions of banking can be broadly categorized into primary functions, secondary functions, and agency functions.

1. Primary Functions

These are the core activities performed by banks:

  1. Accepting Deposits

    • Savings Deposits: Encouraging individuals to save their money, offering interest.
    • Current Deposits: Designed for businesses with no withdrawal limits, but no interest is provided.
    • Fixed Deposits (FD): Deposits for a fixed tenure with higher interest rates.
    • Recurring Deposits (RD): Regular monthly deposits for a specific period.

  2. Granting Loans and Advances

    • Loans: Provided for a fixed tenure against collateral or security.
    • Cash Credit: Businesses are given a pre-approved limit to withdraw funds.
    • Overdraft Facility: Customers can withdraw more than their account balance.
    • Discounting of Bills: Providing funds against trade bills before maturity.

  3. Credit Creation:
    Banks create credit by lending deposits, increasing the money supply in the economy.

2. Secondary Functions

These functions support the economy and banking services:

  1. Issuing Credit Instruments: Banks provide credit instruments like cheques, demand drafts (DD), and letters of credit.

  2. Providing Safe Deposit Facilities:
    Safeguarding valuable items like documents, jewelry, or other assets in lockers.

  3. Investment in Securities:
    Banks invest surplus funds in government and corporate securities.

  4. Providing Foreign Exchange Services:
    Facilitating international trade and currency exchanges.

3. Agency Functions

Banks act as agents for their customers in the following ways:

  1. Collection and Payment of Money:

    • Collecting cheques, dividends, and bills on behalf of customers.
    • Paying insurance premiums, EMIs, and other bills.

  2. Buying and Selling Securities:

    • Assisting customers in trading government or company securities.

  3. Acting as Trustees:
    Safeguarding funds or properties entrusted to the bank.

  4. Providing Tax Consultancy:
    Helping individuals or businesses with tax-related services.

4. Developmental Functions

Banks also contribute to the development of the economy:

  1. Rural and Agricultural Financing:

    • Offering loans and schemes to farmers and rural entrepreneurs.

  2. Promoting Self-Employment:

    • Providing small loans to individuals to start their businesses.

  3. Support to Small and Medium Enterprises (SMEs):

    • Offering loans to startups and small industries.

5. Modern Banking Functions

With the evolution of technology, banks now perform several additional functions:

  1. Digital Banking: Internet banking, mobile banking, and UPI-based transactions.
  2. ATMs and Debit/Credit Cards: Providing easy access to cash and cashless payments.
  3. Merchant Banking: Assisting companies in raising funds and managing IPOs.
  4. Insurance Services: Acting as agents for life and general insurance policies.
  5. Wealth Management: Offering investment advisory and portfolio management services.

These functions highlight the pivotal role banks play in economic growth and financial inclusion.

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