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Class 11 Finance Chapter 2 Meaning and Different Types of Banks
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Meaning and Different Types of Banks
Chapter : 2
| QUESTIONS |
A. Write a very short answer:
1. Write the name of the apex institution of the banking structure of a country.
Ans: The central bank is the apex institution of the banking structure of a country.
2. Which Bank is called the lender of the last resort?
Ans: The central bank acts as the lender of the last resort.
B. Short Answer Questions:
1. What is the Central bank?
Ans: The Central bank is the supreme monetary institution of a country. Its position is at the apex of the monetary and banking structure of a country. Central bank is the leader of the money market. It controls, regulates and supervises the activities of commercial banks operating in the country. Central bank is the central monetary authority.
2. What is a Commercial bank?
Ans: Commercial Bank refers to the financial institution which accepts, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. It mobilises savings from the surplus spending sector and lend these funds to the deficit-spending sector. Funds are lent by commercial banks in the form of loan, cash credit, overdraft and discounting of bills.
3. What is a savings bank?
Ans: A Savings Bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits. Savings banks encourage low-income people to save money and have access to banking services.
Savings banks are specialised financial institutions to raise the savings from the poor and middle income group of people of the society. The Primary objective of savings banks is to encourage habits of thrift and savings among the people with low income.
4. What is an investment / industrial bank?
Ans: Investment banks are involved directly or indirectly for the development of the industrial sector through the investment in shares, debentures and underwriting of capital issue, etc. of industries. Since the investment bank is related with the promotion and development of industries through its various modes of investment, it is also known as an industrial bank.
The investment banks arrange medium and long term finance for business and industry. Generally, it works both as financiers as well as underwriters.
5. What is a development bank?
Ans: A development bank is a multipurpose financial institution. It provides all types of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities. Basically, a development bank is a term lending institution. Its outlook is development oriented.
6. What is an exchange bank?
Ans: Exchange Banks are those banks which are foreign in origin, i.e., they have their head offices located outside the country. Exchange banks deal in foreign exchange. It is specialised in financing international trade. Since the banks are engaged in foreign exchange transactions, they are also known as foreign exchange banks. The main function of exchange banks is to make settlement with transactions of foreign exchange and to finance and facilitate the foreign trade.
7. What is a co-operative bank?
Ans: Co-operative Bank is an institution established on the cooperative basis and dealing in ordinary banking business. Co-operative banks are formed on the principles of cooperation. Co-operation means voluntary association on the basis of equality and for some common purpose. The basic principle of cooperation is ‘each for all and all for each’.
Co-operative banks are organised and managed on co-operative principles and regulated by its special legislative provisions.
8. What is an international bank?
Ans: The banks which have crossed the international border in respect of their banking business are called international banks. It has a worldwide scope of banking activities. It assists to solve the problems of international finance. The individual and the corporate body may be the customers of international banks. Business practices of this bank are governed by the international rules and regulations.
9. What is EXIM bank?
Ans: EXIM bank is a bank that ensures the growth and development of foreign trade of the country. It provides financial and other assistance to exporters and importers. It brings co-ordination among the different agencies involved in financing export and import of goods and services to promote international trade.
C. Long Questions Answer (Type-1):
1. What are the main functions of Exchange Bank?
Ans: The following are some of the important functions/services provided by the exchange bank.
(i) Exchange banks encourage the flow of foreign investment into India.
(ii) It is engaged in discounting of foreign bills of exchange.
(iii) It provides the services of foreign remittances.
(iv) Purchasing and selling of gold and silver is another important function of an exchange bank.
(v) Exchange banks issue letters of credit in the foreign trade.
(vi) It facilitates and finances international Trade.
(vii) It provides necessary assistance in obtaining various clearances regarding transactions in foreign currency.
2. What are the main objectives of Regional Rural Banks?
Ans: Ultimate aim of RRBs is to assist in rural development of India. The main objectives of RRBs are stated below.
(i) The main objective of setting up of RRBs was to fill up the credit gap prevailing in the rural area.
(ii) RRBs are to act as an alternative credit agency to provide institutional credit to rural people to make them free from the clutches of village money lenders.
(iii) The banks are to assist in the development of the rural economy by providing credit and other facilities to small and marginal farmers, agricultural labourers’, small entrepreneurs, artisans, cottage industries, weavers etc.
(iv) To create a new class of entrepreneurs for employment generation in rural areas.
3. State the functions of RRBs.
Ans: Following are some of the important functions performed by RRBs:
(i) RRBs accepts deposits of money from the public through different types of accounts such as Savings Deposits Account, Current Deposits Account, Recurring Deposits Account,, Fixed Deposits Account, etc.
(ii) It grants loans and advances to people particularly small and marginal farmers, artisans etc. in rural and semi urban areas.
(iii) It performs functions like disbursement of wages of different government programmers such as MGNEGA, distribution of Pensions etc.
(iv) It also provides some agency and public utility services to the public. For example collection and payment of bills on behalf of customers, remittance of funds from one place to another, Locker facility to public, etc.
(iv) It provides some important modern banking facilities such as services of Debit and Credit card, mobile banking, internet banking etc.
4. What are the various functions of an Investment Bank?
Ans: Some of the functions generally performed by an investment bank are stated below:
(i) Investment banks accept long term deposits only from the public as it provides long-term finance to meet the fixed capital needs of the industries.
(ii) It provides long term loans to industries for purchasing land and buildings and other fixed assets. Medium term loans are also provided to meet the working capital needs of industries.
(iii) It helps the industries by underwriting the issue of securities of large industrial organisations.
(iv) Investment banks play an important role in management and control of the company by subscribing its shares and debentures.
(v) It provides advisory and technical guidance for the efficient management of the industries.
(vi) It acts as advisor or consultant in matters of merger and acquisition deals of different industrial houses.
(vii) It assists a company to manage financial risk in terms of currency, loans, liquidity, etc.
(viii) It also performs the functions of research in the field of management of equity and debt, fixed income, macroeconomic aspects etc. for the benefits of its clients.
5. What are the various functions of the Development Bank?
Ans: Some of the important functions of development bank are stated as under:
(i) Provide development assistance: The most important function of development banks is to provide development assistance for various development activities such as industries, agriculture, trade and transport, etc.
(ii) Balanced regional development: Development banks provide financial assistance on priority basis to the units set up in backward and forest areas.
(iii) Assistance to small entrepreneurs: Development banks provide financial assistance to small entrepreneurs to prevent concentration of economic powers in a few hands.
(iv) Helps promote new entrepreneurs: Development banks help in promoting new entrepreneurs and small scale units by providing assistance on priority basis.
(v) Accepts deposits of money: Development bank accepts deposits of money for long term only which is repayable after the expiry of fixed period. Like commercial bank, it does not accept demand deposit which is repayable on demand.
(vi) Provides medium and long term credit: It provides medium and long term credit to industries to meet the cost of land and building, plant and machinery, its expansions, renovations and modernization, etc.
(vii) Helps in raising Capital: As underwriter and guarantor, development banks help the corporate sector to raise the capital from the market in respect of issue of shares, debentures, bonds etc.
(viii) Offers multipurpose services: It offers promotional, technical, managerial and consultancy services for the promotion, growth and smooth functioning of industrial units.
(ix) Discovers investment project: It discovers the various investment projects for development of the economy.
(x) Preparation of project reports: It undertakes the preparation of project reports of various developmental projects.
(xi) Raises foreign capital: It raises the foreign capital from different sources and allocates it according to the priority of the different sectors of the economy.
(xii) Undertakes market and investment research: Development banks undertake market and investment research for development of industrial and other sectors of the country.
6. What are the features of Co-operative Bank?
Ans: Some of the important features of cooperative banks are mentioned below–
(i) Co-operative banks are organised and managed on the principles of co-operation, self help and mutual help.
(ii) Its motto is “One member one vote” irrespective of the number of shares held by members.
(iii) They are foster children of the government as these are sponsored, supported and subsidised financial institutions.
(iv) It is the most favoured banking sector since the RBI plays a promotional role rather than regulatory in case of cooperative banks. RBI gives certain relaxation to co-operative banks particularly in case of maintaining CRR, SLR by the cooperative bank.
(v) Another feature of co-operative banks is that it works on the Principles of “No profit no loss.”
(vi) Three tier set-up is another feature of Co-operative banking in India. Three tier set-up is Primary Co-operative Society at village level, Central Co-operative Bank at district level and State Co-operative Bank at state level.
(vii) Liabilities of the members are unlimited particularly in case of village level Primary Co-operative Society.
(viii) Co-operative banks provide short term as well as long term loans to borrowers. Co-operative banks are for short term loans and Land development banks are for long term loans.
(ix) Sources of Co-operative banks come from central and State Government, RBI, NABARD, Membership fee, deposits from public, etc.
(x) There are scheduled as well as non-scheduled Co-operative banks. Non-scheduled Co-operative banks are Primary Cooperative banks and State Co-operative banks are scheduled banks.
7. Write five functions of EXIM Bank.
Ans: Some of the principal functions of EXIM bank are as follows-
(i) It works as an apex institution for assisting and supporting development of such financial institutions which are engaged in financing export and import.
(ii) It is involved in financing the export and import of goods and services within India and abroad.
(iii) It provides finance for joint ventures in foreign countries.
(iv) It brings co-ordination among the different financial institutions and other parties engaged in export-import business.
(v) It provides the services as underwriter relating to the issue of shares, debentures, bonds, etc. of companies involved in the foreign trade.
8. What are the differences between the Central Bank and Commercial Bank?
Ans: The following points clarify the difference between central bank and commercial banks.
| Basis | Central Bank | Commercial Bank |
| Meaning | Central bank is an independent financial institution which is responsible for overseeing the entire monetary, banking and economic policy of a nation. | But a commercial bank is a part of banking and economic system which is related with the normal banking services to business, trade and commerce. |
| Organisation | Central bank is formed by the special statute of the country. (RBI was established under the RBI Act, 1934). | Commercial banks are formed as per the provisions of common banking law of the country. |
| Objectives | The primary objective of a central bank is not to earn profit. It aims at national welfare. | The primary objective of a commercial bank is to earn profit. |
| Note issue | Usually, the central bank of every country has the monopoly power of note issue. | Commercial banks have no power of note issue. |
| Position | Central bank is the apex financial institution of a country. | Commercial banks are subordinate to the central bank. |
| Dealings with Public | Central bank does not directly deal with the public. | Commercial banks directly deal with the public. |
| Area of Operation | Usually, the scope of operation of a central bank is within a country. | A commercial bank can extend banking services to different countries of the world. |
| Credit Control and Credit Creation | Central bank controls credit. | Commercial banks create credit. |
| Monetary policy | Central bank prepares/ introduces monetary policy of the country. | Commercial banks execute the monetary policy prepared by the central bank. |
| Regulation and Control | Central bank is the regulatory and controlling authority of the entire banking system of the country. | Commercial bank has no such authority. |
9. What are the differences between Commercial Bank and Cooperative Bank?
Ans: The operation and working of commercial banks and co-operative banks are different from each other on the following points.
| Basis | Commercial Bank | Co-operative Bank |
| Formation | Commercial banks are formed under the provisions of common banking law of the country. They are formed and guided under the Banking Regulation Act, 1949, and The Reserve Bank Of India Act, 1934. | Co-operative banks are formed under the Cooperative Societies Act, 1904. |
| Scope of Operation | The area of operation of commercial banks is very large. It may be extended to the whole country and even outside the country. | The area of operation of co-operative banks is limited to a particular area or mostly within the state. |
| Motive | The profit motive is the primary objective of commercial banks. | Co-operative banks are running their banking business with a service motive. |
| Structure | Generally, commercial banks are organised under the unitary structure. | Co-operative banks have three tiers set up. (State level, District level and Local/Village level). |
| Members | In India, a minimum seven members can form a commercial bank as a joint stock public company. | Minimum ten members can form a cooperative bank with co-operative principles. |
| Term of Loan | Commercial banks provide mostly short term loans to meet the working capital needs of the business community. | Co-operative bank provides short, medium and long-term loan to agriculture and rural sector of the country. |
| Voting Rights | In commercial banks, borrowers have no voting rights. | In co-operative banks, borrowers are also the shareholders and so they have voting rights. |
| Liability | In case of commercial bank, liability of members are limited to the extent of shareholdings. | In case of co-operative bank, the liability of members is unlimited particularly at the village level co-operatives such as Primary Agricultural Co-operative Credit Societies. |
| Control | Commercial banks are controlled by Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. | Co-operative banks are mainly controlled by the Co-operative Societies Act, 1904. |
| Orientation | Commercial banks are basically urban-oriented. | Co-operative banks are basically rural-oriented. |
| Refinance from the RBI | All scheduled commercial banks are entitled to refinance facilities from the RBI. | State Co-operative Banks only are entitled to refinance facilities from the RBI. |
10. What are the differences between Commercial Banks and Development Banks?
Ans: Development banks are different from the commercial bank on the following points:
| Basis | Commercial Bank | Development Bank |
| Acceptance of Deposits | Commercial banks accept deposits from the public repayable on demand. | Development bank accepts deposits repayable after the expiry of specified time. |
| Liabilities | Liabilities of commercial banks (i.e. demand deposits withdrawal by cheque) are widely accepted as a means of payment or money. | Liabilities of development banks are not accepted as money. |
| Method of Mobilisation of Savings | Commercial banks mobilise savings from the public through the different accounts of banks such as Savings Deposits Account, Current Deposits Accounts, Recurring Deposits Accounts, Fixed Deposits Accounts, etc. | Development banks mobilise savings from the public through the different schemes or against the issue of long term instruments such as debentures, bonds, etc. |
| Credit Creation | Commercial banks can create credit. | Development banks can not create credit. |
| Term of Loan | Commercial banks usually deal in short term loans in the money market. | Development banks deals in medium and long term funds in the capital market. |
| Nature of functions | Commercial banks are homogeneous groups by nature and perform the same types of business. | Development banks are covered by heterogeneous groups and perform diverse business. |
| Cash Reserve Ratio | Commercial banks are required to maintain a cash reserve ratio with the central bank. | Development banks are not required to maintain a cash reserve ratio with the central bank. |
| Purpose of Deposit | Generally, people deposit money with the commercial banks with the objectives of safety, liquidity and convenience. | People invest their surplus money with the development bank for earning income. |
| Purpose of Loan | Usually, commercial banks provide short term loans to meet the working capital needs of trade, commerce and industries. | Development banks grant loans to meet the fixed capital needs of the business community. |
| Control and Regulation | Commercial banks are controlled and regulated by Reserve Bank of India (as per the provisions of Banking Regulation Act, 1949). | Development banks are regulated by the Special Act of their own. |
D. Long Questions Answers (Type-2):
1. Discuss the different functions of the Central Bank?
Ans: Generally, a central bank performs the following functions:
(A) Issue of Currency Notes The issue of the paper currency is the most important function of a central bank. In almost every country, the central bank issues currency notes. The central bank has the sole monopoly power of note issue. The currency notes printed and issued by the Central bank become unlimited legal tender throughout the country. In India, Reserve Bank of India issues currency notes.
The monopoly power of the note issue enjoyed by the central bank has some advantages:
(a) It brings uniformity in note issue and note circulation.
(b) The central bank can exercise better control over the money supply in the country.
(c) It increases public confidence in the monetary system of the country.
(d) It makes monetary management of the paper currency easier.
(e) It helps the central bank to exercise control over undue credit expansion by the commercial banks.
(B) Acts as Banker, Agent and Adviser to the Government: A central bank acts as a banker, agent and financial adviser to the government of the country.
(i) As a banker to government, the central bank-
(a) Maintains the accounts of the central and state government.
(b) Receives deposits from the government.
(b) Makes short-term advances to the government.
(d) Collects cheques and drafts deposited in the government account.
(e) Provides foreign exchange resources to the government (for making various payments).
(ii) As an agent to the government, the central bank-
(a) Collects taxes and other payments on behalf of the government.
(b) Raises loans from the public.
(c) It undertakes the issue of treasury bills.
(d) Represents the government in the international financial institutions and conferences.
(iii) As a financial adviser to the government, the central bank advises the government on financial, monetary, economic and fiscal matters.
(C) Acts as Bankers Bank: A central bank acts as the bankers’ bank on three capacities:
(i) As a Custodian of the Cash Reserve of the commercial banks: A central bank maintains cash reserve of the commercial banks. The commercial banks in the country have to keep a certain percentage of its cash balances as deposits with the central banks. These cash reserve can be utilized by the commercial banks during emergency.
The centralization of cash reserves in the central bank has the following advantages:
(a) It inspire/instill confidence of the public in the banking structure.
(b) It can serve/provide as the basis of a larger and more elastic credit structure.
(c) It enables the central bank to provide additional funds to those banks which are in temporary difficulties.
(ii) As a Lender of Last Resort: The central bank acts as the lender of the last resort. The central bank gives financial accommodation to the commercial banks, mostly, by rediscounting their eligible securities and exchange bills. This accommodation is given at the request of the commercial banks.
The advantages of the central bank’s acting as lender of last resort are:
(a) It increases the elasticity and liquidity of the entire credit structure.
(b) It provides financial help to the commercial banks in time of difficulties.
(c) It helps the central bank to exercise its control over banking system of the country.
(iii) Clearing House: As the custodian of the cash reserves of the commercial banks, the central bank acts as the clearing house (for these banks). As all banks maintain their accounts with the central bank, the claims of banks against one another are settled by simple transfers from and to their accounts.
The main advantages of clearing house function of the central bank are:
(a) It provides economy in the use of money / cash in banking operations.
(b) It reduces the withdrawals of cash.
(c) It tends generally to strengthen the banking system of a country.
(D) Custodian of Gold and Foreign Exchange Reserves: The central bank also acts as the custodian of country’s gold and foreign exchange reserves. A central bank holds reserves of gold and foreign currencies mainly for two purposes:
(i) To overcome the balance of payments difficulties.
(ii) To maintain stability in the exchange rates.
(E) Controller of Credit: The control of credit is considered to be the main function of a central bank. Uncontrolled credit causes economic fluctuations in the economy. By controlling the credit effectively, the central bank establishes:
(i) Stability in the internal prices.
(ii) Stability in the foreign exchange rates.
2. Discuss the primary functions of commercial banks.
Ans: Primary functions of Commercial Banks the primary functions of a commercial bank are basically divided into two groups.
(A) Accepting deposits: Acceptance of deposit is an important primary function of a commercial bank. A bank accepts money / deposits from its customers. Deposits of banks are classified into mainly two categories:
(i) Demand Deposits: This type of deposits is repayable on customer’s demand. Demand deposits mainly comprise the following:
(a) Savings deposits.
(b) Current deposits.
(ii) Term Deposits: This type of deposits is repayable on maturity dates as agreed between the banker and the customers.
Term deposits comprise the following:
(a) Recurring deposits.
(b) Fixed deposits.
Here, the short details on various types of accounts are mentioned below –
(i) Savings Bank Account: Savings Bank Account is primarily for small scale savers. The important objective of savings bank account is to encourage saving habits of the people. Savings account can be opened by Individuals, Guardians (on behalf of their minor children/wards), Karta of Hindu Undivided family, Associations, Trusts, Clubs, etc.
(ii) Current Deposit Account: The current account is generally opened by businessmen, individuals, firms, companies, entrepreneurs, professionals, contractors, institutions, Government bodies/departments, Societies, liquidators, trusts, etc. It is a running account. Money can be deposited and withdrawn at any time. Current accounts provide overdraft facilities to holders of accounts. Usually, a banker does not give any interest on this account.
(iii) Recurring Deposit Account (RD): In recurring deposit account, a fixed amount of savings are required to be compulsorily deposited by the customer at specific intervals for a specific period. It intended to encourage/inculcate regular and compulsory savings habit among the low/middle income group people for meeting their future specific needs e.g. higher education or marriage of children, purchase of vehicle, etc.
(iv) Fixed Deposit Account: In this account bank accepts deposits for a fixed period of time. The period may range from 45 days, 90 days, 180 days, 1 year to 5 years etc. Fixed deposits are repayable on the maturity date along with interest at an agreed rate for the period. Banks pay higher interest rates on fixed deposits as compared to savings bank deposits. Longer period of deposits generally gain higher rate of interest than the shorter period of deposits. Generally, fixed deposits cannot be withdrawn before the expiry of maturity period. Fixed deposits are also known as term deposits.
(B) Granting loans and advances Granting loan and advances is another primary function of a commercial bank. There are different modes or ways of granting loans to the customer. These are discussed below –
(i) Loans Loan is a lump sum amount of advances sanctioned by a bank to the customer for a certain period at an agreed rate of interest. The entire amount is paid on one occasion. The interest is charged for the full amount sanctioned. The loan may be repaid in predetermined instalment or at the expiry of a specific period. The loan may be sanctioned with or without security.
Loan may be categorised into:
(a) Short-term loan.
(b) Medium-term loan. and
(c) Long term loan.
(a) Short-term loans: Short-term loans are given for a period of not exceeding 1 year. It is usually granted to meet working capital requirements of the borrower/industries.
(b) Medium-term loans: Medium-term loans are granted for a period ranging from 1 year to 5 years. It is usually granted for the purchase of various tools and equipment, tractors, vehicles, etc.
(c) Long-term loans: Long-term loans are granted for capital expenditure. It is granted for construction of factory buildings, purchase of land, purchase of new machinery and modernization of plant.
(ii) Overdraft Overdraft is a credit arrangement, whereby, a customer is allowed to withdraw over and above his credit balance in the current account up to a specified limit. Overdraft is a short term credit arrangement. It is purely a temporary arrangement. Overdraft is granted by the bankers against collateral security or personal guarantee of the borrower. The borrower is permitted to draw and repay any number of times.
(iii) Cash Credit A cash credit is an arrangement by which a customer of a bank is permitted to borrow money up to a particular limit. A separate account is opened for this purpose. Cash credit is a permanent arrangement. Cash credits are usually provided against sufficient securities (pledge or hypothecation of goods, and personal security).
(iv) Bill discounting Commercial Banks can also lend money by discounting bills of exchange. In case the holder of a bill needs money immediately, he can get his bills discounted by a commercial bank. The bank charges a commission for discounting of bills. The bills can also be re-discounted at the Central Bank. This method is very popular because of its self liquidity character.
(v) Money at call or call loan Call loan is a very short term advance. Generally the participants involved in this market are different financial institutions, dealers, broker of stock exchanges etc. This loan is given for a period of 1 day to 14 days. This loan can be called back by the bank at a very short notice.
(vi) Consumer Credit Consumer credit is one type of term loan. It is basically provided by the bank to the customer for purchasing T.V., Washing Machine, Air Cooler, Air Conditioner and some other household goods. In addition to these it is also granted for some personal needs, such as payment of medical bills and other household liabilities.
3. Discuss the secondary functions of commercial banks.
Ans: The secondary functions / services of a commercial bank can be classified into the following two categories.
(A) Agency functions / services Banks also perform some agency functions / services for and on behalf of their customers.
They are as follows:
(i) Remittance of fund Banks help their customers in transferring fund from one place to another place or one account to another account. Funds are transferred through cheques, drafts, mail transfer or telegraphic transfer or any other modern techniques of fund transfer. Banks charge a minimum service charge or fee from the customers for providing such type of agency services.
(ii) Making payment on behalf of customers As per the instruction of the customers, bank makes various kinds of payment like payment of electricity bill, municipality tax, coupons, draft, promissory notes, interest, rent, insurance premium, dividend warrants, bill of lading, etc.
(iii) Collection of Cheques, etc Collection of cheques and other negotiable instruments on behalf of customers and crediting the proceeds to their account is an another important agency function rendered by the bank.
(iv) Buying and Selling of Stocks, Securities etc Banks undertake buying and selling of shares, stocks, other securities, foreign exchanges including foreign bank notes. Moreover, banks buy and sell of different units of Mutual funds under various schemes of investment plan as per the instruction of the customer. All these are executed as per the instruction of customers against a nominal fee.
(v) Acting as trustee, executors, etc The commercial banks act as trustee, executors, administrators on behalf of customers. As a trustee, bank takes care of the assets of the customers. Bank also helps in the administration of the trust. As an executor, the bank preserves the wills of their customers and executes them after their death.
(vi) Other agency Services In addition to the above functions, commercial banks also provide some valuable advice to the customers on matters relating to income tax calculation, payment of tax and submission of tax return to the concerned authority. Moreover banks are also working as financial advisor to his customers.
(B) General Utility Functions / services In addition to agency services, modern commercial banks provide many general utility services as given below.
(i) Safe deposit locker facility Providing locker facility to the customer is an important utility service rendered by a commercial bank. The banks provide this facility of locker or safety vaults to keep the valuable articles of customers in safe custody. Under this facility, the banks provide one or more locker boxes to the customers on hire or payment of charges. There are two keys to open the locker box. One is with the customer and other is with the bank. The locker box can be opened if the two keys are used.
(ii) Safe custody of valuable articles In addition to the safe deposit locker facility, bank also provides the services of safe custody of valuable articles. Under this facility, the customer can handover some valuable articles / documents such as negotiable instruments, securities, documents of title, will, trust deed etc. to the bank. For keeping these valuable documents / articles banks charge a fee from the customer. The charges or fee depend on the period of safe keeping and value of goods kept under safe custody.
(iii) Issue of gift Cheques Issue of gift cheque is also an important public utility services. Bank issue this cheque in various denominations to be used on auspicious occasions.
(iv) Issue of letter of credit Letters of Credit is a document issued by the banker to its customer regarding the creditworthiness of customers. This document is generally used in foreign trade.
(v) Collection and Supply of Statistics As a part of utility service, commercial banks collect and publish different information and statistics relating to trade, commerce and industry. Banks advise customers on financial matters relating to growth and development, modernisation, diversification of business.
(vi) Underwriting of shares, debentures etc Banks act as underwriter of capital issue of different companies and government bodies. Commercial banks purchase and sell the shares, debentures of companies as underwriter to raise the capital of the corporate bodies. Banks charge a certain amount of commission against performing the underwriting services.
(vii) Acting as referee Bank also acts as referee regarding the financial position, business reputation and respectability of their customers.
4. Discuss the modern functions of a commercial bank.
Ans: Modern functions of Commercial Banks:
In addition to the traditional functions, a commercial bank performs various modern functions / services. The following are some of the important modern functions generally performed by a commercial bank.
(i) Automated Teller Machine (ATM) cum Debit Card Automated Teller Machine is a computerised telecommunications device. It facilitates the customers of a bank with access to withdraw and deposit their money.
(ii) Credit Card facility Credit Card is a plastic money which acts as an instrument of credit and it replaces the paper money. The credit card holder may purchase goods from many authorised dealers by using the credit cards. Card holder can also withdraw cash from ATM, up to a certain limit, maintained by bank throughout the country.
(iii) SWIFT Message facility Remittance of funds can be done by method of SWIFT message. SWIFT means the ‘Society for Worldwide Interbank Financial Tele communication.’ The transfer of funds from one country to another can be effected by SWIFT Messages which are prompt and cost effective to a customer.
(iv) Mail and Telegraphic Transfer The customer of a bank has a choice to transfer money from one place to another through mail transfer or telegraphic transfer. In this process the customer requests the bank to transfer a part of balance in the payees’ account kept in different place in the same bank for a nominal commission.
(v) Tele Banking Services It is one of the methods of delivering banking services to customers. It is increasingly used as delivery channel for marketing of banking services. Under this method generally non-cash related banking services are performed over the phone anywhere and anytime.
(vi) S.M.S (Short Messaging Service): It is a mobile application based banking service. Under this service the banks send the standard text message to the account holder immediately after the banking transaction occurred through the mobile number registered with that account. For this services bank charges a nominal fee yearly.
(vii) Internet banking Internet banking is a platform for electronic delivery of banking services to the customers. Internet has enabled banking at the click of a mouse. Through internet banking facility a customer can avail different banking services from anywhere and at anytime. Some of the internet banking services are stated below:
(a) Retail and corporate internet banking: The retail or personal internet banking assists the customer to have an online access to bank account anytime and anywhere for the banking transaction.
(b) Electronic Clearing and Electronic Fund Transfer (EFT): Internet banking assists the customers in electronic clearing service for quick movement of funds in a paperless mode. Internet banking helps Electronic Fund Transfer (EFT) to ensure a quick transfer of funds by using electronic media.
(c) RTGS / NEFT Service Instant remittance by customer himself now made possible from one bank to another bank at different places on the same day with the help of online Real Time Gross Settlement (RTGS) or National Electronic Fund Transfer (NEFT) at modest charges.
(d) Online Shopping and Bill Payment, etc. The service of online shopping facilitates the customers to book hotel, buy gift, buy books and a lot of activities by making online payment. Now the customers need not make a queue to pay different kinds of bills.
5. Discuss the functions of the development bank.
Ans: Some of the important functions of development bank are stated as under:
(i) Provide development assistance The most important function of development banks is to provide development assistance for various development activities such as industries, agriculture, trade and transport, etc.
(ii) Balance regional development Development banks provide financial assistance on priority basis to the units set up in backward and forest areas.
(iii) Assistance to small entrepreneurs Development banks provide financial assistance to small entrepreneurs to prevent concentration of economic powers in few hands.
(iv) Helps promote new entrepreneurs Development banks help in promoting new entrepreneurs and small scale units by providing assistance on priority basis.
(v) Accepts deposits of money Development bank accepts deposits of money for long term only which is repayable after the expiry of fixed period. Like commercial bank, it does not accept demand deposit which is repayable on demand.
(vi) Provides medium and long term credit It provides medium and long term credit to industries to meet the cost of land and building, plant and machinery, its expansions, renovations and modernization, etc.
(vii) Helps in raising Capital As underwriter and guarantor, development banks help the corporate sector to raise the capital from the market in respect of issue of shares, debentures, bonds etc.
(viii) Offers multipurpose services It offers promotional, technical, managerial and consultancy services for the promotion, growth and smooth functioning of industrial units.
(ix) Discovers investment project It discovers the various investment projects for development of the economy.
(x) Preparation of project reports It undertakes the preparation of project reports of various developmental projects.
(xi) Raises foreign capital It raises the foreign capital from different sources and allocates it according to the priority of the different sectors of the economy.
(xii) Undertakes market and investment research Development banks undertake the market and investment research for development of industrial and other sectors of the country.
6. Briefly state the functions of a commercial bank.
Ans: The various functions / services of commercial banks are discussed in detail in the following heads.
(i) Primary functions: Primary functions of Commercial Banks The primary functions of a commercial bank are basically divided into two groups.
1. Accepting deposits: Acceptance of deposit is an important primary function of a commercial bank. A bank accepts money / deposits from its customers. Deposits of banks are classified into mainly two categories:
(i) Demand Deposits : This type of deposits is repayable on customer’s demand. Demand deposits mainly comprise the following:
(a) Savings deposits.
(b) Current deposits.
(ii) Term Deposits: This type of deposits is repayable on maturity dates as agreed between the banker and the customers.
Term deposits comprise the following:
(a) Recurring deposits.
(b) Fixed deposits.
2. Secondary functions: Secondary Functions of Commercial Banks The secondary functions / services of a commercial bank can be classified into the following two categories.
(i) Agency functions / Services: Banks also perform some agency functions / services for and on behalf of their customers.
(ii) General utility or Public Utility Services: In addition to agency services, modern commercial banks provide many general utility services as given below.
(a) Safe deposit locker facility Providing locker facility to the customer is an important utility service rendered by a commercial bank. The banks provide this facility of locker or safety vaults to keep the valuable articles of customers in safe custody.
(b) Safe custody of valuable articles In addition to the safe deposit locker facility, bank also provides the services of safe custody of valuable articles. Under this facility, the customer can handover some valuable articles / documents such as negotiable instruments, securities, documents of title, will, trust deed etc. to the bank.
(c) Issue of gift Cheques Issue of gift cheque is also an important public utility service. Bank issue this cheque in various denominations to be used on auspicious occasions.
3. Modern functions: In addition to the traditional functions, a commercial bank performs various modern functions / services. The following are some of the important modern functions generally performed by a commercial bank.
(i) Automated Teller Machine (ATM) cum Debit Card Automated Teller Machine is a computerised telecommunications device. It facilitates the customers of a bank with access to withdraw and deposit their money.
(ii) Credit Card facility Credit Card is a plastic money which acts as an instrument of credit and it replaces the paper money. The credit card holder may purchase goods from many authorised dealers by using the credit cards.
