Basic Banking Concepts, terms and terminologies.
A commercial bank is a financial institution that is authorized to receive money and provide different types of loans to its customers. Besides borrowing and lending, a bank also performs lots of other functions such as wealth management, currency exchange, saving account, financial services, safeguarding money, and investing the deposits in funds.
A Public Sector Bank is a bank in which the Government of India is the major shareholder, and owns more than 51% stake in the bank. In India, all those banks which were previously functioning under private sector were transferred to the public sector by the act of nationalization and thus the nationalized banks came into existence. Nationalization refers to the transfer of public sector assets to be operated or owned by the state or central government.
Given the importance of banks in the economy, banks in India are regulated by the Reserve Bank of India (RBI), the apex banking institution that regulates the monetary policy in the country.
Commercial Banks: Functions
Commercial banks perform a wide range of functions and provide several services to their customers. The various functions performed by a commercial bank include:
- Acceptance of deposits form people and companies.
- Providing loans and advances to borrowers
- Providing payment facilities and fund transfer options through cheques, NEFT, RTGS, online banking, and other means.
- Providing various agency functions to the customers by acting as an agent of the customer.
Types of Accounts
One of the main functions of a commercial bank is to accept deposits from people who have may have some excess funds with them. People like to deposit money with the banks to earn some interest income on the money, and also to keep the money safe in the bank. Besides individuals, a bank also accepts deposits from firms and other institutions.
Deposits constitute the main resources of a bank and a bank may offer different kinds of deposits to its customers.
In India, banks accept mainly three types of deposits:
- Current Account: Deposits in current account are payable on demand, which is why they are also known as demand deposits. There is no restriction on the amount that can be withdrawn and there is no limit on the number of withdrawals. These accounts are mostly held by traders and businessmen who use these accounts for making business payments or to receive payments through cheques. The Banks do not pay any interest on these deposits because these amounts can be withdrawn anytime. Instead, banks impose service charges on their customers for providing banking services.
- Savings Bank Account: These accounts are usually held by the general public, especially the salaried and retired people who may have idle cash. These deposits are payable on demand and money can be withdrawn by cheques. Sometimes, banks impose a limit on the amount and number of withdrawals during a particular period. Deposits in this account earn interest at nominal rates. Money deposited in savings account have high degree of liquidity, and also earn nominal rate of interest. Banks insist on a minimum amount to be maintained in saving bank account for availing cheque facilities.
- Fixed Deposits: The money in a fixed deposit account have to be maintained for longer periods – 6 months, one year, two years or more. These deposits are not payable on demand and one also does not get cheque facilities, i.e., cheques cannot be issued against these deposits for making payments. These deposits are also known as ‘time deposits’ since the money can only be withdrawn on maturity. In practice, however, banks allow the depositors to withdraw money from such deposits even before the maturity period, but they lose some portion of their accumulated interest.
These deposits are made by persons who have funds to spare for some time, especially retired people who are looking for risk-free avenues to earn some interest on their money. Fixed deposits earn higher interest than saving deposits. The rate of interest earned varies with the length of time for which deposit is made.
In addition to the regular Savings Account, Savings account for women and kids, Salary Account, Current Account, some banks also offer more types of accounts, such as Rural Account which is a basic savings account for farmers (a zero balance account).
Types of Loans offered by most banks
- Home loan for purchasing residential properties.
- Commercial loans for buying shops and offices
- Car loan for purchasing vehicles
- Education loan for funding higher education.
- Personal loans: Loans to help people deal with emergencies or short-term expenses such as renovation or holidays.
Impact of change in interest rates on Deposits
The interest rate has an impact on the amount of deposit collected by a bank because Interest rates determine the amount of interest payments that savers will receive on their deposits.
Generally, it is seen that a higher interest rate attracts more deposits whereas a lower interest rate reduces the deposits with a bank. An increase in interest rates will make saving more attractive and should encourage saving. A cut in interest rates will reduce the rewards of saving and will tend to discourage saving So, increased interest rate has a positive significant impact on bank deposits.
Role of Various Departments in a Bank
Wealth Management involves providing financial and investment advice as well as reviewing and re-balancing a company or an individual’s portfolio from time to time to ensure the financial plans are in line with the goals.
Professionals who work in treasury manage the liquidity of a business. They manage and monitor cash inflow and outflow, ensuring sufficient cash balance to fund a company’s operations and ensure its sustainability. Treasury helps a company manage its financial risks as well.
Future of Banking: School Project
Traditional Banking moves towards e-banking with increased penetration of Internet. Traditional Banking moving towards Internet & mobile banking. Economy moving from ‘Cash’ to ‘cash-less’
Reduce dependency on paper (pay-slips, cheque books, cash)
Banks now offer multiple channels for convenience of customers: Bank, ATM, Internet, Apps, Credit/Debit cards
Mobile payment becoming popular, witnesses increased transactions
Use mobile phone to pay bills, buy grocery, buy movie tickets, buy medicine, enjoy food, book tickets, shopping, mobile recharge and more.
Several Mobile Payment Apps available (Paytm, Airtel Money, Paypal, etc.)
With increased dependence of internet, banks focus on tightening security
Agency functions performed by Banks
Banks collect various types of payments on behalf of their customers, such as:
- Collecting cheques, drafts, bill of exchange, dividends, interests etc. on behalf of its customers and credit the amount in their account is one of the most important agency services rendered by commercial banks. Banks accepts standing instructions from the customers and arranges to collect dividend, interest, pension, salaries, bills etc. on behalf of his customers.
- Pensions for retired people who used to be Central and State government employees can be credited directly to their Bank of Baroda account.
- Banks help purchase and sell various securities such as shares, debentures, bonds etc. of various companies on behalf of their customers. Dividends on these Stocks and Mutual funds, held by the customer, can be credited directly to their Bank of Baroda account
- Payment of Subscription, Rent, Insurance Premium etc. on behalf of the customers and debit the account with the amount. Banks accept the standing instructions of the customer and arranges for the payment of such expenses on their behalf. It charges a small amount by way of commission for these services. For example, Insurance premium to be paid to any insurance company can be debited directly from the Bank of Baroda account
- Dealing in foreign exchange. This Bank of Baroda branch deals in foreign exchange. One can get foreign currencies in exchange of Indian rupees, and one can even convert foreign currencies into Indian rupees.
- In big companies where thousands of people work, salary disbursement can be done through bank branches. The salary of the employees can be directly credited to their respective salary accounts every month.
Making a Bank Draft
Commercial banks also provides bank draft to its customers. A bank draft is a payment instrument whose funds are guaranteed by the Bank. The bank charges a small fee for providing this fee. The person who’s being paid by bank draft can deposit it at any Bank, exactly as if it were cash. Since the funds have been guaranteed by the issuing bank, that person is sure to receive the sum of money indicated. While a bank draft has no expiry date, certain banks may refuse a bank draft if it is several months old.
To get a Bank Draft, one has to fill a form indicating the amount for which the Bank Draft is needed. The Bank will then ascertain if sufficient balance exists in the person’s bank account. If sufficient balance exists, the Bank will then provide a Bank draft for the said amount.
Utility and Miscellaneous services provided by the Banks
- Locker Facilities for Safe Custody of Jewellery. Most banks provide locker facilities to customers for safe custody of jewellery and other valuables. Bank lockers are one of the more important facilities offered by a bank and many customers avail of this facility. The amount one pays for renting a bank locker depends on the size of the locker and the bank branch location.
- Banks also offer prepaid International currency card, designed to make international travel hassle-free. The card is safer, secure and convenient to carry as compared to currency & traveler’s cheques. Travellers do not have to spend time in converting currencies or to encash travelers cheque.
Looking at the various agency functions performed, one can say that a commercial bank nowadays can be considered as a departmental store, wherein one can access all kinds of financial services all under one roof. Like a departmental store, customers nowadays expect their banks to provide everything related to their financial needs at one place, and banks are under pressure to fulfill these customer expectations, as they face stiff competition from other banks.
Conclusion
A bank is a financial institution that is authorized to receive deposits from people and businesses, and it in turn provides various kinds of loans and advances to individuals as well as to companies. Over the years, commercial banks have increased the range of services that they offer, considering the changing expectations of customers from banks.
For this project, I visited a Bank of Baroda branch to understand the range of financial services it offers. The company accepts different kinds of deposits from customers, for which it opens account such as Current Account, Savings Account and Fixed Deposit account. Depending on the tenure, the bank offers various rate of interest on the deposits. Usually, a higher interest rate on the deposit attracts more deposit from people, many of whom are looking for a risk-free return on their savings. The bank also offers a wide range of loans to people and businesses. The interest rate charged varies depending on the nature of the loan provided.
Over the years, Banks have been performing several agency functions on behalf of the customer, such as making Bank Drafts, providing foreign exchange, etc. In addition, banks also provide utility services such as providing travelers cheques, providing safe lockers to store valuables, providing financial advice, and so on. In fact, most commercial banks today act as a one-stop solution provider for all the financial requirements of customers, and as such, can be compared to a departmental store.
Projects
Project Requirement:
Take the case of a nationalised bank. Visit any of its branch in your city. Analyse the main functions of this branch. Make a presentation to this effect.
Learn about the functions of a commercial bank before you visit the bank so that you can effectively understand the functioning of the bank you are visiting. Visit the branch of any nationalised bank close to your home and have a discussion with the manager of that branch.
1. Find out what types of deposits are accepted by the bank, what types of accounts are opened by different categories of depositors and how a change in the interest rmates offered by the bank affects the amount of deposits with them. Try to understand the difference between different types of deposits.
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