Main Functions of a Commercial Bank

Math Projects: Main functions of a commercial bank for ICSE Class X.

This project analyses the main functions of Bank of Baroda (a nationalised bank), and will try to understand the various services offered by the bank.

Main Body

For this project, I visited the Bank of Baroda branch in Bangalore. Bank of Baroda was founded by the Maharaja of Baroda in 1908 and was nationalised on 19 July 1969, by the Government of India and has been designated as a profit-making public sector undertaking (PSU).

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 deposits accepted by the bank:

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 There is no restriction on the amount that can be withdrawn and there is no limit on the number of withdrawals.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 The Banks do not pay any interest on these deposits because these amounts can be withdrawn anytime.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 These deposits are payable on demand and money can be withdrawn by cheques.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.

Types of accounts opened by different categories of depositors

Bank of Baroda offers different kinds of accounts to its customers, namely Savings, Current, Fixed deposit, Recurring Deposit, Baroda E-Trade 3-in-1 account However, there are several variants offered within savings account.

The following types of savings account are offered by Bank of Baroda:

• Baroda Advantage Savings Account: This is a zero-balance savings account for both salaried and self-employed individual.
• Super Savings Account: Offered to high value resident customers and the account offers several advantages to the account holder.
• Baroda Pensioners Savings Bank Account: Offered to all pensioners, this account can be opened with a minimum value of only Rs.5.
• Baroda Mahila Shakti Saving Account: Offered to women who can avail higher interest rate.
• Baroda Salary Classic, Baroda Salary Super, Baroda Salary Premium, Baroda Salary Privilege: Offered to customers depending on their net monthly salary.
• Baroda Champ Account: For students below 18 years.

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.

Types of loans and advances given by Bank of Baroda

Bank of Baroda offers a wide range of retail loans at attractive interest rates in order to meet the diverse needs of its customers. The bank provides loans for buying a new house, for education of children, purchasing a new car or home appliances.

Bank of Baroda however does not act as an underwriter and banker for new issues of shares of a company.

Bank of Baroda provides the following types of loans and advances to its customers.

• Home Loan: 6.8% interest rate
• Personal Loan: 10.50% to 16% interest rate, quick processing, online loan repayment
• Car Loan: 7.35% to 10.10% interest rate, longer tenure & lower EMI
• Two-Wheeler Loan: Low processing charges, finance for a minimum of Rs. 5000 and a maximum of Rs. 1 Lakh
• Education Loan: For studies in institutions of India & Abroad, No processing & documentation charges, 0.50% concession in rate of interest to loans for girl students
• Mortgage Loan: 7.2% interest rate, Minimum: Rs.2.00 Lacs to Maximum – Rs.10.00 Crores
• Mudra Loan: 7.5% interest rate, no processing charges. Loan given to Non-farm enterprises, Micro Enterprises and Small Enterprises segment,
• Advance Against Securities such as National Savings Certificates (NSC) / Kisan Vikas Patra (KVP): 7.5% interest rate, Processing Charges – Rs. 75/- per certificate.
• Commission Agents Loan: 9.00% interest rate. Finance for a minimum of Rs. 25,000/- and a maximum of Rs. 200 Lacs. Facility offered to Commission Agents/Arthias who are engaged in Retail Trade.
• Advance Against Gold Ornaments / Jewellery: 7.5% interest rate. Processing Charges – 0.50% + service tax.

Agency functions performed by Banks

Banks like Bank of Baroda 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, including Bank of Baroda, 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 from a Bank of Baroda branch, 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 bank, including Bank of Baroda, 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. For example, Bank of Baroda charges INR 1,500 plus GST annually for a small-sized locker in urban and metro areas.
• Bank of Baroda offers the Baroda TravelEasy Card, which is a 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. With the Baroda TravelEasy card, travellers do not have to spend time in converting currencies or to encash travelers cheque.

Looking at the various agency functions performed by Bank of Baroda, and the different kinds of miscellaneous and utility services provided by the bank, 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.

 

Bibliography

Forex Card Rates | Bank of Baroda
https://www.bankofbaroda.in/forex-card-rates.htm

Effect of interest rate on bank deposits: Evidences from Islamic and non-Islamic economies
https://www.sciencedirect.com/science/article/pii/S2314721017300038

Are Banks The New Department Stores Of Finance?
https://www.forbes.com/sites/tomgroenfeldt/2017/03/14/banks-the-department-stores-of-finance/?sh=163a97006958

Project Details

Main functions (agency, utility, miscellaneous) of a commercial branch.

Assignment Question/Requirements

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.

Consult the Chapter regarding 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 rates offered by the bank affects the amount of deposits with them. Try to understand the difference between different types of deposits.

2. Try to find out the types of loans and advances extended and the loans given to the priority sector by this bank.

3. It would be useful to find out the amount of deposits made and the amount of withdraws from this bank on any particular day.

4. Try to understand various agency functions such as payment of electricity and telephone bills, insurance primia and payment of pensions received by pensioners, etc.

5. Does this bank branch act as an underwriter and banker for new issues of shares of a company?

6. Does it deal in the foreign exchange?

7. Make a list of various miscellaneous services offered by this bank such as issue of travellers’ cheques and gift cheques.

8. Try to understand how drafts are prepared by the bank.

9 It would be interesting to understand the operation of locker facilities provided by the bank for safe custody of jewellery and other valuables.

By looking at the functions performed by this bank. can you say that the banks can be regarded as a departmental store?