You are on page 1of 15

1

Meaning of bank
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Due to their influence within a financial system and the economy, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject tominimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties have played a central role over many centuries. The oldest existing bank was founded in 1472

Definition of 'Bank'
A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank.

A. Primary Functions of Banks

The primary functions of a bank are also known as banking functions. They are the main functions of a bank. These primary functions of banks are explained below.

1. Accepting Deposits

The bank collects deposits from the public. These deposits can be of different types, such as :1. Saving Deposits

2. Fixed Deposits 3. Current Deposits Recurring Deposits a. Saving Deposits

This type of deposits encourages saving habit among the public. The rate of interest is low. At present it is about 5% p.a. Withdrawals of deposits are allowed subject to certain restrictions. This account is suitable to salary and wage earners. This account can be opened in single name or in joint names.

b. Fixed Deposits

Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry of the period. Those who have surplus funds go for fixed deposit.

c. Current Deposits

This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact, there are service charges. The account holders can get the benefit of overdraft facility.

d. Recurring Deposits

This type of account is operated by salaried persons and petty traders. A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit. The types of bank loans and advances are :1. Overdraft 2. Cash Credits 3. Loans 4. Discounting of Bill of Exchange a. Overdraft

This type of advances are given to current account holders. No separate account is maintained. All entries are made in the current account. A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say three months or so. Interest is charged on actual amount withdrawn. An overdraft facility is granted against a collateral security. It is sanctioned to businessman and firms.

b. Cash Credits

The client is allowed cash credit upto a specific limit fixed in advance. It can be given to current account holders as well as to others who do not have an account with bank. Separate cash credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The cash credit is given against the security of tangible assets and / or guarantees. The advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.

c. Loans

It is normally for short term say a period of one year or medium term say a period of five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form of installments spread over a period of time or in a lumpsum amount. Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower than what is charged on overdrafts and cash credits. Loans are normally secured against tangible assets of the company.

d. Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected.

B. Secondary Functions of Banks

The bank performs a number of secondary functions, also called as non-banking functions. These important secondary functions of banks are explained below.

1. Agency Functions

The bank acts as an agent of its customers. The bank performs a number of agency functions which includes :1. Transfer of Funds 2. Collection of Cheques 3. Periodic Payments 4. Portfolio Management 5. Periodic Collections 6. Other Agency Functions a. Transfer of Funds

The bank transfer funds from one branch to another or from one place to another.

b. Collection of Cheques

The bank collects the money of the cheques through clearing section of its customers. The bank also collects money of the bills of exchange.

c. Periodic Payments

On standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent, etc.

d. Portfolio Management

The banks also undertakes to purchase and sell the shares and debentures on behalf of the clients and accordingly debits or credits the account. This facility is called portfolio management.

e. Periodic Collections

The bank collects salary, pension, dividend and such other periodic collections on behalf of the client.

f. Other Agency Functions

They act as trustees, executors, advisers and administrators on behalf of its clients. They act as representatives of clients to deal with other banks and institutions.

2. General Utility Functions

The bank also performs general utility functions, such as :1. Issue of Drafts, Letter of Credits, etc. 2. Locker Facility 3. Underwriting of Shares 4. Dealing in Foreign Exchange 5. Project Reports 6. Social Welfare Programmes 7. Other Utility Functions a. Issue of Drafts and Letter of Credits

Banks issue drafts for transferring money from one place to another. It also issues letter of credit, especially in case of, import trade. It also issues travellers' cheques.

b. Locker Facility

The bank provides a locker facility for the safe custody of valuable documents, gold ornaments and other valuables.

c. Underwriting of Shares

The bank underwrites shares and debentures through its merchant banking division.

d. Dealing in Foreign Exchange

The commercial banks are allowed by RBI to deal in foreign exchange.

e. Project Reports

The bank may also undertake to prepare project reports on behalf of its clients.

f. Social Welfare Programmes

It undertakes social welfare programmes, such as adult literacy programmes, public welfare campaigns, etc.

g. Other Utility Functions

It acts as a referee to financial standing of customers. It collects creditworthiness information about clients of its customers. It provides market information to its customers, etc. It provides travellers' cheque facility.

10

Meaning Of Cheque
A cheque is a bill of exchange drawn on a specified banker & not expressed to be payable otherwise than on demand A cheque a documentthat orders a payment of money from a bank account. The person writing the cheque, the drawer, usually has a current account where their money was previously deposited. The drawer writes the various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated. Cheques are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of money. While paper money evolved from promissory notes, another form of negotiable instrument, similar to cheques in that they were originally a written order to pay the given amount to whoever had it in their possession (the "bearer"). Technically, a cheque is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified transactional account held in the drawer's name with that institution. Both the drawer and payee may be natural persons or legal entities. Specifically, cheques are order instruments, and are not in general payable simply to the bearer (as bearer instruments are) but must be paid to the payee. In some countries, such as the US, the payee may endorse the cheque, allowing them to specify a third party to whom it should be paid.

11

Although forms of cheques have been in use since ancient times and at least since the 9th century, it was during the 20th century that cheques became a highly popular non-cash method for making payments and the usage of cheques peaked. By the second half of the 20th century, as cheque processing became automated, billions of cheques were issued annually; these volumes peaked in or around the early 1990s. Since then cheque usage has fallen, being partly replaced by electronic payment systems. In an increasing number of countries cheques have either become a marginal payment system or have been completely phased out.

Open cheque or bearer cheque: The issuer of the cheque would just fill the name of the person to whom the cheque is issued, writes the amount and attaches his signature and nothing else. This type of issuing a cheque is also called bearer type cheque also known as open cheque or uncrossed cheque. The cheque is negotiable from the date of issue to three months. The issued cheque turns stale after the completion of three months. It has to be revalidated before presenting to the bank. A crossed cheque or an account payee cheque: It is written in the same as that of bearer cheque but issuer specifically specifies it as account payee on the left hand top corner or simply crosses it twice with two parallel lines on the right hand top corner. The bearer of the cheque presenting it to the bank should have an account in the branch to which the written sum is deposited. It is safest type of cheques. A self cheque: A self cheque is written by the account holder as pay self to receive the money in the physical form from the branch where he holds his account. Pay yourself cheque: The account holder issues this type of crossed cheque to the bank asking the bank deduct money

Different types of cheques

12

from his account into banks own account for the purpose buying banking products like drafts, pay orders, fixed deposit receipts or for depositing money into other accounts held by him like recurring deposits and loan accounts. Post dated cheque (PDC): A PDC is a form of a crossed or account payee bearer cheque but post dated to meet the said financial obligation at a future date.

Meaning of chequebook
a book containing detachable blank cheques and issued by a bank or building society to holders of cheque accounts. It is a booklet of blank checks which enable a bank account holder to draw money from his/her checking account deposits.

Automated teller machine (ATM)


A computerized telecommunications device that enables the clients of a financial institution to perform financial transactions without the need for a cashier, human clerk or bank teller. ATMs are known by various other names including ATM machine, automated banking machine and various regional variants derived from trademarks on ATM systems held by particular banks.

Advantages and Disadvantages of ATM Machines and Bank/Debit Cards

13

ATM or Bank Card

You can withdraw cash at any time, day or night. The banks dont need to be open. ATMs offer the convenience of multiple locations. You can withdraw cash at any bank that is part of the system to which your ATM card is linked. Your ATM card is protected by a PIN, keeping your money safe. You dont need to fill out withdrawal and deposit slips as is required at the bank. ATMs are faster than going to the bank no long lines. You can withdraw cash at ATMs in foreign countries.

ATM may be off-line (system down). You may forget your PIN number. Risk of robbery when you leave the ATM. The ATM can break down or run out of cash. Fees charged to use ATMs of other banks can become expensive.

About advantages: 1. You dont need carry cash if you go some places which have ATM. 2. If your ATM card is stolen, your money is safe because the criminal would need your PIN to access your funds. 3. If you need cash, you dont need go to bank. You can access your money at an ATM every time of day or night.

14

4. You dont need pay the common transactions fees. About disadvantages: 1. You also need carry cash because not that there are ATMs everywhere. 2. In our country, most of ATM cards allow you to withdraw limited money during the day. If you need withdraw more, you must go to the bank. 3. Secure problem: the ATM card can be faked, make a loss for banks and users.

15

You might also like