Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Explain in detail the primary functions of the banks.
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Answer
Primary functions:
$I.$ Accepting deposits:
A bank acts as a custodian by accepting people s’ savings in the form of deposits and gives interest in return.Types of deposits a bank accepts:
There are four different ways in which a bank accepts deposits. They are:
Current Account Deposits,
Savings Account Deposits,
Recurring Deposit Account and
Fixed Deposits.
A customer may deposit money in banks by opening any of these accounts.
$1.$ Current account deposits:
A business, firm or an individual can open a current account with the bank. The main objective of this account is to conduct business related transactions.
Bank provides more liquidity to current account i.e. money can be withdrawn number of times during a day.
No interest is given to the customers of current account. At times, bank charges service charge on this account.
The bank also provides over-draft facility on this account i.e. the customer is able to withdraw more money than the available balance in the account
This overdraft facility helps the business or an individual to overcome short term money deficiency.
$2.$ Savings account deposits:
A savings account is an account provided by a bank for individuals to save money and earn interest on the cash held in the account.
Majority of people use savings account to deposit their savings as bank provides interest on this account.
The account holder can withdraw money using cheque, withdrawal slip, debit card and credit card.
$3.$ Recurring deposits:
This type of deposit accounts allows people to deposit small amount of money every month.
The deposit gradually increases and the bank provides interest on the accumulated amount.
Some banks may charge penalty along with some interest loss if a person is not able to deposit money in this account in a particular month.
$4.$ Fixed/ Long term deposits:
People who want to deposit their money for long duration opt for fixed deposits.
These deposits are fixed in nature and thus, money cannot be withdrawn as # and when required by the depositor.
Banks pay highest rate of interest as compared to other deposit accounts. Banks also provide overdraft facility on such deposits.
$II.$ Providing credit facilities:
Banks provide credit facilities to different individuals such as farmers, different professionals, etc. who are in need of money.
Under this system, the needy ones borrow from the bank and the bank charges interest for the credit facility that it provides. The interest charges depends on the purpose of credit i.e. whether the credit is used for personal use, agricultural activity or business activity.
The credit can be for short term $($up to $1$ year$),$ medium term $(1$ year $–\ 5$ years$),$ or long term $(5$ years $–\ 15$ years$).$
$III.$ Payment and withdrawal facilities:
A bank provides easy payment and withdrawal facility to its customers.
The various facilities are cheque, withdrawal slips and drafts, pay order, $ATM$ Facilities $($Automatic Teller Machine$),$ internet banking, debit card and credit card.
$IV.$ Credit creation:
Credit creation is the power of commercial banks to expand deposits, through loans, advances and investments.
In other words, on the basis of cash deposits of the customers in the bank, the bank makes loans and advancement and thus increases the money supply in the market.
They advance much more than what they collect from people in the form of deposits, thus, creating credit in the economy.
Through the process of credit creation, commercial banks provide finance to all sectors of the economy thus, making them more developed.
When the credit creation of bank increases, the supply of money in the economy increase and vice – versa.
$V.$ Inter-banking transactions:
A bank can provide short or long term credit in the form of loans or advance to the other bank as and when required.
Short term credit is provided by one bank to another through central bank and is called ‘call money’ and the interest rate of call money is called ‘call money rate’
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