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Let's start by discussing one of the primary functions of commercial banks — accepting deposits. Can anyone tell me why banks accept deposits?
It's so they can use that money to lend to others or invest.
I think they also pay interest on savings accounts!
Exactly! Banks encourage savings by offering interest, especially in savings accounts. Remember the acronym S.C.F.R. which stands for Savings, Current, Fixed, and Recurring deposits. These are the main types of accounts you can open.
What’s the difference between a savings account and a fixed deposit?
Great question! A savings account is for regular access with lower interest, while a fixed deposit typically offers higher interest with longer commitment. Can anyone think of scenarios where they would prefer one over the other?
I would prefer a fixed deposit if I have money I won’t need for a while.
Exactly! It’s all about the use of funds. In summary, banks accept deposits to mobilize savings which sustains their lending activities.
Now that we’ve covered deposits, let’s delve into the second primary function of commercial banks: lending money. What different ways do banks lend money?
They give loans and advances, right?
And they have overdraft facilities too!
Correct! Loans and advances can be either short-term or long-term depending on the purpose. Let’s remember the acronym C.L.O.A.N. which stands for Cash Credit, Loans, Overdraft, Advances, and Negotiable instruments.
What is cash credit?
Cash credit is a facility where banks allow customers to borrow up to a certain limit, typically secured by collateral. This is especially useful for businesses. Can anyone think of why such facilities are important for businesses?
They need fast access to cash for operations, especially if they have unexpected expenses.
Exactly! Lending plays a crucial role in facilitating economic activities. To conclude this session, remember that lending helps drive growth by providing necessary funds for various purposes.
In addition to accepting deposits and lending money, commercial banks also have secondary functions. Who can tell me what agency functions are?
I think they help us with many services like collecting cheques and paying bills.
Yes! They act like our representatives.
That's correct! These functions simplify transactions for customers. Can anyone recall an example of the utility functions provided by banks?
They provide ATMs and online banking services!
Exactly! The ability to access banking services anytime and anywhere is incredibly important for convenience and security. Remember the term U.L.O.C.R. which stands for Utility, Loans, Online, Cash, and Representation — encapsulating the secondary functions of banks.
What about foreign exchange services? Are they included as well?
Yes, absolutely! Banks play an important role in currency exchange. To summarize, banks not only accept deposits and lend money but also provide essential financial services that make banking easy and accessible.
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
In this section, we explore the primary and secondary functions of commercial banks, covering how they accept deposits through various types of accounts, extend loans, and provide additional services that benefit customers and the economy.
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A. Primary Functions
This chunk introduces the primary functions of a commercial bank, which are the core activities performed by these financial institutions. It sets the stage for understanding how banks operate fundamentally through the acceptance of deposits and the provision of loans.
Think of a commercial bank as a tool that helps manage people's money. Just like a school provides a structured environment for learning, a bank provides a structured approach to saving and borrowing money.
This chunk elaborates on the different types of deposit accounts offered by commercial banks. Savings accounts are designed for individuals who want to save money while earning interest. Current accounts are used for everyday transactions without interest benefits. Fixed deposits provide higher interest rates in exchange for locking money for a predetermined period. Lastly, recurring deposits allow customers to save a fixed amount regularly.
Imagine you are planting trees. A savings account is like a young tree that grows slowly and steadily with care (interest). A current account is like a tree planted in a public park; it’s frequently interacted with, but you don’t get any fruit (interest). Fixed deposits are like a tree that produces a bounty of fruit after a certain time; the longer you wait, the more you earn. Recurring deposits are like nurturing several smaller trees every month, ensuring a future harvest.
Here, we explore how banks lend money to individuals and businesses. Loans and advances can be short-term (like personal loans) or long-term (like mortgages for houses). The overdraft facility lets customers withdraw more than their account balance, providing extra flexibility. Cash credit allows businesses to borrow funds against their assets, such as inventory, which helps them manage liquidity.
Consider a bank as a lending friend in need. If you have a problem, you can ask for help (a loan). If you need to pay a bill urgently, and you are a trustworthy friend, they might lend you extra money (overdraft facility). Similarly, if you have a valuable item like a car, your friend might lend you money based on the value of that car (cash credit).
B. Secondary Functions
This chunk introduces the secondary functions of commercial banks, which supplement their primary functions. These include agency functions and general utility functions, which help in providing additional services to customers.
Think of a commercial bank as a multi-tool. The primary functions are the main tools, like a knife and screwdriver, while the secondary functions are the extra tools like scissors, bottle openers, and files that make the tool more versatile.
This chunk details the agency functions of commercial banks, where they act on behalf of their customers. They handle the collection of cheques, bills, and dividends, making banking more convenient. They also facilitate payments for rent and insurance premiums, reducing the hassle for clients. Moreover, banks can buy and sell securities for customers, which is an essential investment service.
Imagine your bank as a personal assistant. They help you collect your mail (cheques and dividends), ensure you pay your bills on time (rent and insurance), and even help you buy or sell stocks as if they were managing your investments.
In this chunk, we look at general utility functions that provide additional value to customers. Banks issue demand drafts and pay orders, which are secure ways to make payments. They also offer locker facilities for safe storage of valuables, foreign exchange services for travel and business, and convenient services like ATMs and online banking for easy access to funds.
Think of general utility functions as the value-added services at a supermarket. Just like how a supermarket offers delivery, loyalty programs, and even a café to make shopping easier and more enjoyable, banks offer various services to enhance the overall customer experience.
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
Accepting Deposits: Banks accept various types of deposits like savings, current, fixed, and recurring accounts to mobilize savings.
Lending Money: Banks extend loans and other credit facilities to customers, essential for personal and business growth.
Agency Functions: Banks act on behalf of customers to perform tasks like cheque collection and bill payments.
General Utility Functions: Other services provided by banks include ATMs, online banking, locker services, and foreign exchange.
See how the concepts apply in real-world scenarios to understand their practical implications.
A savings account at a bank earns interest, helping individuals save money over time.
A small business uses the overdraft facility to manage cash flow, allowing it to cover expenses even when funds are low.
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
Savings bring interest, every dime, money grows up, in good time.
Once upon a time, a young man named Alex needed cash quickly. His bank provided an overdraft facility, letting him withdraw more than he had to cover urgent expenses. This moment taught him the importance of banks in financial emergencies.
Remember the acronym S.C.F.R. for types of deposits: Savings, Current, Fixed, and Recurring.
Review key concepts with flashcards.
Term
Savings Account
Definition
Fixed Deposit
Overdraft Facility
Agency Functions
Review the Definitions for terms.
Term: Savings Account
Definition:
An account that encourages small savings by providing interest.
Term: Current Account
An account for frequent transactions that usually offers no interest.
Term: Fixed Deposit
A type of deposit that provides a higher interest rate for funds held for a fixed time period.
Term: Overdraft Facility
A service that allows customers to withdraw more money than is available in their accounts.
Term: Cash Credit
A loan facility that allows customers to borrow against securities such as inventory.
Term: Agency Functions
Functions whereby banks act on behalf of their customers in matters such as collecting payments.
Term: General Utility Functions
Other banking services provided to enhance customer convenience, such as locker facilities and ATM services.
Flash Cards
Glossary of Terms