Banking: Functions and Types of Deposits

• Banks are institutions conducting business purely for profit.

Primary Functions of Banks

• Banks collect deposits from the public and classify them into four types.
• Banks advance loans to the business community and the public.
• The profit comes from the difference between lending and deposit interest rates.
• There are four types of loans and advances.

Types of Deposits

• Savings accounts encourage saving with a low interest rate, around 5% per annum.
• Savings accounts allow withdrawals with restrictions and are suitable for salary and wage earners; they can be single or joint.
• Fixed deposits involve depositing a lump sum for a specific period with a higher interest rate that varies, withdrawals are not allowed until expiry, and are suitable for surplus funds.
• Current accounts are for businesspeople with free withdrawals but no interest, plus service charges.
• Recurring deposits involve periodically depositing a sum, primarily for salaried people and petty traders.
• Withdrawals are permitted only after the expiry of a certain period, and a higher interest rate is paid.

Types of Loans and Advances

• Overdrafts are advances for current account holders with no separate account.
• Overdrafts have entries made in the current account; the interest is charged on the actual amount withdrawn, and is secured against collateral.
• Cash credits allow clients to have cash up to a limit fixed in advance.
• Cash credits can be given to current account holders and others.
• A separate cash credit account is maintained; interest is charged on the withdrawn amount exceeding the limit, and is secured by tangible assets and/or guarantees.
• Loans are normally for short-term (one year) or medium-term (five years), with repayment in installments or lump sum.
• Interest is charged on the actual amount, whether withdrawn or not, and may be slightly lower than overdrafts and cash credits.
• Loans are normally secured against tangible assets.
• Discounting Bills of Exchange involves a bank advancing money by discounting domestic and foreign bills.
• The bank pays the bill amount to the drawer/beneficiary, minus discount charges, and collects the full amount upon maturity.

Secondary Functions of Banks

• Secondary functions are also referred to as non-banking functions.

Agency Functions

• Banks act as agents for customers, serving as trustees, executors, advisers, and administrators.

Agency Transactions

• Transfer of Funds: Banks transfer funds between branches or locations.
• Collection of Cheques: Banks collect money from cheques through a clearing section.
• Periodic Payments: Banks make periodic payments for clients, such as electricity bills.
• Portfolio Management: Banks purchase and sell shares/debentures for clients.
• Portfolio management debits or credits the account accordingly.
• Periodic Collections: Banks collect salaries, pensions, dividends, on behalf of clients.

General Utility Functions

• These are tasks performed by banks, like, issuing drafts for fund transfers and letters of credit, especially for import trade, and traveler's cheques.
• Locker Facility: Banks offer lockers for keeping valuables safe.
• Underwriting of Shares: Banks underwrite shares/debentures.
• Dealing in Foreign Exchange: Commercial banks deal in foreign exchange, as allowed by the Reserve Bank of India (RBI).
• Project Reports: Banks prepare project reports for clients.
• Social Welfare Programs: Banks undertake social welfare programs.

Corporations

• Corporations are a common business type, chartered by a state and granted legal rights separate from owners.
• Corporations are viewed as legal persons and can be sued.
• Corporations are characterized by limited liability for owners, stock issuance, and continuous existence.
• Incorporation gives the company separate legal standing via limited liability.
• Several key responsibilities and functions exist within a corporation.

Selecting a CEO

• The board of directors picks a chief executive officer (CEO) who ensures adherence to policies; selecting management teams and organizational structure.

Providing Continuity

• Small corporations are formed to stay in business permanently; continuity of business is an important function.
• Executives and directors must be replaced to keep the company running.

Managing Resources Effectively

• Corporations must manage resources effectively like, procuring manufacturing materials, keeping products in stock, and minimizing waste.

Increasing Profits

• Corporations are responsible for increasing profits to maximize shareholders' earnings per share by selling products and controlling costs.

Social Responsibilities

• Corporations are responsible for giving back to their communities, such as sponsoring events, donating, addressing environmental issues, and ensuring industrial safety.

Cooperatives

• Cooperatives are autonomous associations meeting economic, social, and cultural needs through joint ownership and democratic processes.

Trade Unions

• Trade unions represent employees across trades, occupations, and professions.
• Trade unions advance members' interests through rule-making and collective bargaining.

Militant Functions of Trade Unions

• Trade Unions work to achieve higher wages and better working conditions.
• Trade Unions aim to raise the status of workers and protect them from victimization.

Fraternal Functions of Trade Unions

• Trade Unions generate self-confidence and encourage sincerity among workers.
• Trade Unions provide opportunities for promotion and protect women workers against discrimination.

Social Functions of Trade Unions

• Trade Unions improve the quality of work life, providing welfare activities, education, grievance redressal, publications, and research.

Political Functions of Trade Unions

• Trade Unions include affiliating with political parties, helping in member enrollment, collecting donations, and seeking help during strikes.

International Organizations

• These are entities established by formal political agreements.
• Their existence is recognized by law.
• International Organizations play a role in defining the global economy.

Principal Bodies Regulating International Economic Affairs

• World Bank helps integrate underdeveloped countries.
• International Monetary Fund (IMF) stabilizes currency exchange rates.
• World Trade Organization (WTO) enforces international trade rules.

Transnational Advocacy Groups

• Transnational Advocacy Groups advocate for principled causes.
• Transnational Advocacy Groups include ideas, and values such as human rights, and they work across national boundaries.

Development Agencies

• Development Agencies establish sustainability programs for the community.
• Economic Development Agencies help create and support economic growth.