AFB JUNE 2024 FREE STUDY MATERIAL | ACCOUNTS STUDY NOTES | BANKING OPERATIONS
In this article, we are going to discuss the functions of a bank. What are the basic functions that a bank is supposed to do or deliver in its regular operations. This poem is smart for the unit: Banking operations from the syllabus of Accounting and Finance for Bankers paper of JAIIB 2024 Exams.
As exam dates for Junior associates of the Indian Institute of Bankers are quite near, we are trying to bring you some study notes through which you just need to give a few minutes of yours in your daily routine to refresh the topics or concepts of your June AFB JAIIB 2024 Paper/Exam.
Banking Operations :
The term banking has been defined under Section 5 of the banking regulations act. As per the act, banking means accepting deposits from the public so that banks lend or invest deposit money. This deposit money can be repaid on demand or otherwise as well as it can also be withdrawn by cheque, order, and draft or otherwise.
A Bank gets its power to provide additional services to banking businesses from section 6 of the Banking Regulation Act. This section allows the banks to engage in certain classes of businesses which are incidental or related to the banking business.
Although Section 8 of the act prohibits a bank to buy, sell or deal in goods except when this selling or buying or dealing is related to the realization of security which is held by the bank or it is in connection with the business of collection or negotiations of bills of exchange.
MAIN FUNCTIONS OF COMMERCIAL BANK
The main functions that a modern commercial bank does are mentioned below:
- Accepting deposit: The primary function of a bank is to accept the deposit at a low-interest rate and lend out the deposit amount at a higher interest rate.
The public is offered to deposit money and different kinds of deposits as per your requirements such as:
- Demand Deposits – withdrawable on demand i.e These can be withdrawn by the deposit office anytime they need money or want to withdraw the money.
- Current Account – This kind of account allows the customers to transact as many transactions as they want in their accounts. It is generally opened for business entities so that they can do their daily operations without facing any limitations on their accounts.
- Savings Deposits – General public deposits their money with the bank with the purpose that the bank can keep the money safe so that they can also earn interest on the deposit amount.
- Term Deposits – In this kind of account, a fixed amount is deposited for a fixed period with the bank on which a slightly higher rate of interest is given to their customers.
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Granting loans and advances
- Overdraft – This is a kind of credit facility given by the banks to the business owners. In this kind of account, customers are allowed to withdraw more money than their balance from the accounts.
- Cash Credit – It is a kind of working capital known and which businesses are granted advances for short period against the current assets which usually are their stock & debtors.
- Discounting of Bills – When the banks pay money against the sales invoices after charging a small fee in the form of ‘discounting charges’, it is known as discounting of bills.
- Loans and Advances – Banks also lend out money for short as well as long periods against some type of security.
- Acting as Referee – All the banks are required to keep their customer’s information confidential, but if the customers desire then they can ask their banks to share their financial position status with the third parties.
- Collection of Statistics –
- In India, central banking, the regulatory body which controls the entire banking system, also collects statistical data and statistical information so that it can publish data every month.
- Dealing insecurities, on its account or behalf of its customers – Banks also deal in the securities on behalf of the customers when they open a Demat account for the customers.
- Dealing of foreign exchange – Banks also provide the services of making available the foreign currency to their customers. Anyone who needs foreign currency for whatever purpose he, she, or any other person may have can visit their bank to get foreign currency in exchange for domestic currency.
- Derivatives – Banks also deal in derivatives as they provide arbitrage opportunities.
- Foreign Exchange Business – For the business units, banks also issue letters of credit so that Indian businesses can take advantage of global opportunities.
- Gift Cheques – Gift cheques are decorative cheques that are issued by the banks by charging in an extra charge for their issue. These checks are availed by the customers who wish to give presents to their loved ones on special occasions. This kind of check can be availed in unlimited numbers by any branch of the bank.
- Letter of Credit – LC
- Locker Facility – Something provides a locker facility to their customers where they can keep their important documents for safekeeping. customers can you keep any kind of document or article in the allotted lockers
- Opening letters of credit/ issuing guarantees – This kind of service is easily available to the businesses from the banks. Under it, banks provide guarantees on behalf of the customers to their suppliers (of customers).
- Prepaid payment instruments – Demand draft is one of the instruments which is prepaid in nature. The person in whose favor a DD has been prepared can go to the bank and redeem that DD in their accounts.
- Remittances: Banks also remit money on behalf of their customers to any other person’s account. This sentence can be done through RTGS, NEFT, or other remittance systems.
- Traveler’s Cheques – The people who travel outside India can get these traveler’s cheques instead of getting foreign currency when traveling to foreign countries.
- Underwriting Securities – Banks also sometimes on behalf of their commercial clients to have them in issuing shares of their companies.
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PARA BANKING ACTIVITIES
The banking activities are undertaken by a bank apart from its daily activities such as deposits or withdrawals, ranging from insurance businesses to portfolio management as well as underwriting the bonds for public sector banks. Some of the para banking activities are mentioned below:
- Cheque Writing Facility for Investors of Mutual Funds/Money Market Mutual Funds
- Equipment Leasing, Hire Purchase Business, and Factoring Services
- Insurance Business
- Investment in Venture Capital Funds
- Money Market Mutual Funds
- Mutual Fund Business
- Pension Fund Management
- Portfolio Management Services
- Primary Dealership Business
- Referral Services
- Sponsors to Infrastructure Debt Funds
- Trading on/Membership of SEBI approved Stock Exchanges
- Underwriting Activities
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