Fundamental functions of a bank normally performs

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 2. Granting of Loans and Advances

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
4. 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 4% 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 A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say three months or so. Interest is charged on actual amount withdrawn.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.

Secondary functions 

Besides the primary functions of accepting deposits and lending money, 
banks perform a number of other functions which are called secondary 
functions. These are as follows - 
a) Issuing letters of credit, travellers cheques, circular notes etc. 
b) Undertaking safe custody of valuables, important documents, and 
securities by providing safe deposit vaults or lockers; 
c) Providing customers with facilities of foreign exchange. 
d) Transferring money from one place to another; and from one 
branch to another branch of the bank. 
e) Standing guarantee on behalf of its customers, for making 
payments for purchase of goods, machinery, vehicles etc. 
f) Collecting and supplying business information; 
g) Issuing demand drafts and pay orders; and, 
h) Providing reports on the credit worthiness of customers.