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A bank is a financial institution that accepts public deposits, originates demand deposits, and makes loans at the same time. The bank can either execute lending activities directly or indirectly through capital markets.
Wealth management, currency exchange, and safe deposit boxes are all financial services that banks may offer.
They provide a safe place to put your money as a financial services provider. You can execute normal banking transactions, including deposits, withdrawals, check writing, and bill payments, through a range of account types such as checking and savings accounts and certificates of deposit (CDs). People and businesses can get credit from banks as well.
Functions of bank institutions
1. Deposit security
Banks are thought to be a safe location to put money. Keeping all of your savings in cash under your bed would be inconvenient and dangerous. It also relieves people of their financial concerns. The Bank of England guarantees commercial banks as a lender of last resort in the United Kingdom. As a result, customers regard them as safe places to put their money.
2. Provide Interest on savings accounts
Deposits at commercial banks earn Interest. This may be quite low for current accounts, but the interest rate on savings accounts might be rather high. Interest rates on deposits are critical in sustaining the real value of your money during periods of inflation. It is a significant source of earning for banks.
3. Borrowings
A bank can increase its profits by lending a portion of its deposits to other clients. If a bank pays 2% on bank deposits but pays 6% on loans to businesses and consumers, it might make a greater profit on its deposits. A bank only needs to have enough cash on hand to meet clients’ withdrawal requests.
Types of banks
Central Bank
A central bank is a financial entity that has exclusive control over the production and distribution of money and credit in a country or group of countries. The central bank is typically in charge of monetary policy and member bank regulation in modern economies.
To put it another way, the central bank of a country is also known as the banker’s bank because it provides funds to other banks in the country and oversees the country’s financial system.
Cooperative bank
Agriculture and associated companies can get short-term loans from them. The primary goal of cooperative banks is to help people by providing low-interest loans. Tier 1 (State Level) of State Cooperative Banks (regulated by RBI, State Govt, NABARD)
The project’s funding is contributed by the RBI, the government, and the National Bank for Agriculture and Rural Development (NABARD).
3. Commercial Banks
The corporation was created by the Banking Companies Act of 1956. They operate on a business model, with profit as their primary purpose.
Public sector banks -They have a united structure and are owned by the government, state, or private corporation. Public deposits are these banks’ main source of funds. The government or the central bank of a country owns a majority of the equity in public sector banks.
Private-sector banks- are those in which the majority of the stock is owned by a private entity, an individual, or a group of people.
Foreign banks- Banks having headquarters in other countries, but branches in the United States are classified as foreign banks.
4. Regional rural banks
These banks were established in 1975 under the Regional Rural Bank Act of 1976. With the support of concessional loan programmes, these banks attempt to improve rural and agricultural communities.
5. Local banks
These banks were founded in 1996 and operate under the Companies Act of 1956. These are profit-driven commercial banks with the goal of making a profit. These are managed by private companies. There are currently four Local Area Banks in India, all of which are located in the southern region of the country.
6. Small finance banks
The country’s national government regulates and controls it. Finances and loans are provided to small enterprises and trades such as farming and the poor, unorganised sector.
Types of lending provided by banks-
Personal loan – In this scenario, the bank may grant a loan that must be repaid over a period of time. This loan could be backed by any assets, such as a home. Personal loans can be used to cover a large purchase such as a car or to assist pay a career or school advancement.
Business loan- A business loan is a loan that allows a company to invest and develop its operations.
Overdraft- customers and a bank can agree on an overdraft. This enables them to borrow money swiftly and easily in the near term. The amount authorised, on the other hand, is usually relatively minimal.
Mortgage – A mortgage is a sort of loan in which a bank extends a loan to help you buy a house. The house is legally owned by the bank until the borrowers have paid off their mortgage payments over a 20-40 year period.
Conclusion
The central bank’s functions are extremely important in a country’s economy. The proper execution of these functions by the central bank determines the soundness of a country’s monetary and banking system in major part.
