Functions of Commercial Banks, RRBs, and Payment Banks

Banks are the sole entities that record the finances and savings done by people. In the scenario of economic construction, the banks curate policies that safeguard a country’s finances. In addition, banks also provide various saving options, loans, and credits.

A bank handles accepting deposits, discounting bills of exchange, and other functions. In India, the head of all the banks is the Reserve Bank of India (RBI). The RBI operates all the policies regarding the types of banks and has the authority to change them accordingly.

There are various types of banks available at different levels. These are commercial banks, Regional Rural Banks, and payment banks. The functions, as well as operations of these banks, differ. However, all of them are bound by the policies and guidelines framed by the RBI.

In the sections below, you will learn the functions of commercial banks, RRBs, and payment banks. Furthermore, there will be an elaboration on the functions and operations of these types of banks.

Commercial banks – meaning and functions

Commercial banks are the banks that undertake the economic activities of the people. These banks serve individuals, small businesses, and various enterprises. The role of commercial banks is essential in curating capital and liquidity in the market. Liquidity, in this context, refers to the cash provided by the banks in lieu of the assets given.

Commercial banks create liquidity by lending out funds at credits to different customers after accepting deposits from another set of customers. In this way, the commercial banks create credit, which is returned at a specific rate of interest. This increases production, consumer expenditure, and employment. These are the main factors that boost the economic growth of the country.

There are various functions performed by the commercial banks that are generally public specific. Commercial banks are also liable to provide services to the central bank in India.

The various functions of commercial banks are:

• The primary function of commercial banks is accepting deposits. Commercial banks accept two kinds of deposits from the people: current and fixed deposits 
• Commercial banks offer loans at a specific interest rate. The interest paid becomes one of the main sources of income for the banks
• Commercial banks perform the function of discounting bills of exchange. According to this function, the banks provide loans to the business and, in return, discount their bills
• Commercial banks perform the function of investment of funds. According to this function, the banks invest their funds in government securities and other registered securities 
• Commercial banks perform various agency functions. These functions include collecting cheques, paying insurance premiums, selling and purchasing securities, and collecting drafts 

Commercial banks operate by providing various bank facilities to the public. Commercial banks also perform tasks for the central bank, such as paying cheques, purchasing securities, and collecting interests.

Regional rural banks – meaning and functions

Regional rural banks (RRBs) are commercial banks operated by the government. These banks only operate at the regional level of all states in India. These banks are under the continuous authority of the Ministry of Finance. Initially, these banks were established to serve the needs of rural finances. However today, the RRBs have their branches in urban areas too.

The Government of India defines the functional areas for the RRBs, and the maximum area for RRBs to operate is two districts in a state. These banks are the result of the RRB Act of 1976. According to this passed Act, the RRBs were the prominent entities to provide financial assistance to the rural areas of the states in India.

Apart from being a financial aid to the regions in India, there are various other functions performed by the RRBs. These are as follows:

• RRBs are entitled to provide credit facilities to the rural sectors for agriculture, infrastructure, and provision of basic amenities
• RRBs are entrusted to look after the financial success of governmental schemes like MGNREGA, Pradhan Mantri Awas Yojana, and others
• RRBs provide loans to marginal farmers, artisans, MSMEs, and local traders
• RRBs are entitled with the task of distributing pensions and wages, marked under various schemes of the government for rural India
• The function of RRBs also includes performing secondary tasks like agency facilities, money wire transfers, and bill payments

RRBs operate as the sole entities to look after rural upgradation through provisions of credits and other financial facilities.

Payment banks – meaning and functions

Payment banks are a recent addition to the banking model in India. These banks are generally operated at a very small and restricted level. The RBI had devised this model of banking in 2013. These banks are only meant for the purpose of accepting deposits up to INR 2,00,000 from a single customer. In addition to this, payment banks cannot provide credit to customers.

Payment banks are also not legally liable to issue loans or credit cards. However, these banks can issue ATM cards and debit cards and provide various mobile banking facilities. For a payment bank to be established, there should be a predetermined network, which means the bank must have its resources already planned for the services that it is going to provide.

Payment banks are essentially restricted in their tasks. However, there are some essential functions performed by payment banks. These are:

• Payment banks operate bank facilities digitally. They provide a networked platform for accessing digital facilities, such as UPIs, mobile banking, net banking, etc
• Payment banks function with all banking facilities, except issuing credit cards and loans to the customers
• Payment banks provide the facility for issuing debit cards and ATM cards
• Payment banks accept deposits no more than INR 2,00,000 from a single customer

Payment banks operate beyond a particular state, district, or region. However, the facilities provided are limited and more digitised.

Conclusion

The above information discusses the banking facilities and operations available in India. There are complete discussions on the functions and meanings of commercial banks, RRBs, and payment banks.