Functions of Banks in India

Banks in India perform various functions, which can be broadly categorized into primary and secondary functions.

Primary Functions of Banks

The primary functions of banks in India include:

1. Accepting Deposits: Banks accept deposits from the public in various forms, such as savings accounts, current accounts, and fixed deposits. These deposits serve as a source of funds for the bank, which it can then lend out to borrowers.

2. Lending Loans and Advances: Banks lend money to individuals, businesses, and other entities in the form of loans and advances. This is the primary way in which banks generate income.

Secondary Functions of Banks

In addition to their primary functions, banks in India also perform a number of secondary functions, including:

1. Transfer of Funds: Banks facilitate the transfer of funds between individuals and businesses, both domestically and internationally.

2. Issue of Notes/Drafts: Banks issue notes and drafts, which can be used to make payments.

3. Credit Deposits: Banks credit deposits into the accounts of their customers.

4. Foreign Exchange Services: Banks provide foreign exchange services, such as currency exchange and remittances.

These are just some of the many functions that banks in India perform. By understanding these functions, you can gain a better understanding of how banks work and how they can help you manage your finances.

Banking Functions

1. Accepting Deposits

• Banks accept deposits from customers, who can withdraw their funds at any time.
• Customers can deposit money in various types of bank accounts, such as savings accounts, current accounts, or fixed deposit accounts.
• Savings banks pay interest to customers on their deposits and are popular with small savers.
• Current accounts are running accounts that can be operated multiple times during a working day.
• Fixed deposit accounts hold deposits for a fixed period and offer higher interest rates.

2. Lending Loans & Advances

• Banks lend funds to individuals and businesses at a certain interest rate.
• Loans are primarily provided to agriculturists, industrialists, and businessmen for investment and economic development.

3. Issuance of Notes and Drafts

• Banks issue notes and create other inexpensive modes of exchange, such as drafts and checks.
• In India, the Reserve Bank of India (RBI) is responsible for issuing notes and coins.
• Banks create and enable the transfer of credit instruments like bank notes, bank drafts, letters of credit, and checks.
• These instruments reduce the need for metallic money and facilitate convenient and cost-effective fund transfers.

4. Credit Deposits

• Banks can create deposits by providing loans to customers.
• Borrowers are credited with a withdrawable deposit amount when needed.
• Customers often deposit borrowed funds back into the same bank, either due to bank requirements or to benefit from current deposit account features.
• These deposits are known as Credit Deposits.

Other Functions of Banks Include:

1. Collecting checks drawn on other banks
2. Accepting and collecting bills of exchange
3. Dealing in foreign exchange to assist in settling overseas debts
4. Providing safe deposit facilities
5. Acting as stock exchange trustees
6. Assisting the RBI in maintaining the safety and condition of banknotes

Indian Banking Structure

The Indian Banking Structure can be broadly categorized into two types:

• Scheduled Banks:

  • Defined in the Reserve Bank of India Act as banks listed in the 2nd schedule of the RBI Act of 1934.
  • Includes all RRBs, Indian and foreign commercial banks, and cooperative banks.
  • Must have a minimum paid-up capital and reserves of up to INR 25 lakh.

• Non-Scheduled Banks:

  • Do not follow the 2nd schedule of the RBI Act of 1934 and are not bound by RBI guidelines.
  • Required to maintain a Cash Reserve Ratio (CRR) by themselves, not with the RBI.
  • Have a paid-up capital of less than INR 5 lakhs.

Types of Banks in India

Private Sector Banks:

• Emerged after liberalization in the 1990s.
• Examples: ICICI, HDFC.
• Currently, 22 private-sector banks operate in India.

Foreign Banks:

• Must adhere to guidelines of both home and host countries.
• More effective in countries with high taxes and easy market entry for international firms.
• 46 foreign banks currently operate in India.

Regional Rural Banks (RRBs):

• Established in 1975 based on recommendations of “The Narasimham Committee” under the RRB Act 1976.
• Regulated and supervised by NABARD (National Bank for Agriculture and Rural Development).
• Owned by Central Government (50%), State Government (15%), and Sponsor Banks (35%).
• 56 RRBs currently operate in India.

Cooperative Banks:

• Important forms of business conducted through mutual understanding.
• Play a crucial role in rural economy development.
• Rural cooperative credit sector’s share of credit disbursed has declined from over 50% to less than 20% in recent years.

What is a Bank?

Banks are financial institutions authorized to receive deposits and provide credit. Other functions of banks may include financial services like wealth management, safe deposit boxes, and currency exchanges.

There are several types of banks that are designated to perform all of the above-mentioned functions. The most common types of banks are retail banks, corporate banks, and investment banks.

Banking System in India

In most countries, banks are regulated by the national government or a central bank. In India, the Reserve Bank of India (RBI) regulates all banks and financial institutions.

Specialized Banks

Apart from the traditional types of banks, there are specialized banks that cater to specific customer needs. These banks include:

1. SIDBI (Small Industries Development Bank of India)

SIDBI provides loans to small-scale industries and businesses. It assists entrepreneurs in financing their businesses with modern technology and equipment.

2. EXIM Bank - Export Import Bank of India

EXIM Bank finances the export and import of goods by foreign countries. It operates under the Export-Import Bank of India Act of 1981 and serves as a provider of export credit, similar to global Export Credit Agencies.

3. NABARD (National Bank for Agriculture and Rural Development)

NABARD provides financial assistance for rural, village, and agricultural development, including handicrafts. It acts as the apex regulatory body for regional rural banks (RRBs) and cooperative banks in India. NABARD falls under the jurisdiction of the Ministry of Finance.

4. Small Finance Banks

Small finance banks play a crucial role in supporting micro-industries, marginal farmers, and small artisans. They offer loans and financial assistance to individuals in the unorganized sector of society.

These banks are regulated by the RBI. Some operational small finance banks in India include AU Small Finance Bank, Suryoday Small Finance Bank, Capital Small Finance Bank, Northeast Small Finance Bank, and Jana Small Finance Bank.

5. Payments Banks

Payments banks are a recent innovation introduced by the RBI. These banks allow deposits of up to INR 1 lakh but do not provide credit cards or loans to customers.