When preparing for a competitive exam, it is crucial to understand the various roles of banking, particularly if you are preparing for a position in the banking industry. The following are the five main functions of banks.
1. Deposit Acceptance Feature
The first and most important function of a bank is to accept deposits from individuals and organizations. Banks provide a variety of accounts to suit customers' needs, such as checking accounts, savings accounts, and time deposit accounts. The checking account allows customers to deposit and withdraw money as needed, while the savings account encourages customers to save money and earn interest on their balance. Time deposit accounts offer a higher interest rate but require money to be deposited for a fixed period.
2. Borrow Function
Another vital function of a bank is to provide loans to individuals and businesses. Banks lend money from the funds they collect from customers' deposits. They make money by charging interest on loans. Banks provide various types of loans such as personal loans, home loans, car loans and education loans. In addition, they also provide business loans for businesses and ventures.
3. Credit Creation Function
Creating credit is a unique and essential function of banks. Banks create credit by making more loans than they have cash. They can do this because when they make a loan, the money is deposited back into the bank, thus increasing bank deposits and allowing the bank to lend even more. This system is known as a money multiplier and is the way banks contribute to a country's economic growth.
4. Payment Agent Role
Banks also act as payment agents on behalf of their customers. They facilitate various transactions such as money transfers, bill payments, check and credit card payments. Banks also provide facilities like money orders and money orders for the secure transfer of funds. In addition, they also process direct payments such as salaries and pensions on behalf of companies and governments.
5. Investment Function
Finally, banks play a crucial role in mobilizing and channeling savings into productive investments. They invest the funds deposited by customers in various financial assets such as government bonds, stocks and bonds. In addition, banks also provide investment advisory services to help clients make informed investment decisions.
In short, banks play a vital role in a country's economy. Not only do they help mobilize savings and channel them into productive investments, but they also provide a range of services to facilitate financial transactions. Understanding these functions of banking is crucial for any aspiring banker.
