Banking_document.pdf

32
Nature and Scope of Banking

32.1 Introduction
You have studied in lessons 7 and 10 that banking is an important aid
to industry and trade, and that it also provides a variety of services
to the public in general. Indeed banking may be regarded as an
indispensable part of the economy of every country. The significance
of banking has increased all over the world with the rise in income
levels and growth in the volume of financial transactions.
In this lesson, we shall study about the nature and socpe of banking
and its activities.

32.2 Objectives
After studying this lesson, you will be able to —
l

describe the terms bank and banking;

l

distinguish between banks and money lenders;

l

classify the various types of banks;

l

explain the nature and scope of banking activities;

l

enumerate the advantages of commercial banks;

l

describe how suspension of banking activities will affect trade,
commerce and industry.

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32.3 Meaning of the terms Bank and Banking
Bank is an institution which deals in money and credit. It accepts
deposits from the public and grants loans and advances to those who
are in need of funds for various purposes.
Banking is an activity which involves acceptance of deposits for the
purpose of lending or investing. In addition to accepting deposits and
lending funds, banking also involves providing various other services
alongwith its main banking activity. These are mainly agency services,
but include several general services as well.
A banker is one who undertakes banking activities, accepting deposits
and lending money for different purposes. The Banking Regulation
Act, 1949 defines banking as an activity of accepting funds from the
public for the purpose of lending or investment.
The essential features of banking activities are as follows:i
)

accepting deposits from public;

ii)

lending or investment of such deposits;

iii)

incidental to the activities of accepting deposits for lending or
investing, banks undertake activities like —
a)

Promoting and mobilizing savings of the public;

b)

Providing funds to trade and industry by way of discounting
bills, overdraft, cash credit facility, and transfer of funds
from one place to another;

c)

Providing agency services to customers, such as collection
of bills, payment of insurance premium, purchase and sale
of securities, etc., and other general services, such as issue
of travellers’ cheques, credit cards, locker facility, etc;
Money deposited with the bank is assured as far as its
safety is concerned. Further the depositor is allowed to
withdraw it whenever required. Banks allow interest on
deposits. Such interest helps in the growth of funds
deposited with the bank. Thus the rate of interest provided
on deposits acts as an incentive to the depositors.

Nature and Scope of Banking :: 3

Intext Questions 32.1
Write “T” against the statements which are true and “F” against those
which are false.
i
)

Banks do not deal with public funds.

ii)

Banks accept deposits only from businessmen.

iii)

Banking is an activity concerned with accepting deposits

iv)

Banking Regulation Act 1949 has defined banking in terms of its
main activities.

v)

Banks promote the saving habit of people.

vi)

A Bank cannot purchase or sell securities for its own customers.

vii)

Banks do not allow interest on deposits.

viii)

Only the depositors of money are granted loan by the bank.

32.4 Distinction between Banks and Money Lenders
In order to distinguish between banks and money lenders, it is necessary
to known who is a money lender. A money lender is an individual who
lends money to meet the cash requirements of people. He may or may
not be a professional money lender.
A professional money lender is one who is exclusively engaged in
money lending activity. He may occasionally accept deposits and provide
agency services to his customers. A non–professional money lender, on
the other hand, is either a merchant, or a trader, or a member of the
business community, whose main activity is not money lending. Such
money lenders engage in money lending as a side activity.
A money lender normally meets the cash requirements of the public.
He gives loans for consumption purposes such as marriages and other
social functions. The rate of interest charged by him is generally very
high. He may give loans against the security of jewellery, household
items, property and assets as well as against personal security. Practices
adopted by money lenders are known to be manipulative in nature. For

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instance, they do not furnish receipt of payments made, manipulate
books of accounts, and realise more money than the original loan. The
money lending practices of money lenders are considered to be
exploitative and socially undesirable.
Distinction between bank and money lender
S.No. Basis

Bank

Money lender

1. Entity

Banks are organised
institutions

Money lenders are
generally individuals.

2. Nature

Banks are professional
organisations

Money lenders may or
may not be professionals.

3. Activity

Banking activities
include acceptance
of deposits for lending.

Activities of money
lenders may not include
acceptance of deposits.

4. Clients

Banks meet the needs
of people in general
and the business
community in particular.

Money lenders meet
the cash requirement
of agriculturists and
the poorer people.

5. Security

Banks accept tangible
and personal security
against loans.

Money lenders generally
do not give loan against
personal security.

6. Process of
recovery of
loans.

The process of
recovery is
flexible.

The process of
recovery is
rigid and strict.

7. Purpose of
loan

Normally banks
grant loans for
productive purposes.

Money lenders give
loans for non-productive
purposes

8. Interest Rate

Interest charged by
banks on loan is
12 to 18% p.a.

Rate of Interest
charged by money
lenders is very high.

Nature and Scope of Banking :: 5

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(2)

Commercial Banks

(3)

Industrial Banks

(4)

Foreign Exchange Banks

(5)

Development Banks

(6)

Regional Rural Banks

(7)

Co-operative Banks

Reserve Bank of India (Central Bank)
In every country, the bank which is entrusted with the responsibility of
guiding and regulating the banking system is known as the Central
Bank.
In India the central banking authority is the Reserve Bank of India.
The Reserve Bank does not deal directly with the members of public.
It acts as bankers’ bank maintaining deposit accounts of all other banks
and advances money to banks whenever needed. It regulates the volume
of currency and credit, and has powers of control and supervision over
all banking institutions.
The Reserve Bank also acts as goverment banker and maintains the
record of goverment receipts, payments and borrowings under various
heads. It advises the government on monetary and credit policy, besides
deciding on the rate of interest on bank deposits and bank loans. It is
the custodian of currency reserves consisting of foreign exchange, gold
and other securities. Another important function of the Reserve Bank
is the issue of currency notes and regulation of the money supply.
Commercial banks
Commercial banks are banking institutions which accept deposits from
the public and grant short-term loans and advances to their customers.
In India, there are nationalised (public sector) commercial banks as
well as private sector banks which are corporate organisations. The
largest commercial bank is the State Bank of India which was established
in 1955 under a special Act. The main source of income of commercial
banks is the difference between the interest they charge on loans and

Nature and Scope of Banking :: 7

the interest they allow on deposits. Commercial banks generally grant
short-term loans repayable within one year. But they also meet the
medium-term and long-term requirements of business enterprises. Besides
accepting deposits and lending money, commercial banks provide other
services such as issue of bank drafts, traveller’s cheques and letters of
credit, collection of bills, dividends and interest safe keeping of
valuables, transfer of money from one place to another, payment of
insurnace premium etc.
All these functions are discussed in the next lesson under the head
“Functions of Banks”.
Industrial Banks
Industrial Banks are corporate organisations which specialise in providing
industrial capital by subscribing to the share and debenture issues of
public companies. Industrial banks normally meet the long term
requirements of funds for purchase of land, plant and machinery, and
financing of expansion and diversification activities of industrial
companies. These banks generally secure representation on the board
of directors, and provide technical guidance in the management of
industrial companies.
Foreign Exchange Banks
Business firms engaged in foreign trade receive and make payment
through foreign currency. In order to facilitate such transactions and
also help exporters and importers, there are banking institutions which
primarily engage in transactions involving foreign exchange. These are
known as Foreign Exchange Banks. In India, Export and Import Bank
of India (EXIM Bank) has been set up by the Government to help
export and import trade and other related activities. Such activities are
also undertaken by the foreign exchange division of commercial banks.
Exchange banks which are foreign in origin have their head offices
located outside India. Besides financing foreign trade, the exchange
banks also render services incidental to their main function, such as
acting as referees, collecting and supplying information about the foreign
customers, providing remittance facilities. They engage in other kinds
of banking business as well, like acceptance of deposits, grant of loans
and advances, etc.

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However, financing foreign trade remains their field of specialisation.
Licensing of these banks is required under the Banking Regulation Act
1949. Their operations are subject to general control of the Reserve
Bank of India. Regarding their foreign exchange transactions, these
banks are governed by the Exchange Control Regulations.
Development Banks
Development banks are special financial institutions which provide longterm capital to industry. Rapid development of industries in India after
independence requiring huge financial investment and promotional efforts
led to the establishment of these instutions. Development banks assist
the promotion, expansion and modernisation of industries, Besides
providing long-term finance, these banks also subscribe to the capital
issues of industrial undertakings, if the public subscription falls short
of the total issue. Thus they act as underwriters as well. Moreover,
these banks provide technical advice and assitance, if needed.
Development banks which have been established and functioning in
India are:
Industrial Finance Corporation of India (I.F.C.I)
State Finance Corporation (S.F.Cs.)
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Development Bank of India (I.D.B.I.)
Industrial Reconstruction Bank of India (I.R.B.I.)
Industrial Development Bank of India acts as an apex oganisation to
co-ordinate and assist in long term industrial finance by other
institutions.
Regional Rural Banks
Commercial and industrial banks cater to the financial needs of trade
and industry. In rural areas, there are small farmers, farm labourers,
artisans and small entrepreneurs, who need financial assistance. To
meet their financial needs, a separate category of banks known as
Regional Rural Banks have been set up in India. These banks are financed

Nature and Scope of Banking :: 9

by nationalised banks. The central goverment specifies the local limits
within which regional rural banks shall operate. The banks are allowed
to establish their own branches or agencies within the specified area.
They grant loans at lower rates of interest than the rates charged by
other banks. These banks are rural based, rural oriented and organised
like commercial banks. The purpose of these banks is to finance
agricultural operations and provide employment to rural educated youth
who possess the requisite orientations.
Regional Rural Banks have been conceived to combine the strong
points of both the co-operative and commercial banks eliminating
the weaknesses of both. The Regional Rural Banks have been
included in the second schedule of the Reserve Bank of India Act
and, therefore, they enjoy the same privileges and facilities as the
scheduled banks, including access to the Reserve Bank for financial
accommodation.
Co-operative Banks/Society
Co-operative Banks in India are established under the provisions of the
Co-operative Societies Act 1912. These are organised on co-operative
basis. It was with a view to provide adequate credit at economical rates
of interest to the farmers, that co-operative credit societies were first,
organised in villages for providing financial help to agriculturist and
rural artisans.
Co-operatives banks are organised both at primary and district level.
Co-operative Credit Societies (banks) at the primary level/local level
are members of central co-operative banks at the district level.
Similarly, at the state level, there are state co-operative bank, which
finance, co-ordinate and control the central co-operative banks in
each state. Thus the structure of co-operative banks in India is
pyramidal in nature.
A co-operative credit society (bank) at the primary level can be formed
by the local people having common interest and common purposes.
The co-operative banks generally grant loans for productive purposes
but they can also do so for other purposes. The rate of interest charged
is very moderate. The mode of recovery of loan is not very rigid.

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Unorganised Banking Sector
The unorganised sector of banking in India consists of money lenders
and indigenous bankers known as shroffs, sahukars, mahajans, chettis,
etc. These are individuals doing banking business, along with trading
and commission business in many cases. Their activities are not
organised. They follow rules of their own. But they are trusted people
in their own locality. The people of the area deposit their savings with
them. They lend money to people who need it for purchasing fertilisers,
seeds, agricultural equipments or even for social obligations. Loans
are given on the security of jewellery and other valuable assets. The
rate of interest charged by them is very high. Besides, money lenders
manipulate the book of accounts. They realize more money than what
they had lent. In most of the cases the poor borrowers are unable to
repay the loans and lose their valuables kept as security. Inspite of
these, people borrow money from sahukars or money lenders as they
are easily approachable. However, their significance is gradually
declining due to the spread of modern banking institutions.

Intext Questions 32.3
A.

Write “T” against the statements which are true and “F” against
those which are falsea)

Banks are meant for industrial development only.

b)

Banks are located only in urban areas.

c)

Banks can be established only by the Govt. of India.

d)

Reserve Bank of India is the central bank of India.

e)

Exchange banks do not accept deposits from customers.

f
)

State co-operative banks control the central co-operative
banks.

g)

Reserve Bank of India is a bankers’ bank.

h)

Industrial banks subscribe to shares issued by public
companies.

Nature and Scope of Banking :: 11

B.

i
)

Reserve bank of India cannot issue new currency notes in
India.

j
)

Generally commercial banks grant long-term loans only.

Write full form of the followings
I.F.C.I., I.C.I.C.I., I.D.B.I., I.R.B.I.

32.6 Nature and Scope of Banking Activities
Banking activities are considered to be the life blood of the national
economy. Without banking services, trading and business activities
cannot be carried on smoothly. Banks are the distributors and protectors
of liquid capital which is of vital significance to a developing country.
Efficient administration of the banking system helps in the economic
growth of the nation. Banking is useful to trade and commerce.
Banking activities are useful to trade and industry in the following
ways.
a)

Money deposited in a bank remains safe. Precious articles too
can be kept in the safe custody of banks in lockers.

b)

Banks provide credit facilities to their customers. Customers with
bank accounts also enjoy better credit in the business world.

c)

Banks encourage the habit of saving and thrift among people.
They mobilise savings and invest them in productive activities.
Thus, they help in increasing the rate of savings and investment
in the country.

d)

Banks provide a convenient and safe means of transferring money
from one place to another and facilitate business dealings/
transactions.

e)

Banks collect and realise bills, cheques, interest and dividend
warrants etc. on behalf of their customers.

f
)

Foreign trade is facilitated considerably with the help of banks

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which receive and make payments, provide credit and deal in
foreign exchange. They protect importers from the risk of loss
on account of exchange rate fluctuations. They issue letter of
credit and provide information on the credit worthiness of
importers. They also act as referees of their customers.
g)

Banks meet the financial needs of small-scale business units
which are located in economically backward areas.

h)

Farmers and artisans in rural areas can also avail of bank credit
for financing their activities.

i
)

Commercial banks provide many other services to the general
public which include locker facility, issue of traveller’s cheques
and gift cheques, payment of insurance premium, etc.

Service activities of banks
Service activities of banks may be categorised as follows:
i
)

Agency services

ii)

General services

Agency services
Banks undertake/various agency services for their customers. These are
outlined below.
a)

Collection of cheques, drafts, and bills of exchange on behalf of
customers.

b)

Collection of dividend and interest warrants of customers.

c)

Collection of pension of government employees.

d)

Purchase and sale of securities on the instructions of customers.

e)

Executing standing orders for payment of rent, electricity bill,
insurance premium etc.

f
)

Acting as correspondent or representative of customers in dealing
with other banks.

g)

Acting as trustee or executor when so nominated.

Nature and Scope of Banking :: 13

General Services
A commercial bank also performs the following services of general
utility to the public:
a)

Issue of letters of credit, traveller’s cheques and circular notes.

b)

Safe custody of valuables like gold, jewellery and important
documents in safe deposit vaults (lockers) available on hire.

c)

Supply of trade information.

d)

Acting as a referee as regards financial status of customers.

e)

Acceptance of bills of exchange on behalf of customers.

f
)

Underwriting loans floated by government and public bodies.

Intext Questions 32.4
A.

Write “T” against the statements which are true and “F” against
those which are false a)

Banking activities may be regarded as the life blood of
the national economy.

b)

Banking activities are useful only to trade and commerce.

c)

Money deposited in a bank cannot be withdrawn then and
there.

d)

Banks encourage the habit of saving and thrift among
people.

e)

Banks collect and realise bills, cheques etc. on behalf of
their customers.

f
)

Foreign trade cannot be carried on smoothly without the
help of banks.

g)

Money can be easily transferred from one place to another
with the help of a bank.

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B.

Fill in the blanks with suitable words
a)

Banks collect cheques, drafts and bills on ___________
of customers.

b)

Banks purchase and sell securities on the _________ of
customers.

c)

Banks provide locker facility to customers on __________.

d)

Banks help in increasing the rate of
________ in the country.

_________ and

32.7 Advantages of Commercial Banks
In view of their functions and services, commercial banks play a crucial
role in the development of business activities. Business activities cannot
run smoothly without banking services. Following are the advantages
of commercial banks in a modern soceity.
(1)

Money deposited in commercial banks can be withdrawn on
demand by cheque. Payments can also be made by cheque. Thus,
business firms are not required to maintain large cash balances
with them. They are also not required to make large payments
in cash. Moreover, payment by cheque provide documentary proof
of the transaction.

(2)

Financial assistance is provided by commercial banks by way of
cash credit, overdraft, loans and advances on discounting of bills
of exchange. Availability of short-term funds help business
enterprises to overcome the problem of liquidity due to the time
lag between current expenses and realisation of sale proceeds.

(3)

Various agency services provided by commercial banks are prompt
and reliable. For all these services banks charge only a nominal
fee or commission. Trade and industries get the benefit of these
services available at a reasonable charge.

(4)

Banks offer attractive rates of interest for savings by the public
which help to mobilize funds for lending and investment. Banks
encourage the habit of thrift among people, and attract deposits,

Nature and Scope of Banking :: 15

whereby scattered household savings of the people are pooled and
made available for productive purposes.
(5)

Many general utility services are available to the public through
banks, such as acting as referee, accepting bills of exchange,
providing locker facility, etc. These are of great advantage in
meeting recurrent as well as occasional needs of business firms
and individuals.

(6)

Foreign trade cannot be carried on smoothly without banking
services. Banks receive and make payments, provide credit and
deal in foreign exchange. Most commercial banks currently have
separate foreign exchange divisions.

Intext Questions

32.5

Write “T” against the statements which are True and “F” against those
which are false a)

Commercial Banks play a crucial role in financing business
activities.

b)

Banking helps business to be run without large cash balances.

c)

Those engaged in import and export trade cannot operate smoothly
without banking services.

d)

Banks cannot do much to increase savings by people.

e)

Bank collect and realise bills, interest warrants, etc. and charge
heavily for the service.

f
)

Payment by cheque does not provide documentary proof of the
transaction.

g)

Banks offer attractive rates of interest for savings.

h)

Banks ensure the liquidity of business without involving cash
transactions.

i
)

Cheque system has reduced the volume of currency in circulation.

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Effect of suspension of banking activities on Trade
Commerce and Industry
As a result of economic growth, increase in money supply, growth of
banking habits, and control and guidance by Reserve Bank of India,
the Indian banking system has achieved a record progress over the
years. Banking activities in our economy have become so imperative
and important for the trading community and even for the general
public, that even a temporary halt in banking activities may vitally
affect trade, commerce and industry. This position can be explained
briefly as follows.
(i)

In the event of suspension of banking activities, people would
neither be able to deposit their savings in banks, nor be able to
withdraw money from banks. Savings are then likely to decline
with a corresponding increase in consumption expenditure.

(ii)

Non-availability of bank loans and credit facilities will adversely
affect industrial production. The volume of trade will shrink.
Limited cash in hand and inadequate currency in circulation may
not permit cash transactions in buying and selling of all goods.
With reduced production and rising consumption expenditure
prices would tend to rise. Traders may exploit the situation by
hoarding and blackmarketing of essential goods.

(iii)

Farmers and small business units will suffer badly if banking
operations are suspended. They will be forced to go to money
lenders to borrow money at high rates of interest when bank
finance is not available.

(iv)

Foreign trade will be badly affected in the absence of facilities
regarding issue of letter of credit and foreign exchange
transactions.

(v)

Business firms as well as the public will have to depend on
postal services and private agencies for remittance of money and
on other agencies for collection of bills, interest and dividend
warrants. Heavy expenses will have to be incurred for the
services.

Nature and Scope of Banking :: 17

(vi)

People will have to go to courts of law for recovery of their
jewellery and other valuable articles from bank lockers.

We cannot think of any day without the use of banking services such
is the importance of banking in our daily life.

Intext Questions 32.6
Write “T” against the statements which are true and “F” against those
which are false.
i
)

Banking activities in our economy are very important for the
trading community and general public.

ii)

The suspension of banking activities may lead to severe adverse
effects on trade, commerce and industry.

iii)

In the event of suspension of bank activities, people will deposit
their savings with traders.

iv)

If there is suspension of bank services people will be allowed to
withdraw money from banks.

v)

With the suspension of bank activities, collecting of cheques and
payment by cheque would not be possible.

vi)

Discounting of trade bills may be easily possible even without
banks.

vii)

Even with suspension of bank activities, all business transactions
may be undertaken easily with available cash.

viii)

Traders can easily finance each other in case bank finance is not
available.

ix)

Absence of banking services will not affect the general public at
all.

x)

In the absence of banking activities we cannot use locker facility.

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32.8 What You Have Learnt
A bank is an institution which accepts deposits from the public and
grants loans and advances. Banking is an activity which involves
acceptance of deposits for the purpose of lending or investing. A banker
is one who undertakes banking activities.
The essential features of banking activities are : accepting deposits,
lending money, mobilising savings, financing trade and industry, and
undertaking several agency services as well as general utility services.
Banks are organised institutions whereas money lenders are mostly
individuals, who may or may not accept deposits and engage in trade
or other activities besides money lending.
Banking intsitutions in India may be divided into the following types:
Reserve Bank of India (Central Bank), Commercial Banks, Industrial
Banks, Exchange Banks, Development Bank, Regional Rural Banks
and Co-operative banks. The various types of banks have distinct
functions although some of the functions are common to all.
Banking activities may be regarded as the life blood of an economy.
These activities are extremely useful to trade, industry and business as
well as to the general public. Service activities of banks include agency
services and general utility services. There are several advantages of
commercial banks in a modern society. Supension of banking activities
may have adverse effects not only on industry, trade and commerce,
but also on farmers and small business units in rural areas. Savings by
the public may decline. Productive activities may suffer.

32.9 Terminal Exercise
1.

Define the terms Bank and Banking.

2.

Explain the different types of banks.

3.

Differentiate between banks and money lenders.

4.

What do you mean by industrial bank ?

5.

State briefly the function of foreign exchange banks.

Nature and Scope of Banking :: 19

6.

Define commercial banks..

7.

What type of services do banks provide as agent of their
customers?

8.

Explain the utility of banking services to business.

9.

Describe the services of a commercial bank to the business
community.

10.

How do banks help foreign trade?

11.

Explain the role of banking in modern soceity.

12.

Describe the possible effects of suspension of banking activities.

13.

Do banks provide services other than accepting deposits and
lending money? Discuss

14.

Write brief notes on :
(a)

Reserve Bank of India

(b)

Co-operative Banks

(c)

Development Banks

Answers to Intext Questions
32.1 True iii) iv) v)
False i) ii) vi) vii) viii)
32.2 A.

B.

i
)

institutions

iii)

organised,

ii)

tangible

iv)

lower

True iii) iv) vi)
False i) ii) v) vii)

32.3 A.

True d) f) g) h)
False a) b) c) e) i) j)

B.

Industrial Finance Corporation of India

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Industrial Credit and Investment Corporation of India
Industrial Development Bank of India.
Industrial Reconstruction Bank of India
32.4 A.

True a) d) e) f) g)
False b) c)

B.

a) behalf

b) instructions

c) hire

d) saving, investment

32.5 True a) b) c) g) h) i)
False d) e) f)
32.6 True i) ii) v) x)
False iii) iv) vi) vii) viii) ix)

33
Functions of Commercial Banks

33.1 Introduction
You have studied in the earlier lesson about different types of banks
and their nature. It may be of interest to you now to know about the
various services/functions performed by commercial banks. In this lesson,
you will study about the various services provided by commercial banks
to the business community in particular and the public in general.

33.2 Objectives
After studying this lesson, you will be able to l

describe the various functions of commercial banks;

l

differentiate between primary and secondary functions of
commercial banks;

l

classify and discuss the primary functions of modern commercial
banks;

l

enumerate the various modes of acceptance of deposits;

l

identify various methods of granting loans;

l

describe agency and general utility services of modern commercial
banks.

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33.3 Functions of Commercial Banks
The functions of a commercial banks are divided into two categories:
i)

Primary functions, and

ii)

Secondary functions including agency functions.

i)

Primary functions:

The primary functions of a commercial bank include:
a)

accepting deposits; and

b)

granting loans and advances;
a)

Accepting deposits

The most important activity of a commercial bank is to mobilise
deposits from the public. People who have surplus income and
savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with
bank also earn interest. Thus, deposits with the bank grow along
with the interest earned. If the rate of interest is higher, public
are motivated to deposit more funds with the bank. There is also
safety of funds deposited with the bank.
b)

Grant of loans and advances

The second important function of a commercial bank is to grant
loans and advances. Such loans and advances are given to
members of the public and to the business community at a higher
rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits
and the rate charged on the Loans is the main source of a bank’s
income.
i)

Loans
A loan is granted for a specific time period. Generally,
commercial banks grant short-term loans. But term loans,

Functions of Commercial Banks :: 23

that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lumpsum
or in instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in
lumpsum or in instalments.
ii)

Advances

An advance is a credit facility provided by the bank to its
customers. It differs from loan in the sense that loans may
be granted for longer period, but advances are normally
granted for a short period of time. Further the purpose of
granting advances is to meet the day to day requirements
of business. The rate of interest charged on advances varies
from bank to bank. Interest is charged only on the amount
withdrawn and not on the sanctioned amount.
Modes of short-term financial assistance
Banks grant short-term financial assistance by way of cash credit,
overdraft and bill discounting.
a)

Cash Credit
Cash credit is an arrangement whereby the bank allows the
borrower to draw amounts upto a specified limit. The amount is
credited to the account of the customer. The customer can
withdraw this amount as and when he requires. Interest is charged
on the amount actually withdrawn. Cash Credit is granted as per
agreed terms and conditions with the customers.

b)

Overdraft
Overdraft is also a credit facility granted by bank. A customer
who has a current account with the bank is allowed to withdraw
more than the amount of credit balance in his account. It is a
temporary arrangement. Overdraft facility with a specified limit
is allowed either on the security of assets, or on personal security,
or both.

24 :: Business Studies

c)

Discounting of Bills
Banks provide short-term finance by discounting bills, that is,
making payment of the amount before the due date of the bills
after deducting a certain rate of discount. The party gets the
funds without waiting for the date of maturity of the bills. In
case any bill is dishonoured on the due date, the bank can recover
the amount from the customer.

ii)

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.

33.4 Difference between Primary and Secondary
Functions of Commercial Banks
Primary Functions

Secondary Functions

1.

These are the main activities 1. These are the secondary
of the bank.
activities of the bank.

2.

These are the main sources
of income of the bank.

These are not the main sources of income of the banks.

Functions of Commercial Banks :: 25

3.

These are obligatory on the
part of bank to perform.

These are not obligatory on
the part of bank to perform.
But generally all commercial
banks perform these
activities.

Intext Questions 33.1
Write ‘T’ against the statements which are true, and ‘F’ against those
which are false.
a)

A country cannot make commercial and industrial progress
without a well organised banking system.

b)

Loans may be granted only for long period by bank.

c)

Primary activity of commercial banks includes accepting deposits
and lending money.

d)

Difference of interest allowed to public on deposits and charged
on loan is the main source of income of banks.

e)

In case of dishonour of a bill, which was discounted by a bank,
the amount cannot be recovered from the customer.

f)

A loan cannot be repaid in lumpsum by the borrower.

g)

Primary functions of banks refer to basic activities of banks.

h)

Overdraft is not a credit facility granted by bank.

i)

Loans are generally granted against the security of certain assets.

33.5 Different modes of Acceptance of Deposits
Banks receive money from the public by way of deposits. The following
types of deposits are usually received by banks:
i)

Current deposit

ii)

Saving deposit

iii)

Fixed deposit

26 :: Business Studies

iv)

Recurring deposit

v)

Miscellaneous deposits

i)

Current Deposit

Also called ‘demand deposit’, current deposit can be withdrawn by the
depositor at any time by cheques. Businessmen generally open current
accounts with banks. Current accounts do not carry any interest as the
amount deposited in these accounts is repayable on demand without
any restriction.
The Reserve bank of India prohibits payment of interest on current
accounts or on deposits upto 14 Days or less except where prior sanction
has been obtained. Banks usually charge a small amount known as
incidental charges on current deposit accounts depending on the number
of transaction.

Savings deposit/Savings Bank Accounts
Savings deposit account is meant for individuals who wish to deposit
small amounts out of their current income. It helps in safe guarding
their future and also earning interest on the savings. A saving account
can be opened with or without cheque book facility. There are
restrictions on the withdrawls from this account. Savings account holders
are also allowed to deposit cheques, drafts, dividend warrants, etc.
drawn in their favour for collection by the bank. To open a savings
account, it is necessary for the depositor to be introduced by a person
having a current or savings account with the same bank.

Fixed deposit
The term ‘Fixed deposit’ means deposit repayable after the expiry of
a specified period. Since it is repayable only after a fixed period of
time, which is to be determined at the time of opening of the account,
it is also known as time deposit. Fixed deposits are most useful for a
commercial bank. Since they are repayable only after a fixed period,
the bank may invest these funds more profitably by lending at higher
rates of interest and for relatively longer periods. The rate of interest
on fixed deposits depends upon the period of deposits. The longer the
period, the higher is the rate of interest offered. The rate of interest to

Functions of Commercial Banks :: 27

be allowed on fixed deposits is governed by rules laid down by the
Reserve Bank of India.

Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under this
type of deposit, the depositor is required to deposit a fixed amount of
money every month for a specific period of time. Each instalment may
vary from Rs.5/- to Rs.500/- or more per month and the period of
account may vary from 12 months to 10 years. After the completion of
the specified period, the customer gets back all his deposits alongwith
the cumulative interest accrued on the deposits.

Miscellaneous Deposits
Banks have introduced several deposit schemes to attract deposits from
different types of people, like Home Construction deposit scheme,
Sickness Benefit deposit scheme, Children Gift plan, Old age pension
scheme, Mini deposit scheme, etc.

33.6 Different methods of Granting Loans by Bank
The basic function of a commercial bank is to make loans and advances
out of the money which is received from the public by way of deposits.
The loans are particularly granted to businessmen and members of the
public against personal security, gold and silver and other movable and
immovable assets. Commercial bank generally lend money in the
following form:
i)

Cash credit

ii)

Loans

iii)

Bank overdraft, and

iv)

Discounting of Bills

i)

Cash Credit :

A cash credit is an arrangement whereby the bank agrees to lend money
to the borrower upto a certain limit. The bank puts this amount of
money to the credit of the borrower. The borrower draws the money

28 :: Business Studies

as and when he needs. Interest is charged only on the amount actually
drawn and not on the amount placed to the credit of borrower’s account.
Cash credit is generally granted on a bond of credit or certain other
securities. This a very popular method of lending in our country.

ii)

Loans :

A specified amount sanctioned by a bank to the customer is called a
‘loan’. It is granted for a fixed period, say six months, or a year. The
specified amount is put on the credit of the borrower’s account. He can
withdraw this amount in lump sum or can draw cheques against this
sum for any amount. Interest is charged on the full amount even if the
borrower does not utilise it. The rate of interest is lower on loans in
comparison to cash credit. A loan is generally granted against the
security of property or personal security. The loan may be repaid in
lump sum or in instalments. Every bank has its own procedure of
granting loans. Hence a bank is at liberty to grant loan depending on
its own resources.
The loan can be granted as:
a)

Demand loan, or

b)

Term loan

a)

Demand loan
Demand loan is repayable on demand. In other words it is
repayable at short notice. The entire amount of demand loan is
disbursed at one time and the borrower has to pay interest on it.
The borrower can repay the loan either in lumpsum (one time)
or as agreed with the bank. Loans are normally granted by the
bank against tangible securities including securities like N.S.C.,
Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates.

b)

Term loans
Medium and long term loans are called ‘Term loans’. Term loans
are granted for more than one year and repayment of such loans
is spread over a longer period. The repayment is generally made
in suitable instalments of fixed amount. These loans are repayable
over a period of 5 years and maximum upto 15 years.

Functions of Commercial Banks :: 29

Term loan is required for the purpose of setting up of new
business activity, renovation, modernisation, expansion/extension
of existing units, purchase of plant and machinery, vehicles, land
for setting up a factory, construction of factory building or
purchase of other immovable assets. These loans are generally
secured against the mortgage of land, plant and machinery,
building and other securities. The normal rate of interest charged
for such loans is generally quite high.

iii)

Bank Overdraft

Overdraft facility is more or less similar to cash credit facility. Overdraft
facility is the result of an agreement with the bank by which a current
account holder is allowed to withdraw a specified amount over and
above the credit balance in his/her account. It is a short term facility.
This facility is made available to current account holders who operate
their account through cheques. The customer is permitted to withdraw
the amount as and when he/she needs it and to repay it through deposits
in his account as and when it is convenient to him/her.
Overdraft facility is generally granted by bank on the basis of a written
request by the customer. Some times, banks also insist on either a
promissory note from the borrower or personal security to ensure safety
of funds. Interest is charged on actual amount withdrawn by the
customer. The interest rate on overdraft is higher than that of the rate
on loan.

iv)

Discounting of Bills

Apart from granting cash credit, loans and overdraft, banks also grant
financial assistance to customers by discounting bills of exchange. Banks
purchase the bills at face value minus interest at current rate of interest
for the period of the bill. This is known as ‘discounting of bills’. Bills
of exchange are negotiable instruments and enable the debtors to
discharge their obligations towards their creditors. Such bills of exchange
arise out of commercial transactions both in internal trade and external
trade. By discounting these bills before they are due for a nominal
amount, the banks help the business community. Of course, the banks
recover the full amount of these bills from the persons liable to make
payment.

30 :: Business Studies

Intext Questions 33.2
Fill in the blanks with suitable words
(a)

There are four important ways of lending money by banks. They
are :
1
2
3
4

(b)

Bank loans can be divided into two categories viz _______ and
__________.

(c)

When the loan is repayable on demand or at a very short notice,
the loan is known as __________.

(d)

If the loan granted by a bank is on long-term or medium-term,
the loan is called _________.

(e)

____________ is a flexible system of lending under which the
borrower has the option to withdraw the funds as and when
required.

(f)

_____________ is an agreement with the bank by which a current
account holder is allowed to withdraw over and above the amount
in his account.

(g)

In discounting the bills the banks ________ bills of exchange
before they become due for payment.

(h)

Due date of bill is also known as date of _________________.

33.7 Agency and General Utility Services provided by
Modern Commercial Banks
You have already learnt that the primary activities of commercial banks
include acceptance of deposits from the public and lending money to

Functions of Commercial Banks :: 31

businessmen and other members of society. Besides these two main
activities, commercial banks also render a number of ancillary services.
These services supplement the main activities of the banks. They are
essentially non-banking in nature and broadly fall under two categories:
i)

Agency services, and

ii)

General utility services.

i)

Agency Services

Agency services are those services which are rendered by commercial
banks as agents of their customers. They include :
a)

Collection and payment of cheques and bills on behalf of the
customers;

b)

Collection of dividends, interest and rent, etc. on behalf of
customers, if so instructed by them;

c)

Purchase and sale of shares and securities on behalf of customers;

d)

Payment of rent, interest, insurance premium, subscriptions etc.
on behalf of customers, if so instructed;

e)

Acting as a trustee or executor;

f)

Acting as agents or correspondents on behalf of customers for
other banks and financial institutions at home and abroad.

ii)

General utility services

General utility services are those services which are rendered by
commercial banks not only to the customers but also to the general
public. These are available to the public on payment of a fee or charge.
They include :
a)

Issuing letters of credit and travellers’ cheques;

b)

Underwriting of shares, debentures, etc.;

c)

Safe-keeping of valuables in safe deposit locker;

d)

Underwriting loans floated by government and public bodies.

32 :: Business Studies

e)

Supplying trade information and statistical data useful to
customers;

f)

Acting as a referee regarding the financial status of customers;

g)

Undertaking foreign exchange business.

Intext Questions 33.3
Write “T” against the statements which are true and “F” against those
which are false.
(i)

Accepting deposits is an essential function of a modern
commercial bank.

(ii)

Granting loan to the borrowers is not the main function of a
bank.

(iii)

Ancillary services are also known as supplementary functions of
a commercial bank.

(iv)

General utility services are called non-banking services.

(v)

Services rendered by banks to the general public constitute the
main function of banks.

(vi)

Bank charges some amount for the services rendered.

(vii) Bank cannot buy and sell shares and debentures on behalf of
customers.
(viii) Bank stands guarantee against loan raised by its customers from
other financial institutions.
ix)

Safe deposit vaults are made available by bank only to fixed
deposit account holders.

(x)

Banks generally grant long-term loans to industries.

33.8 What You Have Learnt
In this lesson you have studied various services/functions performed by
commercial banks. Commercial banks render services to the business
community, as well as to the general public.

Functions of Commercial Banks :: 33

The functions of banks are divided into two categories : (i) Primary
functions, (ii) Secondary functions. Primary functions include accepting
deposits and lending money. Loans given by banks are : Short-term
loan and long-term loans. Banks grant short-term loan to its customers
by way of cash credit, overdraft, discounting of bills.
Banks accepts deposits from the public and their customers in the form
of Current deposit, Saving, deposit, fixed deposit, and under other
deposit schemes. Banks grant loans to customers as demand loan and
term loan.
The ancilliary services of banks are agency services and general utility
services. Agency services are rendered as agent of customers, whereas
general utility services are rendered to the general public.

33.9 Terminal Exercise
1.

Explain the Primary functions of banks.

2.

Explain the Secondary functions of banks.

3.

Describe the functions of modern commercial banks.

4.

Explain the methods of granting loan by bank.

5.

What do you mean by bank overdraft? Explain the procedure for
granting overdraft by bank.

6.

Differenciate between loans and advances.

7.

Explain cash credit facility allowed by banks to customers.

8.

What do you mean by discounting of bills by bank?

9.

Explain in brief the agency functions of a commercial bank.

10.

Differenciate between Primary and Secondary functions rendered
by bank.

11.

Describe briefly the various modes of acceptance of deposits by
banks.

34 :: Business Studies

33.10 Answers to Intext Questions
33.1 True a) c) d) g) i)
False b) e) f) h)
33.2 a)

i) loans
ii) Cash credit
iii) Overdraft
iv) Discounting of bills

b) Short-term, Long-term
c) Short-term
d) Term loan
e) Cash credit
f) Overdraft
g) Discount
h) Maturity
33.3 True i) iii) iv) vi) viii)
False ii) v) vii) ix) x)

34
Opening and Operating
Deposit Accounts

34.1

Introduction

In the previous lesson, you have studied that people deposit money in
different types of bank accounts and withdraw it whenever they desire.
The objective of depositing money in a bank account may either be to
save it for future needs, or to provide safety to it, or to invest it in
case a higher rate of return is offered.
There are different types of deposit accounts which are suitable for
different purposes. You may now be interested to know what is to be
done before money can be deposited in a bank account and also before
it can be withdrawn from the bank. It is obvious that one needs to
open an account with the bank and deposit money before it can be
withdrawn from the account.
In this lesson, we shall study how to open and operate deposit accounts.

34.2 Objectives
After studying this lesson, you will be able tol

recall the meaning of deposit accounts;

l

classify various types of deposit accounts;

l

discuss saving bank account and describe the procedure of opening
and operating it;

36 :: Business Studies
l

explain fixed deposit account and describe the procedure of
opening and operating it;

l

explain current account and describe the procedure of opening
and operating it;

l

explain different types of recurring deposit accounts and describe
the procedure of opening and operating them;

l

differentiate between current and saving bank accounts;

34.3 Deposit Accounts
People need money for day to day expenses such as food, clothing,
shelter as well as for future needs such as marriages, education and
other social obligations. The money needed for future expenses are
saved out of the present income. The saved money can be kept at home
but there is risk of loss by fire and theft. Further it may not bring any
return to one who has saved it. The saved money is kept with some
one where its safety and return is guaranteed. We have studied in the
earlier lesson that a bank is a place where money deposited is kept
safe and earns interest on it. Bank offers the facility of opening various
types of accounts where a depositor can deposit money saved by him.
Depending upon the nature of accounts, deposit money can also be
withdrawn to suit the convenience of the depositor.

Classification of deposit accounts
On the basis of purposes served, the deposit accounts can be classified
as follows:
1.

Saving bank account

2.

Fixed deposit account

3.

Current account

4.

Recurring deposit account

5.

Cumulative cum sickness benefit deposit account

6.

Home construction saving account.

Saving Bank Account
Saving bank account is primarily meant for people with limited means

Opening and Operating deposit accounts :: 37

who want to save some money for future. In a saving bank account there
are normally no restrictions on the amount to be withdrawn as well as on
the frequency of withdrawal. The pass book issued to the saving bank
account holder contains the rules regarding its operation. Saving bank
account can be opened with a minimum amount of Rs 500, if cheque
book facility is not availed. In case cheque book facility is availed, then
the minimum balance required to be maintained is Rs 1000. The bank
allows interest at the rate of about 5%. But the rate of interest keeps
changing depending upon the instructions of Reserve Bank of India. Rural
banks, co-operative banks and co-operative societies may allow an additional
interest at the rate of 1/2%. The post office saving bank account earns
interest at a higher rate as compared to commercial banks.

Procedure of opening the saving bank account
The following steps are normally to be undertaken while opening a
saving bank account in a commercial bank:
1.

Filling up the application form
Any person who wants to open a saving bank account is required
to fill up an application form available free of cost at the bank.
The application form usually requires the following information
to be submitted by the applicant:

a)

Name of the person/persons who want to open the account;

b)

Occupation of applicant

c)

His/her residential address

d)

Specimen signature of applicant

e)

Name and signature of the person introducing applicant to the
bank and his account number.

f)

Two pass portsize photographs of applicant.
Besides the above information the applicant has to give an
undertaking that he would observe the rules and regulations of
the bank. (For application, see annexure)

Annexure

38 :: Business Studies

Mh-,Q-DF. 116100×4000 Pads/2-96/0032
lsokesa@To
izca/kd@eq[;izca/kd@TheManager/ChiefManager
flafMdsVcSad/SYNDICATEBANK
..............................................................

cpr cSad [kkrk la-@SavingsBankAccountNo.
cprcSad@pkyw[kkrk[kksyusdsfy,vkosnu&i=
oS;fDrd@la;qDr@LokfeRo
APPLICATION FOR OPENING OF SAVINGS/
CURRENT ACCOUNT-INDIVIDUALS/JOINT/
PROPRIETORSHIP

fiz;egksn;@DearSir,
1

2
-

3
-

eSa@gevkilsvuqjks/kdjrk@djrhgw¡@djrsgSafdcSaddhcfg;ksaesaesjs@gekjsuke@ukeksaesacprcSad@pkyw[kkrk[kksysaAcprcSadpkyw[kkrslslacafèkrizpfyrcSaddsfu;evkSjfofu;eksa
dkseSaus@geusi<+fy;kgSAeq>s@gesale>k;kx;kgSeSaus@geusmUgsale>fy;kgSvkSjeSa@ge,sls[kkrksadsizpfyrcSaddsfu;eksadkikyudjusrFkkmulsck/;jgusdsfy,,rn~}kjk
lgergw¡@gSaAeSa@ge,rn~}kjk#---------------------------------------------------#i;s-------------------------------------------)izkjafHkdtekjkf'kds:iesaizf"krdjrk@djrhgw¡@djrsgSaA
I/We request you to open in my/our name/s Savings/Current Account in the books of the Bank. The rules and regulations of the Bank pertaining to Savings/
Current Account which are in force now, have been read by me/us/read over and interpreted to me/us and I/we have understood the same and I/we agree to abide
by and to be bound by the Bank's ruloes for the time being in force for such accounts. I am/we are remitting herewith as my/our initial deposit
Rs......................................... Rupees .....................................................................
esjk@gekjs uke] irk@irs vkSj vU; fooj.k uhps fn;k x;k gSa@fn;s x;s gSa% My/our,name/s,address/esandotherparticularsaregivenbelow:

tekdrkZ@vksadk@dsuke(vo;Ldgksusdsekeys
esavfHkj{kddsukedkHkhmYys[kdjsa)

;fnvO;Ldgks
rkstUefrfFk

Name of Depositor/s (in case of minor
mention Guardian's name also)

Date of Birth
if minor

O;olk; Occupation

iwjk irk FullAddress

d)

*

fQygkyeSa@gefdlhvU;cSad@'kk[kkvksaesa]½.klhekdkmi;ksxughadjjgk@jghgw¡@jgsgSaAtcdHkhvU;cSad@'kk[kkls½.klqfoèkk,amiyCèkd:¡xk@d:axh@djsaxsrksvkidks
lwfprdjusdsfy,opuc¼gw¡@gSaA

a)

*

At present I/we am/are not enjoying any credit facility with any other Bank/Branches. I/We undertake to inform you as and when Credit facilities are
availed by me/us with other Bank/Branches.

[k)
b)

*
*

vU;cSadks@'kk[kkvksalseSa@gefQygky[kkrkj[krk@j[krhgw¡@j[krhgSavkSjfuEukafdrlqfo/kkvksadkmi;ksxdjjgk@jghgw¡@jgsgSaA
At present, I/we am/are having account and enjoying the following facilities with other Bank/Branches.
cSad@'kk[kkdkuke

lqfo/kkdkLo:i

ewyvfxze@lhek

cdk;k'ks"k

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Name of the Bank/Branch

Nature of
facility

Original
Advance/Limit

Balance
Outstanding

Securities

4
-

la;qDr[kkrksadsekeysesa@IncaseofJointaccount

4-1

gevkilsvuqjks/kdjrsgSavkSjvkidksizkf/kd`rdjrsgSafdbldsfoijhrgeesalsfdlhdsfyf[kr:ilsuksfVlnsusrdgeesals-----------------------------------}kjkgekjhrjQ
lsla;qDrvkSj@;ki`Fkd:ilsgLrk{kfjrlHkhpSdksa]tkjhfd;sx;svU;vkns'k]Lohd`rfofue;&i=;kopu&i=ksadksldkjsavkSj,slspSdksadksvkidks;gk¡fLFkrgekjs[kkrsesaukes
Mkysapkgsmlle;ml[kkrsesatek'ks"kgks;kv/;kgfjrgksAgevkils;gHkhvuqjks/kdjrsgSafdgesaizns;pSd]vkns'k]fcy;kopu&i=ksaijgeesals-------------------------ds
la;qDrvkSj@;ki`Fkd:ilsi`"BkadudksHkhLohdkjdjsaA
We request and authorise you, until any one of us shall give you notice in writing to the contrary, to honour all cheques or other orders drawn or Bills of Exchange
accepted or notes made on our behalf singed by ....................................................................................... of us jointly and/or severally and to debit such cheques to
our account with you whether such account be for the time being in credit or overdrawn. We also request you to accept the endorsement of
............................................................................................................ ......................................................... of us jointly and/or severally on Cheques, Orders, Bills
or Notes payable to us.

4-2

vius[kkrsdsfglkclsvkidsdeh'ku]C;ktrFkkvU;izHkkjksalfgrfdlhle;vkidksns;jkf'k;ksadsfy,la;qDr@i`Fkd:ilsck/;gksusdsfy,geopuc¼gSaA;fn[kkrkv/;kgfjr
gkstkrkgS@[kkrsesauke'ks"kdsfy,vuqefrnhtkrhgS]rksizk;ksT;njijvkidsdeh'ku]C;ktvkSjvU;izklafxdizHkkjksalfgrle;ijvkidksns;jkf'k;ksadsfy,la;qDr,oa
i`Fkd:ilsck/;gksusdkgeopunsrsgSaA
We undertake to be jointly and severally liable to you for any moneys owing to you from time to time in case the account is overdrawn and/debit balance is
allowed including your commission, interest at the appropriate rate and other incidental charges.

4-3

vius[kkrsdsfglkclsvkidsdeh'ku]C;ktrFkkvU;izHkkjksalfgrfdlhle;vkidksns;jkf'k;ksadsfy,la;qDr@i`Fkd:ilsck/;gksusdsfy,geopuc¼gSaA;fn[kkrkv/;kgfjr
gkstkrkgS@[kkrsesaukes'k"kdsfy,vuqefrnhtkrhgS]rksizk;ksT;njijvkidsdeh'ku]C;ktvkSjvU;izklafxdizHkkjksalfgrle;ijvkidksns;jkf'k;ksadsfy,la;qDr,oa
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In the event of the death, insolvency or withdrawal of any of us, the Survivor/s of us shall have full control of any moneys then and thereafter standing to our
credit in our Account with you, and in that event the Survivor/s will have full powers to operate the Account and/or to close the Account.

tks ykxw ugha mls dkV nsa Strikeoutifnotapplicable

@dsoycSaddsmi;ksxkFkZ@FORBANKUSEONLY

Opening and Operating deposit accounts :: 39
5
-

ukekadu(;fnvko';dugks rksen5-1vkSj5-2dkVnsa)
NOMINATION (Strike out items 5.1 and 5.2 if not required)

5-1

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g
S
a
A
I/We nominate the following person to whom in the event of my/our/minor's death the amount of the deposit outstanding in my our account, opened herewith,
may be returned by you.

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vk;q@Age

Name and Address of the nominee

tekdrkZ@vksalslaca/k];fndksbZgks

tUefrfFk];fnukferhvo;Ldgks

Relationship with the depositor/s, if any

Date of Birth if nominee is minor

5-2

pw¡fdukfefrblrkjh[kdksvo;LdgSvkSjmlukferhdhvo;LdrkdsnkSjkuesjh@gekjh@vo;Lddhe`R;qgksusijukferhdhvksjlstekjkf'kizkIrdjusdsfy,
eSa@ge@Jh@Jherh@dqekjh-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------dhvk;qdh]fuoklh-------------------------------------------------------------dksfu;qDrdjrk@djrhgw¡@djrsgSaA
As the nominee is minor on this date, I/we appoint Sri/Smt./Kum .......................................................................................................... to receive the deposit on
aged .......................................... years, residing at .............................................................................................................. to receive deposit on behalf of the nominee in the event of my/our/minor's death during the minority of the nominee.

;fntekjkf'kukckfyxdsukeesatekdhtkrhgS]rksukekaduijmlO;fDrdsgLrk{kjgksuspkfg,tksukckfyxdhvksjlsdk;Zdjusdsfy,dkuwuhrkSjijvf/kd`rgSA
When a deposit is made in the name of the a minor, the nomination should be signed by a person lawfully entitled to act on behalf of the minor.

6
-

esjk@gekjk@gekjs}kjkÅijlwfprizkf/kd`rO;fDr@O;fDr;ksadsuewukgLrk{kjdkMZeSa@gelayxudjjgk@jghgw¡@jgsgSaA
I/We enclose specimen signature card/s of mine/us/of the person/s authorised by us above.

vaxwBkfu'kkuksadsekeysesavuqizek.kdksadsgLrk{kj]ukeoirk

Hkonhi@Yours faithfully,

In case of thumb impressions
Signature, name and address of attestors
1.

................................................................................................................
................................................................................................................

2.

................................................................................................................
tekdrkZ@vksadsgLrk{kj@Signature/sofDepositor/s

(LokfeRo[kkrksadsekeysesajcM+dheksgjyxkb,)
(Affix rubber stamp in case of proprietorship)

fnukad@Date:..............................
(LokfeRo[kkrksadsfy,)
eSa---------------------------------------------------------------------dsukevkSj<axesaO;kikjdjjgkgw¡vkSj;gfdeSamDrlaLFkkdk,dek=ekfydgw¡AvkxseSavkidkslwfprdjukpkgrk@pkgrh
gw¡fdvkidslkFkgq,lHkhlapkyuksavkSjmixrck/;rkvksa]pkgsogO;kikjfuke;kesjsoS;fDrduke;kvU;dsla;kstulsgks]dsfy,eSaftEesnkjgw¡]tksesjs}kjkvU;Fkkfyf[krlwpuk
nsusrdizHkkoh@ykxwjgsxkA
(For Proprietorship Accounts)
I am trading under the name and style of ..................................................................................................................... and that I am the sole proprietor of the said
concern. I further wish to intimate that I am responsible for all transactions entered into and obligations incurred with you whether under the trade name of in my
individual name or in conjunction with others till I inform in writing otherwise.

Hkonh;@Yours faithfully,
ekfyd ds gLrk{kj@SignatureofProprietor

fdlds }kjk ifjp; djk;k x;k@INTRODUCEDBY
dsoycSaddsmi;ksxdsfy,

eSa@gefiNys--------------------------------------o"kks±lstekdrkZlsifjfprgw¡@gSaA

FOR BANK USE ONLY

I/We know the Depositor since ............................... years.

uke/Name
gLrk{kj vkSj fnukad/Singnature&Date:
ifjp;drkZdsgLrk{kjdklR;kiufd;kvkSjBhdik;k
Signature of introducer verified and found in order

iwjkirk;k[kkrkla-,oanwjHkk"kla[;k;fngksrks%
Full Address or A/c No. and Telephone No. if any :

ukekaduiathdj.kla[;k,oafnukad

fnukad%

izkf/kd`rgLrk{kjdrkZ

Nomination Registration No. & Date

Date :

Authorised Signatory

fo'ks"klgk;d@lgk;dizca/[email protected]./Asst.Manager

mi&izca/kd@izca/kd@Sub-Manager/Manager

[kkrklaAccount No.

40 :: Business Studies

2.

Introduction of the applicant
At the time of opening the saving bank account, the person who
desires to open the account is introduced to the bank by a person
who is already an account holder of the bank or by parties
known to the bank. This is done to prevent the opening of an
account by any undesirable person. Banks, therefore, require proper
introduction of every person at the time of opening the account. The
name, address and signature of the person introducing the applicant
to the bank is necessary to open the account.

3.

Specimen Signature
Normally bank obtains the specimen signature of the applicant on a
separate card/sheet on which photograph of the depositor is pasted.
This is to ensure that money deposited is withdrawn only by the
depositor. A specimen of signature card/sheet is given below.

flafMdsVcSad SYNDICATE BANK

uewuk gLrk{kj dkMZ

Specimen Signature Card

fo'ks"k vuqns'k

[kkrk la[;k

Special Instructions

Account No.

[kkrsnkj dk uke
Name of the Account Holder

O;olk;/Occupation
iwjk irk
Full Address

vo;Ld dh tUefrfFk

xBu

Constitution:

Date of birth of Minor

gLrk{kjdrkZ dk uke
Name of the Signatory

[kkrk la[;k

Account No.

1.

uewuk gLrk{kj
Specimen Singature

Photo
2.

'kk[kk

fnukad

/date

Branch

izca/kd/Manager
fM-,Q-D.F.157/100×5100 Pkfs. 9-96/029
Figure: 34.1 Specimen Signature Card

This specimen signature card/sheet is preserved by the bank.
Whenever the depositor wants to withdraw money, his signature
is tallied/compared with his specimen signature. If the signature
differs, the bank refuses to make payment. The specimen signature

Opening and Operating deposit accounts :: 41

thus protects not only the bank but also the account holder against
withdrawal by any person other than the depositor.
After the formalities stated above are completed and the bank is
satisfied, the bank opens the account in the name/names of the
applicant, (or applicants, in case it is desired to open the account
in joint name).The applicant is given an account number. The
bank also issues a Pass Book/Statement which records the deposits
made, amount withdrawn and the balance to the credit of account
holder. If the customer desires to avail of the facility of cheque
book, it can be issued to him.

Cheque
A cheque is an order by the customer of the bank directing the banker
to pay on demand the specified amount, to or to the order of the
person named therein or to the bearer.
There are two types of cheques
i)

Bearer/Order cheque

ii)

Crossed cheque

A specimen cheque form is given below.

Figure: 34.2 Specimen of Cheque Form

42 :: Business Studies

Operating the saving bank account
Operating a bank account means dealing with the bank when the account
holder deposits money into the bank and withdraws money from it. A
special feature of operating the bank account is that each transaction
of deposit/withdrawal is supported by a separate slip or document.
Hence a customer is required to make use of
i)

Pay-in-slip form for depositing cash or cheque in the bank account;

ii)

Cheque or withdrawl slip for withdrawing the money from the
bank.

Pay-in-slip
Pay-in-slips are printed forms with perforated counterfoils used for
depositing cash or cheque. It contains information in respect of the
name of account holder, amount deposited, and the signature of the
person depositing it. On the receipt of money, the cashier signs and
stamps the pay-in-slip and the counterfoil. The counterfoil is given
back to the depositor which serves as a proof of deposit. The counterfoil
must be kept safe for future reference. Some banks prescribe and supply
separate slips of different colours for depositing cash and cheques,
drafts etc., while others supply the same type of slip for depositing
cash and cheques. In case the deposit is made in cash, the particulars
of different denominations of currency notes are to be given. The main
foil is retained by the bank and the other part of the foil known as
counterfoil is returned to the depositer.
A specimen of Pay-in-slip is given below.

Opening and Operating deposit accounts :: 43

Pass Book
The bank provides the account holder a small and handy book in
which it records all the transactions of deposits and withdrawals. This
book is known as pass book. Pass book in reality is a copy of the
account-holder’s ledger account maintained by the bank. Where the
banking operations are computerised the bank issues a computerised
sheet for withdrawal and deposit by the customer, or a pass book in
which records of deposit and withdrawal are made by the computer.

Figure 34.4 Specimen of Pass Book

Withdrawal from saving bank account
Whenever the account-holder wants to withdraw money from his
account, he can either withdraw the amount by filling up a withdrawal
form or by issuing a cheque. Withdrawal can also be made from the
depositor's account when he or she issues cheques in the name of some

44 :: Business Studies

other person or party. When money is withdrawn either by presenting
with drawal form or cheque in favour of the account holder, it is
known as cash withdrawal.
A specimen of withdrawal form is given below

Figure 34.5 Specimen of Withdrawal Form

When the account holder avails of cheque facility, he can issue cheques
for withdrawing money or making payment to others. The cheque or
the withdrawal slip is handed over to the bank clerk at the bank counter
for withdrawing the money. If every thing is correctly written and there
is sufficient balance in his account and his signature tallies with the
specimen signature, the bank clerk enters the amount of withdrawal in
his account in the ledger and gives a metal disk or token bearing a
number. The cheque or withdrawal slip is sent to the cashier for payment
and the payment is made. In case the account-holder wants to make
payment to some one by cheque, he has to write the name of that
person/party on the cheque.
However, no payment is made to any other person on the basis of
withdrawal form.

Teller system of withdrawal
Under this system one person in the bank, handles all the payments

Opening and Operating deposit accounts :: 45

upto Rs. 10,000 or so to the account holders. (The amount differs from
bank to bank). He receives the cheque/withdrawal form, marks the
entry in the ledger account, verifies the signature and makes payment.
Under the teller system money can be withdrawn quickly. In other
words, the teller system facilitates quick withdrawal from the bank.

Debit Slip
When the bank charges any amount from customer’s account in
connection with its services, a debit slip is prepared and the amount
is debited to the customer’s account. Thus, the debit slip reduces the
balance in the customer’s account.
A specimen of debit slip is given below

Figure: 34.6 Specimen of Debit Slip

Payment of Interest
Interest at the rate of about 5% per annum is allowed on the credit
balance of the saving bank account though the rate of interest keeps
changing with the instructions of the Reserve Bank of India. Interest is
calculated on the minimum balance held in the account during the
period starting from the 10th day to the last day of each calender
month.

46 :: Business Studies

Intext Questions 34.1
1.

Write “T” against the following statements which are true and
‘F’ against those which are false.

i)

No interest is allowed on saving bank account.

ii)

Any number of withdrawals can be made from savings account.

iii)

One has to fill up pay-in-slip for depositing money in saving
bank account

iv)

Pay-in-slip is used to withdrawal money from bank.

v)

Money is deposited in saving bank account for a fixed period.

vi)

Interest paid by a commercial bank on saving bank account is
higher than in a co-operative bank.

vii)

While opening a saving bank account, the bank requires specimen
signature of the depositor.

viii)

At the time of payment, the bank clerk tallies the signature with
signature card.

ix)

Any person can deposit any amount in saving bank account.

x)

Saving bank account holder cannot avail of withdrawal form
facility in case he avails of the cheque book facility.

xi)

Saving bank account holder cannot introduce any person at the
time of opening new account in the bank.

2.

Match the word in the first column with the statements in the
second column.

i)

Cheque

a) Document used to deposit money

ii)

Pass book

b) Document used to withdraw money

iii)

Pay-in-slip

c) Document required for opening an account

iv)

Application form d) Contain the records of all transactions
of a customer with his bank.

Opening and Operating deposit accounts :: 47

3.

Fill in the blanks with appropriate words:

i)

____________ is used for depositing money into a bank account.

ii)

One part of the pay-in-slip is known as main foil and the other
part as____________

iii)

Counterfoil of the slip is returned to the _________ by the bank.

iv)

Counterfoil acts as a _________ of money deposited into the
bank by the ___________

v)

Pay-in-slip is supplied by ______________ free of charge.

34.4 Fixed Deposit Account
It is also known as term deposit account. Money deposited in fixed
deposit account ranges for a period starting from 30 days to more than
3 years. At the end of the specified period, the depositor may either
withdraw the money or renew the deposit further for a specified period.
Banks pay interest on fixed deposit depending upon the period for
which the deposit is kept with the bank. The rate of interest on fixed
deposit account normally ranges from 6% to 12% per annum. People
who want safety, prefer a reasonable rate of return and do not believe
in taking risk, go for fixed deposit accounts.

Procedure of opening and operating fixed deposit account
For opening a fixed deposit account, a depositor is required to fill up
an application form in which he has to mention his own particulars,
such as name, father’s name, residential address, etc. The amount of
deposit and the period for which deposit is to be made also needs to
be mentioned. He has also to give specimen of his signature. When the
bank is satisfied with the formalities, the depositor is asked to deposit
the amount. After the deposit of the amount, the bank issues a fixed
deposit receipt. A fixed deposit receipt is an acknowledgement of receipt
of the sum of money specified therein. The fixed deposit receipt
mentions the amount, period, rate of interest and the amount to be paid
on maturity.

48 :: Business Studies

A specimen of fixed deposit receipt is given below

Figure 34.7 Specimen of Fixed Deposit Receipt

Rate of interest on fixed deposit.
The rate of interest and other terms and conditions regulating fixed
deposits are determined by the Reserve Bank of India for all commercial
banks. The Reserve Bank of India keeps on revising the rate of interest
from time to time. The rate of interest currently applicable on fixed
deposits are as follows.
Revised interest rates on bank fixed deposits with effect from
17-1-1998.

Opening and Operating deposit accounts :: 49

Names of Bank

30-45 46-60
days days

61-90 91-120 170-179
days
days
days

Bank of Maharastra

6.0

6.5

6.5

7.5

7.5

Canara bank

6.0

7.0

8.0

8.5

8.5

Oriental Bank of Coms.

8.0

8.0

8.5

8.5

9.5

Sate Bank of India

6.0

6.0

6.0

7.0

7.0

Union Bank of India

7.0

7.0

7.0

8.0

8.0

180-270
days

271-364
days

1 year
to
2 years

2 year
to
3y ear

3 year
to
5 year

8.5

8.5

10.5

11.0

12.0

9.0

9.0

10.5

11.0

12.0

9.5

10.5

11.5

12.0

12.0

8.5

8.5

10.5

11.0

12.0

9.0

9.0

10.5

11.0

11.5

Payment of interest
Though the interest is payable on the maturity of fixed deposit account,
banks may pay interest quarterly or half yearly also. In case the bank
pays interest before maturity, the amount of such interest is transferred
to depositor’s saving bank account. Normally the interest on fixed
deposit is compounded in case the depositor does not withdraw the
interest. If the fixed deposit is renewed, the interest on it is also
compounded. When the depositor fails to claim the deposit on due date
and later on desires to renew the deposit, the bank may renew it from
the date of maturity. In such a situation the depositor does not lose the
interest.

Payment of fixed deposits before the date of maturity
Fixed deposits are normally payable on maturity. In case the depositor

50 :: Business Studies

requires the money before the due date, he or she makes a request to
the bank for its payment. The bank may consider such a request and
make payment of the fixed deposit. When the payment of fixed deposit
is made before the date of maturity, the depositor loses interest which
is 1% less compared to the rate applicable for the period.

Advance against fixed deposits
The bank may grant loan against fixed deposit receipt. But according
to the directions of Reserve Bank of India, the rate of interest charged
on such a loan is to be at least 2% above the rate payable on the
deposit.

Fixed deposit in joint names
Fixed deposits may be made in the joint names of two or more persons
payable to either or survivor. The money on such deposit is payable to
either of them or survivor at the time of maturity.

Intext Questions 34.2
Write T against the statements which are true and F against those
which are false :
i)

Higher rate of interest is paid on fixed deposit account.

ii)

Fixed deposit account cannot be opened in joint names.

iii)

Interest is paid on overdue deposit, if it is renewed.

iv)

Loans can be taken against fixed deposit receipt

v)

We cannot withdraw fixed deposit before the date of maturity.

vi)

Higher rate of interest is paid an fixed deposit account than the
saving bank account.

vii)

Survivor cannot receive the amount of fixed deposit after the
death of depositor.

viii)

Fixed deposit receipt cannot be encashed before the date of
maturity.

Opening and Operating deposit accounts :: 51

ix)

Bank cannot reduce the rate of interest in case fixed deposits
encashed before the due date.

x)

Fixed deposit account is opened only in single name.

34.5 Current Account
In current account, a customer can withdraw or deposit money any
number of times he desires. Current account is suitable to those persons
who either deposit or make payments frequently. It is thus suitable for
business people and institutions which have frequent dealings with the
bank. Bank permits overdraft facility on current account. In view of
this facility, the banks do not pay any interest on current accounts.
Some times, banks charge some amount from the current account holder
as fees for the services extended. Current account holders have to
maintain a minimum amount of Rs.2000 as balance in the account.
Such accounts are normally operated through cheques.
Special features of the current account are:
1)

It provides convenience of operation as certain facilities are
associated with current account. The objective is not to mobilize
saving through such account.

ii)

The current account has an operating cost. There are bank charges
for the services provided to the holder of current accounts.

iii)

Banks do not pay any interest on such accounts.

Opening the current account
The procedure for opening a current account is the same as that of
saving bank account. To open a current account, one has to fill up the
prescribed application form giving all the information required by bank.
The applicant must be introduced by a person known to the bank and
operating current account with it. The specimen signature of the person
who will operate the account must also be put on a separate card. After
completing all the formalities, the applicant is given an account number
to be mentioned at the time of withdrawing money or depositing any
amount in the account.

52 :: Business Studies

Operating the current account
Unlike saving bank account money can be withdrawn any number of
times from this account. Money can also be deposited in current account
as many times as the depositor desires. With the permission of the
bank, a depositor can withdraw money in excess of what he has
deposited in the bank. This facility is known as overdraft facility and
is normally granted only to current account holder. The steps for
operating the current account as far as depositing money is concerned
is the same as in the case of saving bank account. Similarly the steps
for withdrawing money or making payment from the account through
the issue of cheques is also the same as with saving bank account.

34.6 Distinction between Current Account and Saving
Bank Account
S.No. Basis of
Difference

Current account

Saving bank account

1.

Operation of
accounts

Current account is mainly
opened and operated by
business firms and
institutions.

Saving bank account is
mainly opened by individuals and salaried people.

2.

Withdrawals

Deposits and withdrawals
can be made frequently.
There is no limit to its
frequency.

Withdrawl are not permitted as frequent as in
case of current account.

3.

Interest

No interest is paid
by bank on such
account.

Interest is paid on saving
bank account though the
rate of interest happens to
be low.

4.

Overdraft

Overdraft facility is
available.

No such facility is allowed.

5..

Service
charges

Service charges are
payable

No. service charges
payable.

Opening and Operating deposit accounts :: 53

Intext Questions 34.3
Write T against the statements which are true and F against those
which are false
i)

There is no need to fill up any application form for opening a
current account.

ii)

Introduction is a must for opening a current account.

iii)

Withdrawls can be made from current account any number of
times during a working day.

iv)

Current account can be opened without initial deposit in the
bank.

v)

Interest is paid on current account balance.

vi)

There is no limit or minimum balance in current account.

vii)

Rate of interest on current account is lower than that on saving
account.

viii)

The current account cannot be opened in joint names.

ix)

When the current account is opened in joint names, any one
person can operate the account.

34.6 Recurring Deposit Account
The procedure for opening a recurring deposit account is the same as
in the case of saving bank account.
The recurring deposit account can be opened by any person either
individually or jointly or by a guardian in the name of a minor. At the
time of opening the account, the depositor is given a pass book which
is to be presented at the time of depositing money. The depositor
deposits a fixed amount once in a month before the 10th day of month,
or once in a month, in the account for a given period.
Normally the withdrawl from such account is not permitted. However,
the depositor can take loan from the bank against the security of
recurring deposit account.

54 :: Business Studies

The interest earned on recurring account is higher than on the saving
account. It varies with the duration of deposit. Currently the rate of
interest on recurring deposit account is higher than saving bank account
and lower than fixed deposit account.
Types of recurring deposit scheme:
i)

Home safe account

ii)

Cumulative-cum-sickness deposit scheme

iii)

Home construction deposit scheme

Home safe account
In home safe account the bank provides a safe or box (Gullak) to the
depositor for the purpose of saving money. The depositor puts money
in the safe or gullak periodically. The money saved is collected by the
bank’s representative and credited to the account of the depositor.
Normally such accounts carry only a nominal rate of interest. Though
it promotes saving habit among people, it is not found to be very
popular.

Cumulative-cum-sickness deposit scheme
The purpose of such deposit is to provide security against sudden
illness or uniforeseen circumstances to the depositor. After opening
such an account, the account holder deposits regularly a certain sum of
money in the account. The deposited money along with interest earned
on it, is utilized for making payments of medical bills, hospital bills
and doctor’s bill etc.

Home construction deposit scheme
Home construction deposit scheme is meant for either constructing or
purchase of a house. It helps a person to purchase or construct his house.
The scheme involves regular deposit of a certain amount for a period.
The amount deposited along with interest can be utilized for the purpose
of construction or purchase of house. The rate of interest offered on
such scheme is higher as compared to other schemes. It is an attractive
scheme that helps individuals to make a plan for construction of house
within a few years.

Opening and Operating deposit accounts :: 55

Intext Questions 34.4
Write ‘T’ against the statements which are true and ‘F’ against those
which are false.
i)

A guardian can open recurring deposit account in the name of a
minor.

ii)

The amount can be withdrawn before maturity of deposit under
recurring scheme.

iii)

The bank provides a safe or box to the depositor at the time of
opening home safe deposit account.

iv)

The depositor puts money in the safe or box under home safe
deposit scheme.

v)

The bank’s representative does not collect the amount from time
to time under home safe deposit scheme.

vi)

Recurring deposit scheme carry only a nominal rate of interest.

vii)

Home safe deposit account promotes saving habit in the children.

34.8 What You Have Learnt
The following types of deposit accounts can be opened in commercial
banks:
Saving bank account, Fixed deposit account, Current account, Recurring
deposit account.
Any person who wants to open a saving bank account has to fill an
application form provided by the bank. The application must be
introduced by an existing account holder. The applicant has to give his
specimen signature on a separate card which is used by the bank when
the depositor wants to withdraw mony from his account. After this the
applicant has to deposit a minimum amount. He is then allotted an
account number, which is later on used as a reference. The bank,
thereafter, provides the customer Pay-in-slip, Cheque book, Pass book,
etc.

56 :: Business Studies

In the case of fixed deposit account, an amount is deposited with the
bank for a fixed period. The bank issues a fixed deposit receipt to the
depositor mentioning the amount, period and rate of interest to be paid
on the deposit. Interest is payable on the maturity of the fixed deposit.
Banks permit withdrawal of a fixed deposit even before the due date
at the request of the depositor. The bank may also grant loan against
fixed deposit. The fixed deposit account can be opened individually or
in joint name of two or more persons.
For opening a current account one has also to apply on a prescribed
form of the bank giving all the details and introduction from an existing
account holder. The bank also requires the specimen signature of the
applicant. The applicant has to make an initial deposit which differs
from bank to bank. The bank thereafter provides the customer with
pay-in-slip, cheque book and pass book. A current account holder can
withdraw money as often as he wants. Overdraft is also allowed against
current account on previous arrangement with the bank.
The recurring deposit account can be opened by any individual, or any
one jointly with others. Banks offer the same rate of interest on such
deposits as is applicable in respect of fixed deposits. A depositor can
close the account before the expiry of the period agreed upon. But in
that case he is allowed a lower rate of interest.

34.9

Terminal Exercise

i)

Discuss in brief how to open and operate a saving account.

ii)

Discribe the procedure of opening and operating a current account.

iii)

Discuss how fixed deposit account can be opened.

iv)

Differentiate between saving bank account and current account.

v)

Can a customer encash a fixed deposit receipt before the due
date? Discuss.

vi)

Write short notes on(a)

Recurring deposit account

(b)

Specimen signature card

Opening and Operating deposit accounts :: 57

(c)

Pay-in-slip

(d)

Pass book.

(e)

Cheque book

(f)

Types of cheque

vii)

What is a pay-in-slip? What purpose does it serve?

viii)

What is a pass book? Discuss its importance. Does the depositor
have any remedy for wrong entries made in the pass book?

ix)

What is fixed deposit receipt? Why is it issued?

x)

Differenciate between:
(a) Pass book and Cheque book.
(b) Pass book and Fixed deposit receipt.

xi)

Can we withdraw any amount in excess of the balance in current
account? Discuss
Practical Activity:
Please go to a bank and open a saving bank account after
completing all formalities.

34.10 Answers to Intext Questions
34.1 1.

i) False

ii) False

iii) True

iv) False

v) False

vi) False

vii) True

viii) True

ix) True

x) False

xi) False

2.

i) b

ii) d

iii) a

3.

i) Pay-in-slip

iv) c

ii) Counter foil

iii) depositor

iv) proof customer v) Bank
34.2 i) True
vi) True

ii) False

iii) True

iv) True

v) False

vii) False

viii) False

ix) False

x) False

58 :: Business Studies

34.3 i) False
vi) False
34.4 i) True
v) False

ii) True

iii) True

iv) False

vii) True

viii) False

ix) True

ii) True

iii) True

iv) True

vi) True

vii) True

v) False

35
Loans and Advances

35.1 Introduction
In the previous lesson you have learnt the meaning and types of depositaccounts including the procedure of opening and operating bank
accounts. We have seen that the commercial banks accept deposits and
also lend money to the people who require it for various purposes.
Lending of funds to traders, businessmen and industrial enterprises is
one of the important activities of commercial banks. The major part
of the deposits received by banks is lent out, and a large part of their
income is earned from interest on such lending. There is a considerable
difference between the rate of interest which the commercial bank
grants on deposits, and the rate they charge on loans and advances. It
is this difference which constitutes the main source of bank earnings.
Operation and expansion of business and commercial activities depend
a great deal on the availability of loans/advances from commercial
banks. In this lesson, you will learn about the procedure of getting
loans and advance, cash credits, overdrafts, etc from the commercial
banks.

35.2 Objectives
After studying this lesson, you will be able to:l

enlist the utility of granting loans and advances by commercial
banks;

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l

differentiate borrowing rates from lending rates;

l

enumerate the ways of lending money;

l

distinguish between long-term and short-term loans;

l

point out the nature of security provided for loans; and

l

outline the procedure for grant of cash credit, overdraft and
discounting of bills of exchange.

35.3 Meaning of Loans and Advances
The term ‘loan’ refers to the amount borrowed by one person from
another. The amount is in the nature of loan and refers to the sum paid
to the borrower. Thus. from the view point of borrower, it is ‘borrowing’
and from the view point of bank, it is ‘lending’. Loan may be regarded
as ‘credit’ granted where the money is disbursed and its recovery is
made on a later date. It is a debt for the borrower. While granting
loans, credit is given for a definite purpose and for a predetermined
period. Interest is charged on the loan at agreed rate and intervals of
payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by
the bank. Banks grant advances largely for short-term purposes, such
as purchase of goods traded in and meeting other short-term trading
liabilities. There is a sense of debt in loan, whereas an advance is a
facility being availed of by the borrower. However, like loans, advances
are also to be repaid. Thus a credit facility- repayable in instalments
over a period is termed as loan while a credit facility repayable within
one year may be known as advances. However, in the present lesson
these two terms are used interchangeably.

Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial
to individuals, firms, companies and industrial concerns. The growth
and diversification of business activities are effected to a large extent
through bank financing. Loans and advances granted by banks help in
meeting short-term and long term financial needs of business enterprises.
We can discuss the role played by banks in the business world by way
of loans and advances as follows :(a)

Loans and advances can be arranged from banks in keeping with

Loans and Advances :: 61

the flexibility in business operations. Traders, may borrow money
for day to day financial needs availing of the facility of cash
credit, bank overdraft and discounting of bills. The amount raised
as loan may be repaid within a short period to suit the
convenience of the borrower. Thus business may be run efficiently
with borrowed funds from banks for financing its working capital
requirements.
(b)

Loans and advances are utilized for making payment of current
liabilities, wage and salaries of employees, and also the tax
liability of business.

(c)

Loans and advances from banks are found to be ‘economical’ for
traders and businessmen, because banks charge a reasonable rate
of interest on such loans/advances. For loans from money lenders,
the rate of interest charged is very high. The interest charged by
commercial banks is regulated by the Reserve Bank of India.

(d)

Banks generally do not interfere with the use, management and
control of the borrowed money. But it takes care to ensure that
the money lent is used only for business purposes.

(e)

Bank loans and advances are found to be convenient as far as its
repayment is concerned. This facilitates planning for future and
timely repayment of loans. Otherwise business activities would
have come to a halt.

(f)

Loans and advances by banks generally carry element of secrecy
with it. Banks are duty-bound to maintain secrecy of their
transactions with the customers. This enhances people’s faith in
the banking system.

Intext Questions 35.1
1

Write ‘true’ or ‘false’ as may be appropriate against the following
statements :
(a)

Banks provide credit facility to businessmen only.

(b)

‘Loan’ is an amount borrowed from bank.

(c)

Loan is always repaid in lump-sum.

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2

(d)

The period for which loan or advance is granted cannot
be extended on customer’s request.

(e)

‘Advance’ carries the sense of debt.

Fill in the blanks with suitable words.
(a)

A bank charges interest on loan/advance and allows interest
on deposits. The difference constitutes ____________ of
the bank.

(b)

A ‘credit’ whereby money is lent in lumpsum and recovery
is made in instalment is called ________ .

(c)

Banks generally grant ‘advance’ for _________ period.

(d)

Bank loan may be used for paying ____________ .

(e)

The rate of interest charged by banks on loans and advances
is regulated by _____________ .

(f)

An advantage of bank loan/advance is that the bank is
duty bound to maintain _________ of the customer's
transactions.

35.4 Borrowing Rate and Lending Rate
People make their funds available to the banks by depositing their
‘savings’ in various types of accounts. In other words, bank funds
mainly consist of deposits from the public, though banks may also
borrow money from other institutions and the Reserve Bank of India.
Banks, thus mobilises funds through its deposits. On public deposits
the banks pay interest at and the rate of interest vary according to the
type of deposit. The borrowing rate refers to the rate of interest paid
by a bank on its deposits. The rates which the banks allow depend
upon the nature of deposit account and the period for which the deposit
is made with the bank. No interest is generally paid on current account
deposits. The rate is relatively lower on savings account deposits. Higher
rates ranging from 6% to 12% per annum are paid on Fixed deposit
accounts according to the period of deposit.

Loans and Advances :: 63

Banks also borrow from other institutions as well as from the Reserve
Bank of India. When the Reserve Bank of India lends money to
commercial banks, the rate of interest it charges for lending is known
as ‘Bank Rate’.
The rate at which commercial banks make funds available to people is
known as ‘Lending-rate’. The lending rates also vary depending upon
the nature of loans and advances. The rates also vary according to the
purpose in view. For example if the loan is sanctioned for the purpose
of activities for the development of backward areas, the rate of interest
is relatively lower as against loans and advances for commercial/business
purposes. Similarly for smaller amounts of loan the rate of interest is
higher as compared to larger amounts. Again lending rates for consumer
durables, e.g. loans for purchase of two-wheelers, cars, refrigerators,
etc. are relatively higher than for commercial borrowings.
However, the Reserve Bank of India from time to time announces
changes in the interest-rate structure to regulate the lending of funds
by banks. Different rates of interest are prescribed for various categories
of advances, such as advances to agriculture, small scale industries,
road transport, etc. Graded rates of interest are prescribed for backward
areas. Lower rate is normally charged from agencies selling food-grains
at fixed price through Govt. approved outlets.
Lastly, lower rate of interest is charged for loans granted to persons
belonging to ‘weaker sections of the society’.

Intext Questions 35.2
Match column (A) with column (B) as given below :–
Column A

Column B

(A) Bank-borrowing

(1) is the rate at which Reserve Bank of
India lends money to commercial
banks.

(B) Bank- Rate

(2) usually get loans/advances at a
relatively lower rate of interest

(C) Reserve Bank of India (3) Mobilize funds by accepting the
deposits.

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(D) Commercial Banks

(4) an apex institution from which banks
can borrow.

(E) Lending-rate

(5) the funds deposited by the public in
banks.

(F) Weaker sections of
the society

(6) is the rate at which commercial banks
make funds available to public.

35.5 Lending of Money
You have noted in the earlier lessons that commercial banks lend money
in four different ways: (a) direct loans, (b) cash credit, (c) overdraft,
and (d) discounting of bills. These are briefly discussed below:

(I)

Loans
Loan is the amount borrowed from bank. The nature of borrowing
is that the money is disbursed and recovery is made in instalments.
While lending money by way of loan, credit is given for a
definite purpose and for a pre-determined period. Depending upon
the purpose and period of loan, each bank has its own procedure
for granting loan. However the bank is at liberty to grant the
loan requested or refuse it depending upon its own cash position
and lending policy. There are two types of loan available from
banks :
(a) Demand loan, and
(b) Term loan
(a)

A Demand Loan is a loan which is repayable on demand
by the bank. In other words, it is repayable at short-notice.
The entire amount of demand loan is disbursed at one
time and the borrower has to pay interest on it. The
borrower can repay the loan either in lumpsum (one time)
or as agreed with the bank. For example, if it is so agreed
the amount of loan may be repaid in suitable instalments.
Such loans are normally granted by banks against security.
The security may include materials or goods in stock,
shares of companies or any other asset. Demand loans are

Loans and Advances :: 65

raised normally for working capital purposes, like purchase
of raw materials, making payment of short-term liabilities.
(b)

Term Loans : Medium and long term loans are called
term loans. Term loans are granted for more than a year
and repayment of such loans is spread over a longer period.
The repayment is generally made in suitable instalments
of a fixed amount.
Term loan is required for the purpose of starting a new
business activity, renovation, modernization, expansion/
extension of existing units, purchase of plant and
machinery, purchase of land for setting up of a factory,
construction of factory building or purchase of other
immovable assets. These loans are generally secured against
the mortgage of land, plant and machinery, building and
the like.

(II)

Cash credit
Cash credit is a flexible system of lending under which the
borrower has the option to withdraw the funds as and when
required and to the extent of his needs. Under this arrangement
the banker specifies a limit of loan for the customer (known as
cash credit limit) up to which the customer is allowed to draw.
The cash credit limit is based on the borrower’s need and as
agreed with the bank.
Against the limit of cash credit, the borrower is permitted to
withdraw as and when he needs money subject to the limit
sanctioned.
It is normally sanctioned for a period of one year and secured
by the security of some tangible assets or personal guarantee. If
the account is running satisfactorily, the limit of cash credit may
be renewed by the bank at the end of year. The interest is
calculated and charged to the customer’s account.
Cash credit, is one of the types of bank lending against security
by way of pledge or /hypothetication of goods. ‘Pledge’ means

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bailment of goods as security for payment of debt. Its primary
purpose is to put the goods pledged in the possession of the
lender. It ensures recovery of loan in case of failure of the
borrower to repay the borrowed amount. In ‘Hypothetication’,
goods remain in the possession of the borrower, who binds himself
under the agreement to give possession of goods to the banker
whenever the banker requires him to do so. So hypothetication
is a device to create a charge over the asset under circumstances
in which transfer of possession is either inconvenient or
impracticable.

(III) Overdraft
Overdraft facility is more or less similar to ‘cash credit’ facility.
Overdraft facility is the result of an agreement with the bank by
which a current account holder is allowed to draw over and
above the credit balance in his/her account. It is a short-period
facility. This facility is made available to current account holders
who operate their account through cheques. The customer is
permitted to withdraw the amount of overdraft allowed as and
when he/she needs it and to repay it through deposits in the
account as and when it is convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of
a written request by the customer. Sometimes the bank also insists
on either a promissory note from the borrower or personal security
of the borrower to ensure safety of amount withdrawn by the
customer. The interest rate on overdraft is higher than is charged
on loan. The following are some of the benefits of cash credits
and overdraft :(i)

Cash credit and overdraft allow flexibility of borrowing,
which depends upon the need of the borrower.

(ii)

There is no necessity of providing security and
documentation again and again for borrowing funds.

(iii)

This mode of borrowing is simple and elastic and meets
the short term financial needs of the business.

Loans and Advances :: 67

(IV) Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills
of exchange by bank is another way of making funds available
to the customers. Bills of exchange are negotiable instruments
which enable debtors to discharge their obligations to the
creditors. Such Bills of exchange arise out of commercial
transactions both in inland trade and foreign trade. When the
seller of goods has to realise his dues from the buyer at a distant
place immediately or after the lapse of the agreed period of
time, the bill of exchange facilitates this task with the help of
the banking institution.
Banks invest a good percentage of their funds in discounting
bills of exchange. These bills may be payable on demand or
after a stated period.
In discounting a bill, the bank pays the amount to the customer
in advance, i.e. before the due date. For this purpose, the bank
charges discount on the bill at a specified rate. The bill so
discounted , is retained by the bank till its due date and is
presented to the drawee on the date of maturity. In case the bill
is dishonoured on due date the amount due on bill together with
interest and other charges is debited by the bank to the customers
account.

Intext Questions 35.3
Fill in the blanks with suitable word/s.
(a)

There are four different ways of bank lending; these are:
1. __________
2. __________
3. ___________
4. ___________

(b)

Bank Loan can be divided into two categories, viz. ___________
and ____________ .

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(c)

When the loan is repayable on demand or at a very short notice,
the loan is known as _________ .

(d)

When the loan granted by bank is for a long or medium period,
the loan is called ______________ .

(e)

___________ is a flexible system of lending under which the
borrower has the option to withdraw the amount as and when
required.

(f)

_________ is an arrangement with the bank by which a current
account holder is allowed to draw an amount in excess of the
balance in his account.

(g)

Due date of bill is also known as date of__________ .

35.6 Long-term and Short-term Loans
Commercial banks grant loans for different periods-long, short and
medium term for different purposes.

(1)

Short-term loans
Short term loans are granted by banks to meet the working capital
needs of business. The working capital needs refer to financial
needs for such purposes as, purchase of raw materials, payment
of wages, electricity bill, taxes etc. Such loans are granted by
banks to its borrowers to be repaid within a short period of time
not exceeding 15 months.
Short term loans are normally granted against the security of
tangible assets like goods in stock, shares, debentures, etc. The
rate of interest charged on short term loans ranges from 12% to
18% p.a.

(2)

Term Loans
Medium and long term loans are generally known as ‘term loans’.
These loans are granted for more than 15 months. In case of
medium term loan, the period ranges from 15 months to less
than 5 years. Medium term loans are generally granted for heavy

Loans and Advances :: 69

repairs, expansion of existing units, modernisation/renovation etc.
Such loans are sanctioned against the security of immovable
assets. The normal rate of interest ranges between 12% to 18%
depending upon the period, purpose, nature and amount of the
loan. Though banks may grant long term loans, they avoid
granting loan for more than 5 years.

Intext Question 35.4
Write true (t) or false (f) as may be appropriate against the following
statements:
(i)

Short term loans are sanctioned only for one month.

(ii)

Medium or long term loans are known as ‘term loans’.

(iii)

Long term loans are not required to meet the working capital
needs of the business.

(iv)

Shares and Debentures are ‘immovable assets’.

(v)

Commercial banks normally grant loans for more than a period
of 15 months.

(vi)

Before sanctioning loan, the bank examines the customer’s/
borrower’s financial position.

35.7 Nature and Security of Loans
To ensure the safety of funds lent, the first and most important factor
considered by a bank is the capacity of borrowers to repay the amount
of loan, The bank therefore, relies primarily on the character, capacity
and financial soundness of the borrower. But the bank can hardly afford
to take any risk in this regard and hence it also has the security of
tangible assets owned by the borrower. In case the borrower fails to
repay the loan, the bank can recover the amount by attaching the
assets.
It can sell the assets offered as security and realize the amount. Thus
from the view point of security of loans, we can devide the loans into

70 :: Business Studies

two categories: (a) secured, and (b) unsecured. Unsecured loans are
those loans which are not covered by the security of tangible assets.
Such loans are granted to firms/institutions against the personal security
of the owner, manager or director. On the other hand, Secured loans
are those which are granted against the security of tangible assets, like
stock in trade and immovable property. Thus, while granting loan against
the security of some assets, a charge is created over the assets of the
borrower in favour of the bank. This enables the bank to recover the
dues from the customer out of the sale proceeds of the assets in case
the borrower fails to repay the loan.
There are various types of securities which may be offered against
loans granted, but all of those are not acceptable to the banks. The
types of securities generally accepted by the bank are the following:
l

Tangible assets such as plant and machinery, motor-van, etc.

l

Documents of title to goods, like Railway Receipt (R/R), Bills
of exchange, etc.

l

Financial Securities (Shares and Debentures)

l

Life-Insurance Policy

l

Real estates (Land, building, etc).

l

Fixed Deposit Receipt (FDR)

l

Gold ornaments, Jewellery etc.

Intext Questions 35.5
Fill in the blanks with appropriate words given in the bracket.
(a)

The most important factor to be considered to ensure the safety
of loan sanctioned is ................ of the customer/borrower. (Health/
Goodwill/Capacity to Pay)

(b)

In case of default on the part of the borrower to repay, the bank
can ................ the goods/asset offered as security. (release, sell,
return).

(c)

The loans which are not covered by the security of tangible
assets are ................ loans. (long term, short term, unsecured)

Loans and Advances :: 71

(d)

Financial securities include ................
bill of exchange, bonds)

(e)

Real estate as security refers to
motorcar, house or flat)

(shares & debentures,

................ (stock in trade,

35.8 Procedure of granting Cash Credit, Overdraft and
Discounting Bills
We have studied in this lesson that banks provide financial assistance
to its customers in the form of loans, advances, cash credit, overdraft
and through the discounting of bills. The procedure of applying for and
sanction of loans and advances differs from bank to bank. However,
the steps which are generally to be taken in all cases are as follow:–

(I)

Filling up of loan application form
Each bank has separate loan application forms for different
categories of borrowers. When you want to borrow money from
a bank, you will have to fill up a loan application form available
with the bank free of cost.
The loan application form contains different columns to be filled
in by the applicant. It includes all information required about the
borrower, purpose of loan, nature of facility (cash-credit, overdraft
etc) required, period of repayment, nature of security offered,
and the financial status of the borrower. A running business
limit may be required to furnish additional information in respect
of :
—

assets and liabilities

—

profit and loss for the last 2 to 3 years.

—

The names and addresses of three persons
(which may include borrowers, suppliers, customers and
bankers) for reference purposes.

(ii)

Submission of form along with relevant documents
The loan application form duly filled in should be submitted to
the bank along with the relevant documents.

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(iii)

Sanctioning of loan
The bank scrutinizes the documents submitted and determines
the credit worthiness of the applicant. If it is found to be feasible,
the loan is sanctioned. If the loan is for Rs 5000 or less,
normally the Branch Manager himself can take the decision and
sanction the loan. In case the amount of loan is more than Rs
5000, the application is considered at regional, zonal or head
office level, depending on the amount of loan.

(iv)

Executing the Agreement
When the loan is sanctioned by the bank and the borrower is
informed about it, he will have to execute an agreement with the
bank regarding terms and condition for the amount of loan raised.

(v)

Arrangement of Security for Loan
The borrower will now arrange for security against the loan.
These securities may be immovable properties, shares, debentures,
fixed deposit receipts, and other documents, like, Kisan Vikas
Patra, National Savings Certificate, as per agreement.
When the borrower completes all the formalities, he is allowed
to get the amount of loan/advance/ over draft as sanctioned by
the bank. In case of ‘discounting of bills’, the bank credits the
amount of bill to the customer’s account before the realization
of the bill and thus, makes available the fund. In case, the bill
is dishonored on due date, the amount due on the bill together
with interest and other charges are payable by the party whose
bill is discounted.

Intext-Questions 35.6
Fill in the blank With Suitable Words:(i)

The procedure to apply for and sanction of loans and advances
____________ from bank to bank.

(ii)

Loan Application forms are available with the bank ____________
of cost.

Loans and Advances :: 73

(iii)

The Bank determines ________________ of the applicant before
sanctioning loan.

(iv)

A loan of Rs.80,000 would generally be considered at _________
level.

(v)

Agreement with the bank includes _________ for the amount of
loan raised.

(vi)

In case of ___________ the bank credits the amount of bill to
the customers account before the realization of the bill.

35.8 What You Have Learnt
The main activities of a commercial bank include acceptance of deposits,
that is mobilisation of funds, and lending these funds to people who
require it for various purpose. On the deposits received the bank pays
interest to the depositors at a specified rate. This is known as the
‘Borrowing Rate’. When the Reserve Bank of India lends money to
commercial banks, the rate of interest it charges is known as ‘Bank
rate’. The other important activity of a bank is that of granting loans
and advances to the public. The rate of interest at which commercial
banks lend money to the people is known as ‘Lending rate’. The
borrowing rates and lending rates are subject to change from time to
time.
There are four different ways of lending money by banks; viz. (a)
Direct loans; (b) Cash credits; (c) Overdraft, and (d) discounting of
bills. Bank loans may also be classified into 3 categories i.e. Shortterm loan, medium term loan and Long-term loan. Short-term loans are
granted by banks to meet the working capital needs of business. Mediumterm loans and long-terms loans are generally known as ‘Term loans’.
These loans are granted for more than one year for heavy repairs,
expansion of units, modernisation/renovation etc. Such loans are
sanctioned against the security of permanent, immovable assets.
To ensure the safety of the funds lent, banks require the security of
tangible assets owned by the owner, both in the case of short-term and
term loans. Unsecured loans are those granted against the personal

74 :: Business Studies

security of the borrowers. There are various types of securities which
are acceptable by banks against loans and advances.
For getting a loan sanctioned by any bank, one has to apply for it with
relevant documents. The bank verifies the application and determines
the creditworthiness of the applicant. If it is feasible, the loan is
sanctioned. After the sanction of loan the borrower has to enter into an
agreement with the bank regarding terms and conditions of the loan.
The last step is to arrange for the security for the loan granted by
bank. After completing these formalities the borrower is allowed to
draw money against the loan.

35.9 Terminal Exercise
(I)

What is meant by ‘Secured loans’? Enumerate the types of
securities generally required by banks for such loans.

(II)

Discuss in brief the different ways of lending money by
commercial banks.

(III)

Is there any difference between ‘Demand loan’ and ‘Term loan’?
If yes, write in brief.

(IV)

Enumerate the advantages of loans and advances raised from
banks by business firms.

(V)

Outline in brief the difference between the terms: ‘Lending-rate’
and ‘Borrowing-rate’ of a modern bank.

(VI)

What do you mean by ‘cash-credit’ and ‘overdraft’? How do
banks extend the facility of ‘overdraft’?

(VII) How do banks make funds available to their customers through
‘discounting of bills’?
(VIII) What is the difference between ‘Loan’ and ‘Advance’?
(IX)

State the meaning of:
(a) Term Loan

(b) Cash Credit

(d) Lending Rate (e) Bank Rate

(c) Borrowing Rate

Loans and Advances :: 75

Practical work:
(A)

Chart out the procedure for getting loans and advances from
bank with the important documents required and other formalities
to be completed.

(B)

Visit the nearest bank and enquire about the prevailing rates of
interest on different accounts and loans and advances.

(C)

Familiarise yourself with the important documents, like application
form for loan, including procedure involved in getting Shortterm and Term loan.

(D)

Discuss with Bank Manager/P.R.O. regarding different types of
securities to be pledged/mortgaged against any particular type of
loan raised.

35.10 Answers to Intext Questions
35.1 1.

True (a), (b)
False (c), (d), (e)

2.

(a)

Earning;

(b)

Loan

(c)

Short

(d)

Current liabilities

(e)

Reserve Bank of India

(f)

Secrecy.

35.2 Matching

(A)

----

(5)

(B)

-----

(1)

(C)

-----

(4)

(D)

-----

(3)

(E)

-----

(6)

(F)

-----

(2)

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35.3 (a)

(1) Direct loan
(2) Cash credit
(3) Overdraft
(4) Discounting of Bills

35.4

(b)

Demand loan and Term loan

(c)

Demand loan.

(d)

Term loan

(e)

Cash credit

(f)

Overdraft

(g)

Maturity.

True (ii), (iii), (vi)
False (i), (iv), (v).

35.5 (a)

Capacity to pay

(b)

Sell

(c)

unsecured

(d)

Shares and Debentures

(e)

House or flat.

35.6 (i)

Differs

(ii)

Free

(iii)

Credit worthiness/Paying capacity

(iv)

Regional/Zonal

(v)

Terms and Conditions

(vi)

Discounting of bills.

36
Other Banking Services

36.1 Introduction
In previous lessons, you have learnt that commercial banks play an
important role in the field of trade, commerce and industry. They
promote and mobilize savings by providing safety, confidentiality and
attractive rate of interest. Banks inspire confidence in people and help
in creating banking habits in them. This promotes saving. Savings by
individuals are made available to those who wish to invest them in
developmental activities.
The primary functions of commercial banks may be summarized as
‘borrowing’ and ‘lending’ of money. Besides these two main functions,
a commercial bank also undertakes a variety of other activities. These
activities involve services offered by banks to help the customers
(account holders). Such activities include collection of cheques, dividend,
warrants, etc. on behalf of customers as well as effecting transfer of
funds, remittances by mail and telegram. In order to attract customers
and make banking services effective, banks always make efforts to
diversify their activities. Such diversification takes place by way of
new service activities and schemes. These services offered by banks
are generally known as agency services. These are also termed as nonbanking, general utility, and miscellaneous services.
The relationship between a customer and a bank is that of a ‘Principal’
and ‘Agent’. The bank acts as an agent on behalf of the customer as
principal. When any bank acts as an agent, the services rendered by it

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are known as agency services. Under agency services, the bank
undertakes payment of subscriptions, premium on insurance, collection
of cheques, dividents, etc. It acts as a trustee, executor or administrator
and an ‘agent’ for buying and selling shares, stocks, debentures on
behalf of the customer.
General utility services refer to those non-bank services which are in
the interest of general public, i.e. the society at large. Such services are
called ‘non-banking services’ because they are not directly concerned
with the main banking activities. These services include issue of
traveller’s cheques, credit cards, drafts, circular notes, gift cheques and
safe custody of valuables, like negotiable securities, jewellery, documents
of title to goods, etc.
The range of services offered differs from bank to bank, depending
mainly on the size and type of bank, but the acceptance of deposits
from the public and lending operations form the main stay of the
banking business.
In this lesson we shall describe the supplementary functions of banks
and discuss the significance of non-banking services.

36.2 Objectives
After studying this lesson, you will be able to :–
l

describe the supplementary functions performed by commercial
banks;

l

classify and enumerate the non-banking services of a modern
bank; and

l

discuss the significance and utility of non-banking services.

36.3 Supplementary Functions/Services of a Bank
Beside performing the two main banking functions of accepting deposits
and lending funds, a commercial bank renders a number of ancillary
services also. These services are known as supplementary functions.
They supplement the main functions of the bank. They are essentially
non-banking in nature and broadly fall under two categories:

Other Banking Services :: 79

(i)

Services rendered by bank to its own customers.

(ii)

Services that are available to the public in general.

Services of bank to its customers
Some of functions in this category are enumerated below:
(a)

Dealing in Bills of Exchange, Promissory Notes, Hundies and
Drafts.

(b)

Issuing letter of credit, Traveller’s cheques and Circular notes.

(c)

Buying, selling and dealing in bullion as well as foreign exchange
and foreign bank notes.

(d)

Acting as ‘agent’ for clients, buying and selling shares and
debentures, and acting as underwriter.

(e)

Collection and remittance of money and extending guarantee
against loans raised by customers.

Services to the General Public
Some of the services in this category may be enumerated as follows:–
(i)

Providing lockers for safe custody of valuables.

(ii)

Undertaking and executing trusts, supporting and helping
associations by way of advances for social welfare activities etc.

(iii)

Performing such activities/services which are incidental or
conducive to the promotion or advancement of general wellbeing of the society.

(vi)

Extending loans at concessional rate of interest to socially
neglected people such as rickshaw pullers, as well as smalltraders, transport operators, talented professionals, self-employed
persons, and students.

(v)

Promoting thrift and saving habits among people for their own
benefit as well as investment for the development of rural areas,
and financing trade and industrial activities.

80 :: Business Studies

(vi)

Banks also provide ‘Customer Service’ in different ways, like
adjusting banking hours to suit the convenience of depositors,
installing Automatic Teller Machines (ATM) to enable withdrawal
of money at any time, etc.

Intext Questions 36.1
I

Write ‘True’ or ‘False’ as may be appropriate against the
following statements:
(i)

Accepting deposit from customers is a major function of
modern banks.

(ii)

Granting loans to trading firms is not the main function of
a bank.

(iii)

Ancillary Services are also known as Supplementary
functions of a Bank.

(iv)

Supplementary functions are also called non-banking
functions.

(v)

Services rendered to the general public may be regarded
as the main function of banks.

(vi)

Banks charge fees for the services rendered.

(vii) Banks cannot buy and sell shares and debentures on behalf
of customers.
(viii) Banks stand guarantee for loans raised by customers from
other financial institutions.

36.4 Classifying and Enumerating the Non-Banking
Services of a Modern Bank
As mentioned earlier, commercial banking functions include accepting
deposits and lending money for investment purposes and these two
functions are considered to be essential activities (main functions) of
banks. In addition, commercial banks render a number of other services,

Other Banking Services :: 81

called non-banking services which may be divided into two categories:a)

Services rendered by banks to their customers. These services
are functions performed by a bank as the agent of customers.
Hence, these functions are also knwon as ‘Agency functions’ of
banks.

b)

Services rendered to the general public/society. These functions
are essentially non-banking in nature and in addition to the main
functions of a bank.
Let us enumerate the agency and non-banking functions
undertaken by banks on behalf of customers and for the benefit
of the general public.

(a)

Services to Customers
(i)

Accepting and discounting bills of exchange.

(ii)

Collecting cheques, bills, salaries, pension, dividends,
interest on investments, etc. on behalf of clients.

(iii)

Undertaking payment of subscriptions to clubs or other
associations, insurance premium, rents, taxes, etc

(iv)

Acting as an agent of customers for buying and selling
shares and debentures, National Saving Certificates (NSCs),
and dealing in government securities.

(v)

Acting as a Correspondent or authorised representative of
customers in dealing with other banks and financial
institutions.

(vi)

Acting as an ‘executor’ or ‘administrator’ under power of
auttorney and carrying out the instructions of a deseased
as expressed in his will.

(vii) Acting as attorney. When the bank acts as an attorney, it
is generally authorised to receive dividends, interests on
securities, and to sign on behalf of customers on transfer
forms etc. for sale and purchase of securities.

82 :: Business Studies

(viii) Arranging remittance of funds from one place to another
on behalf of customers.

(b)

(ix)

Issuing letter of credit.

(x)

Issuing credit cards, circular notes and traveller’s cheque
for the convenience of customers.

(xi)

Giving guarantee against loans raised by customers.

Services to the General Public
(i)

Providing facility of lockers for the safe custody of
valuables.

(ii)

Financial assistance for the establishment of trusts,
association, clubs and charitable institutions.

(iii)

Performing such functions as are incidental or conducive
to the promotion and advancement of trade and commerce.

(iv)

extending financial help to the weaker sections of society
for self-employment.

(v)

Issue of bank drafts, gift-cheques, banker's cheques, etc.

(vi)

Providing financial assistance to the physically handicaped
to engage in gainful occupation and earn their livelihood.

Intext Questions 36.2
Fill in the blanks with suitable word/s.
(1)

Services rendered by a bank, other than its essential functions
are called ___________ Services.

(2)

Two main function performed by a modern bank are _______
and __________ .

(3)

When the bank acts as an ‘Agent’ of its customers, the services
rendered are called _______ functions.

(4)

Services rendered by bank to the general public are called

Other Banking Services :: 83

_____________ functions. These functions are ___________ in
nature.
(5)

A bank acts as an ______ of the customer when it buys and
sells shares and debentures on his behalf.

(6)

A bank acts as __________ or ___________ of the customer
when it deals with other banks and Financial Institutions on
behalf of the customer.

(7)

Bank plays the role of ________ or __________ under power of
attorney when it carries out the instructions of a deseased as
expressed by him/her in his/her will.

(8)

When the bank is authorized to receive dividends, interest on
securities, and to sign on behalf of his customer on transfer
forms for sale and purchase of securities, it is said to act as
__________ .

(9)

Locker facility is given by bank for the safe custody of
_________ .

(10)

Cheques printed with attractive colours and designs, which are
issued by bank to the members of public to enable them to
present a specific amount to a friend or relative on special
occasion are called __________ .

36.5 Significance and Utility of Non-banking Services
(i)

Banks undertake collection of book debts, bills of exchange,
promissory notes, dividend warrants, etc. which greatly facilitate
business activities. The collection charges payable to the bank
far outweigh the advantages to the users of the service.

(ii)

Foreign trade activities are also greatly facilitated by banks
undertaking issue of letter of credit, acceptance and payment of
documentary bills, and providing financial assitance by way of
pre-shipment and post-shipment credit, etc.

84 :: Business Studies

(iii)

Safe custody of valuable articles and documents can be arranged
by hiring lockers in banks. This facility provided by banks is
highly useful to business firm as well as individuals.

(iv)

Those who wish to subscribe to shares and debentures floated
by companies can do so through designated banks. Also, banks
may be authorised to buy and sell shares, debentures and
government securities to the advantage of investors.

(v)

Banks may and do undertake payment of subscription to clubs,
insurance premium, income tax and sales tax, etc. These services
save time and effort of people.

(vi)

An important service provided by banks to individuals and
business firms is that of acting as a reference. Thus, suppliers
can confidentially ascertain the financial status and creditworthiness of customers.

(vii) Accepting bills of exchange and guaranteeing loans of clients
are two other services of banks which are availed of by business
firms and individuals to their advantage.
(viii) Remittance of money is required for business purpose as also to
meet individual needs. Banks provide remittance facilities by
way of mail transfer or telegraphic transfer of funds from one
branch office to another located elsewhere.
(ix)

Transfer of money from one place to another is also possible by
means of bank draft, which is an order issued by a bank on any
branch of the same bank to pay the specified amount to the
person named in it. For transfer of money in the same city banks
also issue Bankers’ Cheque or Pay order.

(x)

Banks issue traveller’s cheques mainly for the convenience of
travelling executive or individuals. These cheques can be encashed
from the branch office of the bank at the place of visit, and also
used to pay for airlines booking, settling hotel bills, etc.

(xi)

Credit cards issued by banks serve the purpose of availing instant
credit facility by the holder for purchase of goods and availing
services. The card is made of stiff plastic and hence popularly

Other Banking Services :: 85

known as ‘plastic money’. These cards are issued to persons
having income above a certain limit, and include the name of the
issuing bank and the card-holder along with the latter’s specimen
signature.

Intext Questions 36.3
A

Match the following terms with their meaning and characteristics.
Column- I

Column -II

(a) Bank acting as
a ‘Referee’

(i)

(b) Credit Card

(ii) is an instrument which provides
instant credit facility to its holder to
buy of goods and services at the
merchant’s outlet.

(c) Safe-custody of
valuables

(iii) is an order issued by a bank to its
branch to pay a certain sum of
money to the person named therein.

(d) Bank acting as agent

(iv) means a locker facility provided by
bank to the public to keep the
important documents and articles.

(e) Traveller’s cheque

(v) means that the Bank reports on the
financial Status of a person/customer.

(f)

(vi) is a service rendered by bank to
purchase and sale shares and
debentures on behalf of its customers.

Bank draft

are issued mainly for the convenience
of travelling public.

36.6 What You Have Learnt
Commercial Banks promote saving habit among people and inspire
confidence in the general public. Banks performa variety of functions.
Apart from the two main functions of mobilising deposits and ‘lending’,
a bank renders various services to the business community and general
public. These services offered by bank to customers are generally known

86 :: Business Studies

as agency services. These are termed ‘non-banking’ services, when
rendered to the general public.
l

Agency Services include payment of subscription, insurance
premium, collection of cheques and dividends, buying and selling
shares and debentures on behalf of customers.

l

Non-banking services are rendered in the interest of general
public. Some of these services are: issue of Traveller’s cheques,
gift-cheques, Bank drafts, circular notes and safe custody of
valuable articles and documents in bank lockers, etc.

Commercial banks have proved to be very useful to the society in
general and to trade and industry in particular.
The usefulness of the service functions of banks to trade and industry
and their significance to the general public are wide-ranging in nature
and variety. Banks offer attractive rates of interest on savings of
customers and thus create the habit of thrift and savings in many
people. They are very useful in facilitating foreign trade activities.
Besides acting as ‘agent’, referee, trustee, ‘executor’ and administrator
banks render numerous other services like providing locker facilities,
payment of taxes, insurance premium, issuing drafts, arranging
remittances, etc..

36.7 Terminal Exercise
1.

What type of services do banks provide as ‘Agent’ of customers?
Mention any five services.

2.

Does a bank provide services other than accepting deposits and
lending money ?

3.

Explain in what ways a bank may be helpful to (a) a retired
pensioner, (b) a traveller, and (c) a house-wife

4.

What is the meaning of :–
(i)

Non-banking services

(ii)

Agency services

Other Banking Services :: 87

5.

Explain how commercial banks serve the business community in
our country.

6.

Ennumerate various services rendered by a modern bank to the
business community and general public.

Practical Activity
Visit a bank and enquire about the types of deposit accounts operated
there, see the locker facility available, observe the procedure of
withdrawal by cheque and how the bank issues Bank-draft/Gift cheque
etc.

36.8 Answers to Intext Questions
36.1 True (i), (iii), (iv), (vi), (viii)
False (ii), (v), (vii)
36.2 1.

Supplementary

2.

Borrowing and Lending

3.

Agency

4.

Miscellaneous, Non-banking

5.

Agent

6.

Correspondent, Authorized representative

7.

Executor, Administrator

8.

Attorney

9.

Valuables/Important documents

10.

Gift Cheques

88 :: Business Studies

36.3 (a)

(v)

(b)

(ii)

(c)

(iv)

(d)

(vi)

(e)

(i)

(f)

(iii)