A bank is an institution which deals in money. Broadly speaking, bank draw surplus money from the people who are not using it at the time, and lend to those who are in. a position to use it for productive purposes. Modern banks have developed from very small beginnings. The earlier bankers were goldsmiths. Crow ther observes that “the present-day banker has three ancestors: merchant money-lender and goldsmith. A modern bank is something of each of these. It is said money has two properties. It is Oat so that it can be piled up, and it is round so that it is can circulate. The progeny of the money-lender are concerned with Oat money, piled up
money, savings. The progeny of the goldsmith are concerned with round money. circulating money, cash.”
FUNCTIONS OF COMMERCIAL BANKS
Broadly speaking, there are three principal functions that banks (other than central
banks) pcrfonn: (a) receiving deposits; (b) advancing loans; and (c) discounting bills.
(a) Receiving Deposits. This function is important, because banksmainly~depend on the funds deposited with them by the public. Depositsare of three kinds
(i) current or demand deposits,
(ii) fixed or time
ji) savings deposits. On current or demand deposits, the bank pays practically no Banking. interest. They can be withdrawn in part or in full at any time by issuing a cheque. Field deposits are so called because they are left with the bank for a certain fixed period before the expiry of which they cannot be withdrawn except after giving
due notice. On such deposits, the bank pays higher interest. Savings deposits can be the subject to certain limitations regarding the amount with drawn or the frequency of withdrawals. There is, for instance, a limit to total weeky withdrawals. Modem banks are now more liberal in this respect and have relaxed most of these restrictions. In actual fact, only a small percentage of savings isis withdrawn at any particular time. But since withdrawals can and do take place, the bank has to keep a
certain proportion of its assets in liquid rm. the rest cancan be lent for varying periods. This brings us to the second function of banks.
Advancing Loans.In this respect, the banker has to shoulder a heavily responsibility. The bank makes profit by advancing loans, But the bank deals in other people’s money. It has. therefore, to keep ready cash to meet the depositors’ demands.Hence, great care has to be exercised in the mutter of lending and keeping reserves. The bank must strike a finc balance between liquidity and profitability. If it keeps its assets in too liquid a form. it loses profit. and. if it tries to make too much profit. it lI1~Y not be able to meet the depositors’ demands. It must aim at both liquidity and profitability. It should be noted that the bank docs not merelylend funds actually deposited with it by its clients. The bank can itself create deposits and thus make advances considerably in excess of thc SUI1lSdeposited with it. After satisfying itself that the purpose for which the loan is required is economically sound and after taking precautions as regards security, the bank gives its client thc right to draw cheques. The loan thus becomes a deposit to the credit of the customer concerned. If the customer, by a cheque or a series of cheques, withdraws this amount, the payment is made to somebody. These cheques, in their turn. come back
either to the same bank or to other banks of the country or locality. Thcy appear as deposits in the credit of the various people to whom thc payments were made, Thus, it is that “loans create deposits.” 1 is why it is said that in modern times, deposits of cash have changed into deposits of credit.
(c) Discounting Hills. Discounting of bills is, practically speaking, lending fur short periods. A trader. for instance, who docs not wish to lock up largefunds in trade credits. may draw a bill of exchange on his debtor, and . after it has been accepted by ,or on behalf of, the debtor, he may get it discounted by hisbanker. This gives the trader immediate possession of the money due to him less a deduction for the loss of interest and for the commission to the bank. These bills are usually for three months, and when they mature: the bank realises the face value of the hills. Thus, ihrbank earns a profit in addition to facilitating tra,Lh… These bills mature after short periods, and if the worst happens, they can be rediscounted at the central bank. This is a common way of keeping a part of the assets of the bank ill a liquid form. The bankers regard discounting of bills as a very good investment. That is
why it is remarked that a good bank manager knows the difference between a bill and a mortgage. In modern times, trade bills occupy a very small position in thc discount market as compared with Treasury Bills. Summing Up. The main functions of the banks can be summed up in one sentence: The banks borrow tu lend. Thcy borrow in thc form of deposits, (a) Fixed Deposits, (b) Savings Bank Deposits, and
(c) Current Deposits in Account . Thc banks lend inthree ways: (0) on open account for overdraft: (b) loans on thc cash credit basis; and (c) discounting of bills. The hanks borrow short end long. Their liabilities mature earlier than their loans. Their liabilities arc money and their assets partly money and partly near-money, The interest they have to pay on their liabilities is, therefore, less than what they earn on their assets, “The nearer to money that near-money is, the lower is the income it will yield. The further away from money Higher is the yield.’?