BCom 3rd Year Bank Definition Money Financial Function Study Material notes
Table of Contents
BCom 3rd Year Bank Definition Money Financial Function Study Material notes: Origin of the world bank Functions of Commercial Banks General Utility Functions Exercise Questions Long Answer Questions Short Answer Questions Objective Question ( Most Important For BCom 3rd Year Student Help in Your Examinations )
BCom 3rd Year Nature Importance Financial Money Study Material notes
BANK: DEFINITION AND
FUNCTIONS
ORIGIN OF THE WORLD
BANK “Bank’ is an English word. The history of the use of the term bank is very old. Even at present, the term is very popular, But there is no evidence as to time and place associated with the origin of this term. There is dissension even among scholars in this regard. Some people held that ‘Bank’ has been derived from the Italian term ‘BANCO’ which was later called ‘BANKE’ in French. On the other hand some people consider the origin of this term from the German term ‘BANCK’. Besides these, BANQUE, BANKE and BANC etc. are also considered as mythological terms for BANK. Whatsoever be the origin of this term, all the scholars agree on the concept that the present system of banking started in Italy. Merchants in Italy and other European Countries used to sit on benches to exchange money in ancient times. These people kept money of different places with them and could change the money (currencies) of traders in the currencies of the desired place for their convenience.
These merchants used to lend money to one another. In this regard the origin of the term BANK can be considered from ‘BANCO’ because Banco means to sit around the benches. The benches of merchants were broken into pieces if they violated their agreements or failed in their enterprises. This was how the term ‘Bankrupt originated.
On the other hand, ‘BANK’ means-Joint Stock fund. It means centralisation of money deposited by many people at a place.
So long as the starting of modern banking is concerned, it is supposed to have taken place in the 17th century A.D. Bank of Amsterdam in 1609 in Holland; Bank of Hamburg in 1619 in Germany and Bank of England in 1694 were the initially set up banks in number on modern line of banks. Since then banks have been increasing gradually in different countries of the world.
Bank Definition Money Financial
DEFINITIONS OF BANK
Today the term ‘bank’ simply means commercial banks. The definitions of banks can be classified as follows for the convenience of study:
General Definitions
Definitions of Bank Functional Definitions
Legal Definitions
Proper Definition
(A) General Definitions
Following are important general definitions of banks :
(1) According to H. L. Hart, “A banker is one who in the ordinary course of his business receives deposits and he pays by honoring cheques.”
(2) According to Kinley, “Bank is an establishment which makes to individuals such advances of money as may be required and safely made and to which individuals entrust money when not required by them for use.” |
(3) According to Sayers, “Bank as an institution whose debts, or bankdeposits is commonly accepted in final settlement of other people’s debts.”
(4) According to Crowther, “The banker’s business is to take deposits of other people, to offer his own exchange facility and there by create money.”
Bank Definition Money Financial
(B) Functional Definitions
Following are the functional definitions of bank :
(1) According to Findly Shirras, “A banker or bank is a person or a firm or company having a place of business where credits are opened by the deposit or collection of money or currency subject to be paid or remitted upon draft, cheques of order or where money is advanced or loaned on stock, bonds, bullion and bills of exchange and promissory notes are received for discount and sale.”
(2) According to Webster’s Dictionary, “Bank is an institution which trades on money, establishment for the deposit, custody and issue of money, as also for making loans and discount and facilitating the transmission of remittances from one place to another.”
Bank Definition Money Financial
(C) Legal Definitions
The term ‘Bank’ has been defined in the Banking Regulation Acts of various countries. Some prominent legal definitions are given below :
(1) According to England’s Bills of Exchange Act, 1882, “Banker includes any body or person whether incorporated or not who carry on the business of banking.”
(2) According to the Negotiable Instrument Act, 1881, “Banker includes any person acting as a banker and any post office saving bank.”
(3) According to Indian Companies Act, 1936, “A company which carries on as its principal business by accepting the deposits of money on current account or otherwise subject to withdrawal by cheque, draft or order.”
(4) According to Indian Banking Companies Act, 1949, “The accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”
After a thoughtful observation of the above mentioned all definitions, we come to a conclusion that the definitions given in the general category are incomplete. Functional and legal definitions have glimpses of completion. On this basis, a proper or ideal definition of bank can be given.
Bank Definition Money Financial
(D) Proper Definition
In a nutshell, it can be said, “A Bank is an institution that performs the task of exchanging money and credits.” But in a detailed description, we can say, “A bank is such money-dealing institution where money is deposited, loans are granted and the facility of transactions of money is provided. With these the conservation of deposits and credit formation also take place.
FUNCTIONS OF COMMERCIAL BANKS
Now-a-day, just the use of the term ‘Bank signifies the commercial banks and commercial banks are specially known by their functions. The functions of commercial banks can be classified under these categories:
Primary Functions
Functions of Commercial Banks Agency Functions
General Utility Functions
(A) PRIMARY FUNCTIONS
Banks perform two main primary functions:
(1) Receiving Deposits: The first and foremost work of commercial banks is receiving money from people in the form of deposits. People deposits big and small savings in various accounts with banks. Various deposit accounts are as follows:
(i) Fixed Deposit Account : Just as the name suggest this account has a nature of performance. The depositor deposits his money with the bank for a fixed period. The bank gives the depositor a receipt at the time of depositing money. This receipt contains information regarding the rate of interest, the maturity period and the deposited amount. This receipt is non-transferable. This amount is not allowed to be withdrawn before maturity. But the depositor can take loan on the basis of this receipt as collateral guarantee. Otherwise, he can get his deposit with interest after depositing the receipt on maturity. The bank gives maximum interest on this account in comparison to any other account. Money can be deposited for the minimum period of 46 days. This account is also called “Time Deposit.
(ii) Saving Bank Account: Banks manage a special kind of account for the common people. This is called ‘Saving Account’. This account helps in the capital formation for the people with low income. This account can be opened with a small amount. A depositor can deposit money in this account on any working day of the week. Account holders deposit their money through pay-in-slip. They can withdraw their amount according to their needs through cheque or withdrawal form. But commercial banks authorise their customer to withdraw money from their accounts only on two or three days of the week. Banks give interest on the money deposited in this account, but the rate of interest is low as compared to fixed deposit. Account holders are also given a passbook by the bank.
Bank Definition Money Financial
(iii) Current Account: Banks maintain a special account for industrials, traders and other commercial institutions. This is called current account. Depositors may deposit in and withdraw from these accounts as many times as they wish. Bank can’t invest money deposited in these accounts according to their choice. That is why banks give no or nominal interest on deposits in these accounts. Some reputed banks charge some amount from their account holders for running such account. Banks also grant the facility of Overdraft’ to customers with good credit.
(iv) Recurring Deposit Account: It is the speciality of this account that the same amount has to be deposited in it every month. It means once the account is opened, it takes the form of a compulsion. A Recurring Deposit Account is operated for a period of 6 months, 1 year, 2 years, 3 years or 5 years. The account holder gets his deposit along with interest on maturity. The interest given on this account is equal or equivalent to that of Fixed Deposit Account.
Besides these accounts there is also a Domestic Saving Account or Home Safe Account which is now not in use.
2. Advancing Loans : The second important task of commercial bank is advancing loans. A part of money deposited with the bank has to be kept with the Reserve Bank of India and the remaining is retained by banks as liquid money. Banks distribute the maximum part of their deposits as loans on getting! proper collateral/guarantee. The difference in interest charged on loans and interest paid on deposits is the profit of the bank. Commercial banks advance! loans in the following ways:
(i) Loans and Advances : Banks give a definite sum for a definite (very often long) period to their customers on getting proper collateral. Such a sum is called loans or advances. In this kind of loan banks don’t pay their customers the granted sum as a lump sum, but open loan accounts in their name and make entry of the loan amount given from time to time in these accounts. The customers are allowed to withdraw money through cheques according to their needs. But customers have to pay interest on the whole sum right from the beginning even if they withdrew just a small part of the loan.
(ii) Cash Credit : Commercial banks give this facility of credit to business persons. In this system banks grant loans on the basis of collaterals such as commercial goods, bonds or accepted securities. Instead of paying a lump sum amount, bank fixes a limit. The business person can take his/her cash credit up to that limit on the basis of the trade stock as collateral. Banks often take care of it that the business person has the stock of goods in his godown equivalent to the amount withdrawn from the bank. If the stock is less, the bank should get the amount which back. In this kind of loans banks charge interest only that much amount which the customer owes and not on the whole loan granted.
Bank Definition Money Financial
(iii) Overdraft : This is a facility that the banks grant only to those customers who have current accounts with banks. Considering the credit of account holders banks grant them the concession of withdrawing an amount bigger than their actual deposits. Excess of withdrawl over deposit is called ‘Overdraft’, But this is a short-term facility. Bank charges interest on overdraft amount. However, bank grants the facility of overdraft to some special customers even on their savings accounts.
(iv) Discounting of Bills : Commercial banks grant some short-term loans to traders by discounting bills too. Bills of exchange are a kind of credit instrument. A bill can generally be discounted when the drawer of the bill has an account with the bank. While discounting the bill the bank credits the account with the face value of the bill less discounting charge. The discount deducted by the bank is the amount of interest charged by the bank. The amount of discount depends upon the rate of interest.
(v) Money at Call and Short Notice: When banks grant loans to traders for a period ranging from 1 day to 10 days, it is called ‘Money at Call and Short Notice’. In such a loan, the banks reserve the right to ask for the loans to be repaid on short notices. Such loans are mostly taken by speculators and share brokers.
(vi) Educational Loan: Banks grant loans to students for higher education on the guarantee of their parents/guardians. Owing to this facility granted by the banks, the meritorious students of common households become able to get higher education.
Bank Definition Money Financial
(B) AGENCY FUNCTIONS
Banks are also agents of their customers. Thus, banks perform many agency functions for their customers on their demand. Banks take some commission in return for these functions. This commission serves as a source of bank’s income. Though, banks perform some tasks without any charge also. The main agency functions of banks are:
(1) To Make Payments on behalf of Customers : Banks nav customers, insurance-premium, rents and installments of loan-repayment from their accounts on their orders. Banks charge some commission for su services.
(2) To Collect Payments on behalf of Customers: Banks collect inter on investment, dividend, rents and other receipts on behalf of their custom and deposit these in the accounts of customer.
(3) Purchase and Sale of Securities : Banks sell and purchase shay debentures and other government and non-government securities on the demand of their customer.
(4) Transfer of Fund : Banks also perform the job of transferring mone from one place to another. Banks adopt following methods for these :
(a) Issuing Bank Draft: A Bank Draft is a paper through which a bank orders the other bank or any other branch of the same bank to pay the mentioned amount to the person or organisation in whose name the draft has been issued.
(b) CBS-Core Banking Solution : Most of banks have associated themselves with electronic system now-a-days. This enables a customer to deposit an amount in the bank and withdraw the same from some other branch. Besides this, the customer have also been given the facility that they can transfer money from their account.
In other words, core banking solution is a process that is conducted as a centralised environment, which means that all the informations are stored at the central server of the bank, which is connected to branches through networking system. This makes withdrawal of funds or deposit of funds or transaction of business anywhere in the country from a branch connected under CBS possible. So, it is called anywhere banking or 24 x 7 Banking.
(c) RTGS-Real Time Gross Settlement : This system facilitates customers to send a sum of one lakh rupees or more to some other person’s account within a short time and at a small commission.
(d) NEFT-National Electronic Fund Transfer : This method is very useful for sending sum less than one lakh rupees. This system transfers money four times a day at a fixed times viz 9:30 am, 10:30 am, 12 p.m. and 4 p.m. Banks transfers money through some other ways besides these also.
(e) Payment of Cheques, Bills etc: Banks pay cheques and bills of their customers. With this, banks also accept bills of exchange.
(f) Underwriting of Securities: Underwriting is also a work of commercial banks. They take up the task of selling shares issued by company customer’s securities. Banks get underwriting commission for it.
Bank Definition Money Financial
(C) GENERAL UTILITY FUNCTIONS
Banks perform following jobs under the category of General Utility Functions:
(1) State Custody of Valuables : Commercial banks provide their customers locker facility for the safety of gold and other precious metals, important documents etc. The customer keeps the key of locker and he/she can put or take out his/her assets in the locker according to his/her convenience during the banking hours. Banks charge an annual rent for this useful facility.
(2) To Issue Letter of Credit: Banks issue letters of credit to help in their trade activities. The customers get help in dealing with foreign trade and strangers. Besides this, banks also issue traveller’s cheque. But after the coming of the core banking, the use of traveller’s cheque has been marginalised.
(3) To Give Information about Credit : Commercial banks keep information about the credit of their customers. They can give this information to other customers on request to help in transaction. The traders get the help in trading at the minimum risk.
(4) Financial Advice : Commercial banks also give financial advice to their customers. Such advice from banks turns out to be helpful in establishing industries, safe investment of money, sale and purchase of shares and debentures etc.
(5) Collection and Publication of Electronic Statistics : Like the Central Bank, big commercial banks, too, collect statistics about trade and commerce, industries, banking etc. and publish these. This gives the common people proper information regarding the economic fields.
(6) Provision of Foreign Exchange : Banks manage foreign exchange for traders associated to imports and exports.
(7) ATM (Automated Teller Machine) Facility : Banks have installed ATMs at various places to facilitate their customers to withdraw money. This helps customers a great deal.
(8) Debit Card : This is a facility that banks provide to their customers in return for their deposits. Customers can purchase goods and services with the help of this card, provided the sufficient amount is deposited in their account. The sellers can get payment for the goods and services if they have terminals. This card is made of plastic and contains information like the bank’s name, card number etc. printed on it.
Bank Definition Money Financial
(9) Credit Card : This is also called ‘Plastic Money’. Good and services can be purchased with this card. It is not mandatory that the customers must have sufficient deposit in thier accounts. The card holder can use these cards to pay for goods and services they use. In a way, credit cards give the facility of overdraft, but its limit is already fixed. The card holders have to pay an annual charge for this facility. The users of this card become a debtor of banks.
(10) Tele-Banking: Banks give facility of knowing the account balance and other information by making a call any time.
Bank Definition Money Financial
EXERCISE QUESTIONS
Long Answer Type Questions
1. What is Bank? Explain the functions of Commercial Banks.
2. Explain the concept of Bank. Describe the functions of a modern bank.
3. Write Notes:
(a) Overdraft
(b) Cash Credit
(c) Debit Note
(d) Credit Note
Short Answer Type Questions
1 What is the meaning of Bank?
2. What are the functions of Commercial Banks ?
III. Objective Type Questions
Choose the correct option
1. A ………….. account can be opened in banks.
(a) Fixed Deposit Account
(b) Saving Bank Account
(c) Current Account
(d) All of the above
2. Which account is opened by business persons ?
(a) Current Account
(b) Saving Bank Account
(c) Home Safe Account
(d) All of the above
3. Which of these is a system of advancing loans ?
(a) Overdraft
(b) Cash Credit
(c) Loans and Advances
(d) All of the above
4. On using which account the card holders become a debtor of the bank ?
(a) Debit Card
(b) Credit Card
(c) ATM cum Debit Card
(d) All of the above
5. Paying Insurance premiums on behalf of customers by bank falls under the ……….. category of banks’ functions.
(a) Primary functions
(b) Agency functions
(c) General utility functions
(d) None of these
[Ans. : 1. (d), 2. (a), 3. (d), 4. (b), 5. (b)]
State whether the following statements are True or False :
1 Receiving deposits is the primary function of a bank.
2. Advancing loans is the secondary function of a bank.
3. Credit card is also known as plastic money.
4. Overdraft is short-term loan.
5. RTGS is one of the methods of transfer of fund.
6. Cash credit is a type of fixed deposit.
(Ans.: 1. True, 2. False, 3. True, 4. True, 5. True, 6. False.]
Bank Definition Money Financial
