1. Mobilisation of Savings:
The bank promotes savings by offering safe-keeping and a reward for abstaining from current consumption in the shape of interest. Banks gather the savings of individuals through deposits.
The deposits are of various types, current, savings and fixed. A deposit is a loan to the bank and is a liability of the bank.
Image Source: c2.staticflickr.com
2. Supply of Finance:
The bank borrows money not for its own sake. They direct the main channels of investment and production by granting loans to merchants and producers. Commercial banks generally confine themselves to short-term lending against readily realisable assets while investment banks lend money for longer period against assets which are not readily realisable.
ADVERTISEMENTS:
Thus, banks on the one hand borrow money from the public and on the other hand, supply money to other institutions. But banks do not act as brokers but as principals.
3. Creation of Money:
Banks supply a part of the medium of exchange. Formerly private banks could issue notes which circulated as money. This power has now been withdrawn in most countries. But private banks still supply a part of the medium of exchange through their power of creating deposits.
When a bank lends money it creates a new deposit account for the borrower and empowers him to draw cheques on it. Such a deposit is known as “created deposit” to distinguish it from an actual deposit of cash by the customer.
4. Miscellaneous Functions:
Banks perform a number of other functions on behalf of their customers. They act as agents for the purchase of shares and securities and for the collection and payment of bills. They keep valuables in safe custody.
ADVERTISEMENTS:
They issue letter of credit and traveller’s cheques. They arrange for transfer of money from one place to another by bank drafts. Some banks deal in foreign exchange and foreign moneys can be obtained from them subject to the foreign exchange regulations of the country concerned.