Bank Correspondence

Meaning of Bank

The bank is a Financial Institution. The bank is one of the important aids to trade. The bank plays an important role in the economic development of the country by providing financial services. The primary functions of commercial banks include – Accepting deposits and lending funds. Bank Correspondence is essential for every business organization.

A bank may be a financial organization, during which those people that have idle or surplus cash, deposit it within the bank and people who require funds (Loan), borrow from banks. Banks promote saving habits among the people and channelize these savings into profitable investments.

Definitions of Bank

Sec.5(1)(b) of the Banking Regulation Act, 1949 ‘’Banking means accepting for the aim of lending or investment of deposits of cash from the people repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.’’

Section 5(c) of the Banking Regulation Act, 1949 defines a depository financial organization as any company that transacts the business of banking in India. From the above definitions, we’ll say that a bank is an institution that receives money as deposits and lends money in several forms.

Functions of Commercial Bank

I) Primary Functions

The primary functions of a bank include –

1) Accepting Deposits        2) Lending Money

1. Accepting Deposit:

Accepting deposits from the public is the basic or primary function of a commercial bank. The bank pays interest on deposits at a lower rate and charges interest on loans at a higher rate. The difference between these two rates of interest is that the profit of the bank. People who have surplus funds and savings, deposit the amount with the banks in different types of deposits.

The bank accepts two types of deposits from the public :

A) Demand Deposits

The deposits which are repayable on demand are called Demand Deposits. The banks accept the demand deposits in the following forms:-

a. Savings Deposits

To encourage saving habits among the people, the bank allows depositors to open a savings account. There are certain restrictions on the frequency and the number of withdrawals from a savings bank account. E-statement is available on demand. The passbook is issued to the depositor.

b. Current Deposits 

This account is normally opened by business persons, firms or companies. There is no limit on the amount or number of withdrawals. Generally, interest is not payable on this account. Overdraft facility is given only to current depositors, after following the prescribed procedures of the bank.

B) Time Deposit

The deposits which are not repayable on demand are called ‘Time Deposits.’ These deposits are repayable after a specific period.

The banks accept the Time deposits in the following forms :

a. Fixed Deposits

Fixed Deposits are the deposits received for a hard and fast period. It carries a specified rate of interest, which depends on the period of deposits. Interest is high for fixed deposits. Interest is paid either on a periodic basis or on the maturity of deposits. Fixed Deposit Receipt (F.D.R.) is issued to the depositor. The loan facility is also given against fixed deposits.

b. Recurring Deposits

In order to encourage customers to make regular savings, banks receive deposits in the form of Recurring Deposits. A customer is required to deposit a fixed sum of money for a specified period of time. The money is deposited periodically. The rate of interest is more than Savings Deposits. The passbook is issued to the depositor. E-Statement is issued on demand.

2. Lending Money

Out of the deposits accepted, after keeping certain cash reserves, commercial banks grant loans and advances to the needy borrowers. Commercial banks accept deposits at a lower rate of interest and give them as loans and advances at a higher rate of interest.

Generally, banks grant loans and advances to the borrowers within the following forms.

A.) Loans

A loan granted for a specific time period against personal security, gold and silver and other movable and immovable assets is called a term loan. It is credited to the borrower’s account.

Types of Term Loans are as under :

a. Short Term Loans

These loans are provided for a period of not more than one year. The rate of interest is higher than call loans and lower than medium-term loans. It is required by businessmen in order to fulfil their requirements of working capital.

b. Medium Term Loans

These loans are provided by commercial banks for the amount from 1-year up to five years. The rate of interest charged by banks is above short term loans and less than long term loans.

c. Long Term Loans

When Commercial Banks give loans for a period of quite 5 years, they’re referred to as Long Term Loans. The rate of interest charged is highest as compared to other sorts of loans. It is required for the growth and development of the business.

B.) Advances

An advance may be a credit facility provided by the bank to its customers. It differs from loans, within the sense that, Loans could also be granted for an extended period, but advances are normally given for a shorter period. The purpose of granting advances is to satisfy the day-to-day requirements of a business. Interest is charged only on the quantity withdrawn and not on the quantity sanctioned.

Types of Advances

a. Overdraft

An overdraft may be a credit facility granted by banks to accounting holders. Under overdraft facility the bank allows its customer to overdraw an amount, up to a selected limit, i.e. to withdraw quite the quantity of credit balance in his accounting. The collateral securities accepted for overdraft facility are-Shares, Government Securities, F.D.R., L.I.C. Policy, etc. The rate of interest charged by full-service banks for Overdraft is low.

b. Cash Credit

A separate cash charge account is to be opened to avail of this facility. Securities like the stock of raw material, finished goods etc. are required to avail this facility. Under the Cash Credit facility, a bank allows the borrower to withdraw an amount up to a specific limit. It is a separate account where the bank credits the sanctioned amount. The borrower can withdraw the amount as and when he needs it. Interest is charged on the quantity actually withdrawn.

c. Discounting of Bills

A bill of exchange is a Negotiable Instrument. Banks can provide short-term finance by discounting bills, i.e. provide financial assistance before the due date of the bill.

II) Secondary Functions

The secondary Functions of a bank are often divided into two parts:-

1) Agency Functions:

Banks perform various functions on behalf of their Customers or account holders like :

a) Collection of cheques and bills
b) Collection of Dividend, Interest and Salary
c) Payment of Rent, premium, Electricity Bill etc.
d) Purchase and Sale of Securities (Banks play a role as Depository participant i.e.D.P.)
e) Remittances (transfer) of money.
f) Fulfill standing instructions of depositors
g) Act as trustees, agent of will and attorney.
h) Act as Banker to the difficulty, Lead Manager, etc. for Companies.

2) Utility Functions:

The commercial banks also provide the following general utility services:

a) Safe deposit vaults (Locker Facility)
b) Letter of Credit
c) Dealing in Foreign Exchange
d) A.T.M., Credit cards, Debit cards.
e) Financial position status Report
f) Buying and selling of Securities.
g) Traveller’s cheque
i) R.T.G.S. (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer) NACH (National Automated Clearing House) and ECS (Electronic Clearing Service)