Bank – Meaning, Characteristics and Functions

A bank is financial institution, which deals with money and credit. Bank accepts deposits from the public and mobilizes the fund to productive sectors. Bank also provides remittance facility to transfer money from one place to another. Generally, bank accepts deposits from business institutions and individuals, which is mobilized into productive sectors mainly business and consumer lending. So bank is also called a dealer of money. At present context, a bank may engaged in different types of functions such as remittance, exchange currency, joint venture, underwriting, bank guarantee, discounting bills etc. The modern bank refers to an institution having the following characteristics:

Banks are the principal source of credit for millions of individuals and families and for many units of government. They are among the most important financial institutions in the economy. Moreover, for small local businesses to large dealers, banks are often the major source of credit to stock the shelves with merchandise. Banks grand more installment loans to consumer than any other financial institutions.

Bank - Meaning, Characteristics and Functions

Banks are among the leading buyers of bonds and notes issued by government to finance public facilities, ranging from hospitals and football stadiums to airports and highways. Moreover, bank reserves are the principal channel for government economic policy to stabilize the economy.

Banks are the important sources of short-term working capital for businesses. They have become increasingly active in recent years in making long-term business loans for new plants and equipment. When businesses and consumers must make payments for purchase of goods and services, more often they use bank provided cheques, debit or credit cards, or electronic accounts connected to a computer network.

Bank is a intermediary which accepts deposits and grants loans. It offers widest menu of services of any financial institution. In fact, a modern bank performs such a variety of functions that it is difficult to give a precise and general definition of a bank.

Generally, modern commercial banks offer following services to customers or public:

  1. Accepting Deposits – Accepting deposits from savers or account holders is the primary function of bank. Banks accept deposit from those who can save money, but cannot utilize in profitable sectors. People prefer to deposit their savings in a bank because by doing so, they earn interest.
  2. Advancing of Loans – Banks are profit oriented business organizations. So they have to advance loan to public and generate interest from them as profit. After keeping certain cash reserves, banks provide short-term, medium-term and long-term loans to needy borrowers. 
  3. Discounting of Bill of Exchange – Bill of exchange is a negotiable instrument, which is accepted by the debtor, drawn upon him/her by the creditor and agrees to pay the amount mentioned on maturity. Discounting bill of exchange is another function of modern commercial bank. Under this, banks purchase bill of exchange from holder in discount after making some marginal deduction in the form of commission. The banks pay the deducted value to the holders when traders discount it into bank.
  4. Cheque Payment – Banks provide cheque books to the account holders. Account holders can draw cheque upon bank to pay money. Banks pay for cheques of customers after formal verification and official procedures.
  5. Remittance – Remittance is a system, through which cash fund is transferred from one place to another. Banks provide the facilities of remittance to the customers and earn some service charge.
  6. Collection And Payment Of Credit Instruments – In modern business, different types of credit instruments such as bill of exchange, promissory notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay different types of credit instruments as the representative of the customers.
  7. Foreign Currency Exchange – Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the international trade.
  8. Consultancy – Modern commercial banks are large organizations. They can expand their function to consultancy business. In this function, banks hire financial, legal and market experts, who provide advice’s to customers in regarding investment, industry, trade, income, tax etc.
  9. Bank Guarantee – Customers are provided the facility of bank guarantee by modern commercial banks. When customers have to deposit certain fund in governmental offices or courts for specific purpose, bank can present itself as the guarantee for the customer, instead of depositing fund by customers.

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