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The functions of banking

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  • 1. the Functions Of BankingThe most important functions of banking may be classified as follows: (1) to assemble capital and make iteffective; (2) to receivedepositsandmakecollections; (3) to check out andtransferfunds; (4) todiscountorlend; (5) to exercise fiduciary or trust powers; (6) to issue circulating notes. Everybankwhich expects tosucceed must first of all prove its value to the community. The services which a bank performs are sogenerally taken for granted that the public is unaware of the real extent of the facilities offered. Banks areequipped to utilize funds, for either ashortor long period of time, safely, and withsomeprofit.Depositorsindividually do not enjoy the same ability. An individuals unused funds are perhapssmall in amount, cannot be loaned toadvantagewith the assurance of immediate return when desired, andthe care of themoneyinvolves worry and risk. The bank, on the other hand, possesses the necessarymen, machinery and experience. By obtaining deposits, each perhaps small in itself, from many people, itacquires a large reservoir of funds. From this supply, which is constantly being increased byadditionaldepositsand decreased by withdrawals according to the needs and circumstances of thedepositors, the bank can now makeloansandotherinvestmentsfrom time to time. It is known as a placewhere loans may be sought, and it is protected in making theseloansof funds which it has had left with iton deposit by the law of averages which usually operates in such a way that withdrawals and depositsabout balance each other, the normal tendency being in favor of a net increase. By receiving depositsand making collections the bank saves the depositor much personal effort. To receive or deposit in onecity a check made payable in another, hundreds or thousands of miles away, to convert that check in arelatively short time intocashavailable for the depositors use, and all this with no direct assistance fromthe customer and at a very slightexpenseto him or none at all, is indeed service. So also is the willingnessof the bank to collect promissory notes,draftsand other negotiable paper in a similar way. In addition totaking care of funds without charge and making collections, the bank provides the means of withdrawingand transferring funds readily by giving its customer a book of blank checks. If a depositor owes anotherman one hundred dollars, the depositor need not go to the bank, withdraw the cash and pay his debt. Hecan give his creditor an order on the bank, which can be presented at the bank in person and the cashobtained, or it can be deposited in this or another bank. By lending money the bank benefits thecommunity to the extent that itsuppliesfunds to assist worthy business. Temporary working capital toassist in the commercial, agricultural or industrial life of a community is very important. Borrowers logicallylook to a bank for such assistance and are thereby saved the necessity of either going without the fundsthey need or spending an endless amount of time and effort in negotiating many small loans fromindividuals. Note issue, originally a common right of a bank, is now restricted by law to Nationalbanks,Federal Reserve banksand the Government, and is chiefly valuable as a means of puttingadditional currency in circulation according to the needs of trade. There has been such an enormousgrowth in the business done by trust companies and by trust departments of banks in the last few yearsby acting in various fiduciary capacities that it seems necessary to include this as one of the importantbanking functions, which will be more fully discussed a little later.Read more:http://chestofbooks.com/finance/banking/Elementary-Banking-AIB/The-Functions-Of-Banking.html#ixzz1jmmGEN57
  • 2. Introduction To BanksBanks have developed around 200 years ago. The natures of banks have changed as the time haschanged. The term bank is related to financial transactions. It is a financial establishment which uses,money deposited by customers for investment, pays it out when required, makes loans at interestexchanges currency etc. however to understand the concept in detail we need to see some of itsdefinitions. Many economists have tried to give different meanings of the term bank.Nature of Commercial BanksCommercial banks are an organisation which normally performs certain financial transactions. Itperforms the twin task of accepting deposits from members of public and make advances to needy andworthy people form the society. When banks accept deposits its liabilities increase and it becomes adebtor, but when it makes advances its assets increases and it becomes a creditor. Banking transactionsare socially and legally approved. It is responsible in maintaining the deposits of its account holders.Definitions of Commercial BanksWhile defining the term banks it is taken into account that what type of task is performed by the banks.Some of the famous definitions are given below:According to Prof. Sayers, "A bank is an institution whose debts are widely accepted in settlement ofother peoples debts to each other." In this definition Sayers has emphasized the transactions fromdebts which are raised by a financial institution.According to the Indian Banking Company Act 1949, "A banking company means any company whichtransacts the business of banking . Banking means accepting for the purpose of lending of investment ofdeposits of money from the public, payable on demand or other wise and withdraw able by cheque,draft or otherwise."
  • 3. Functions of Commercial BanksCommercial bank being the financial institution performs diverse types of functions. It satisfies thefinancial needs of the sectors such as agriculture, industry, trade, communication, etc. That means theyplay very significant role in a process of economic social needs. The functions performed by banks arechanging according to change in time and recently they are becoming customer centric and wideningtheir functions. Generally the functions of commercial banks are divided into two categories viz. primaryfunctions and the secondary functions. The following chart simplifies the functions of banks.Primary Functions of Commercial BanksCommercial Banks performs various primary functions some of them are given belowAccepting Deposits : Commercial bank accepts various types of deposits from public especially from itsclients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. Thesedeposits are payable after a certain time period.Making Advances : The commercial banks provide loans and advances of various forms. It includes anover draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loansto all types of clients against proper security.Credit creation : It is most significant function of the commercial banks. While sanctioning a loan to acustomer, a bank does not provide cash to the borrower Instead it opens a deposit account from wherethe borrower can withdraw. In other words while sanctioning a loan a bank automatically createsdeposits. This is known as a credit creation from commercial bank.Secondary Functions of Commercial Banks
  • 4. Along with the primary functions each commercial bank has to perform several secondary functions too.It includes many agency functions or general utility functions. The secondary functions of commercialbanks can be divided into agency functions and utility functions.Agency Functions : Various agency functions of commercial banks areTo collect and clear cheque, dividends and interest warrant.To make payment of rent, insurance premium, etc.To deal in foreign exchange transactions.To purchase and sell securities.To act as trusty, attorney, correspondent and executor.To accept tax proceeds and tax returns.General Utility Functions : The general utility functions of the commercial banks includeTo provide safety locker facility to customers.To provide money transfer facility.To issue travellerscheque.To act as referees.To accept various bills for payment e.g phone bills, gas bills, water bills, etc.To provide merchant banking facility.To provide various cards such as credit cards, debit cards, Smart cards, etc.Regional bankIn the US, the term regional bank is used to describe a midsizeddepository institution that is larger than a community bank, butsmaller than one of the large money center banks. The termregional bank does not have an exact definition, but a regional bankhas certain characteristics. First, in a list ranked by assets a regionalbank would not make the top 5, but the largest of these would be inthe top 25. Second, a regional bank has a presence in a singlegeographic region, perhaps spanning more than one state. Third,the regional bank probably does not have any international
  • 5. presence. Fourth, the regional bank probably has more than ahandful of retail branches. Ongoing consolidation in the bankingindustry periodically results in the merger or acquisition of a well-known regional bank. Examples of major regional bank in 2005include Fifth Third Bancorp, PNC Financial, and North Fork Bank. Analternative classification scheme used by the FDIC that does notinclude the term regional bank groups banks as either top 25, mid-sized, or community.A bank that only operates in one state or province, or in only a few neighboring states or provinces. Aregional bank differs from a money center bank, which has a national and/or global presence. Regionalbanks usually specialize in retail banking, making loans and taking deposits. See also: Thrift, Regionalexchange.A bank that operates in one region of a country, as opposed to a money center bank, which operates nationally andglobally.A bank with deposit gathering and lending concentrated in a particulargeographic area of the country. For example, a regional bank may serve foursoutheastern states.Community BankUnlike huge multi-state and multi-national banks, community banks are locally owned and operated bankinginstitutions. These community banks offer all of the standard banking services including checking, savings, loans andmortgages, safe deposit boxes, etc., for both consumers and business customers. Most community banks do notoffer some of the services that larger banks offer such as brokerage services and multi-million dollar financing.The advantage of banking with a community bank over larger banks is that community banks are locally owned andoperated. This means that all lending decisions are made locally by people who understand the unique challengesand financial needs of the business people and residents who live and work in the community that the bank serves.This fact often makes it easier to obtain a loan that might not be written by a bigger bank for any number of reasons.But dont assume that your money is not safe in a community bank just because it is small. Community banks aregoverned by the same laws that govern the big banks and your money is insured by theFDIC just like it would be ifyou banked with one of the giants.Money centre bank.A large bank in a major financial center which borrows from and lends to governments, corporations, and other banks,rather than consumers.Read more: http://www.investorwords.com/3102/money_center_bank.html#ixzz1jn2En5yy
  • 6. Diversified financialDefinitionThe diversified financial services segment includes a range of consumer and commercially-orientedcompanies offering a wide variety of products and services, including various lending products (suchas home equity loans andcredit cards), insurance, and securities and investment products. Some of thesefirms were created during the wave of consolidation that has taken place in the financial industry over thepast decade.Specialized financeThe development of financial systems in emerging markets requires a reasonable degree of diversity andefficiency, which usually involves creating specialized financial intermediaries. Research has shown thatincome level and the degree of financial intermediation and diversity are closely associated.The Bank Group works with client countries to increase diversity and efficiency in their financial systemsby developing specialized nonbank financial intermediaries (e.g., leasing companies, private equity funds)for SME finance and by creating efficient, market-based housing finance, which also improve urbanizationpatterns.Specializedfinance systemOverview of the specialized finance systemOur main product, the Specialized Finance System, or SFS, is a credit risk management system designed to handlelarge, complex deals with multiple tranches and currencies. It is an integrated, completely customizable solution formeasuring, managing and reporting on the risk and performance of specialized finance assets including commercialreal estate and project finance from both a debt and equity perspective.Main benefits of the SFSConsolidation of loan informationThe SFS credit risk management system allows a bank to properly consolidate all loan data into an integratedsystem, beginning with initial structuring, through pricing, and continuing on to maturity. After initial data entry, eithermanually or electronically, the bank will be able to put to good use everything known about the collateral, borrower, orchanges in valuation. Information from multiple banking systems at an institution are customarily fed into the SFS.Structuring and PricingAs the most flexible and effective credit risk management system available for loan origination, the SFS collects andmakes use of the rich data to price and structure deals in complex asset classes.Risk AnalysisThe SFS provides a complete structure for consolidating all known loan information, thereby streamlining the riskmanagement process. It is capable of slicing the portfolio to separate the assets by credit exposure in a geographicarea, LTV, size, margin, maturities and other variables.
  • 7. For each loan in your portfolio, the SFS models the cash flow—allowing any amortization structure—and uses cashflow simulation to generate all necessary risk metrics for a single investment or portfolio as a whole. Risk metricsinclude probability of default (PD) and loss given default (LGD) at the loan and portfolio-level. The SFS is also widelyused for grading, structuring and pricing loans still in the pipeline.ReportingThe SFS easily generates risk reporting and graphical representation of the analytics for both internal and regulatoryreporting, including those required for Advanced Basel II compliance. It is also used to calculate economic capital.Stress testingThe SFS is an intuitive system that is completely configurable to your bank’s macroeconomic outlook. Futureassumptions used in cash flow models can be easily updated in the system, making stress testing a matter ofselecting parameters, such as interest rate movement, and then running the whole portfolio again. Of course, thechallenge of stress testing is determining which factors to stress, which ones should be done together and how manyfactors should be stressed.Implementation & customizationFor more than 10 years, Risk Integrated has refined and enhanced the SFS to meet the evolving needs of largebanks and asset managers. During each implementation, we apply our knowledge and experience to accuratelyassess your bank’s exact requirements and customize the SFS, sometimes markedly, to meet those needs.Three Delivery options for implementationFully outsoursed portfolio analyticsThe client sends the loan-level data to Risk Integrated and receives back a set of detailed portfolio projections forgrades, losses and cash flows. The analytics are by far the most detailed available in the market for commercial realestate lending. The requirements for the input data per loan are extremely flexible and range from half a dozen to athousand unique fields depending on the deals complexity and the institutions current state of data availability. Thisservice is provided on a one-time or quarterly basisHands-on analytics with outsoursed.It infrastructureThis approach is applicable both for portfolio analyses such as stress testing and deal-level analyses such asgrading, structuring and pricing. In this approach the client has full access to all the risk models and documentation.After training, if desired, the client can define their own stresses, parameters and even alter the model structure tosuit their institution’s business and view of the market. For rapid and flexible implementation, the software isaccessed securely across the web and run on dedicated servers in Risk Integrateds data centers. This means thatthere is no requirement for an initial in-house IT implementation.Hands-on analytics with in house it infrastructureThis approach is applicable for portfolio and deal-level analysis and, again, the client has full access to all the models.After the initial trial on Risk Integrateds servers, the software in installed in-house and fully embedded in the client’sIT infrastructure and data flow.Consumer finance perspectives: Consumer finance can be studied from 3 principal perspectives:Individuals and householdsFinancial companies and the financial industryThe broad political economy
  • 8. Applicability of consumer finance: Apart from its immediate utility to the student, the study of consumer finance also ishighly appropriate for anyone who expects to be a financial services professional who will be advising clients onpersonal finance issues. These career paths include, but are not limited to:Consumer financeDefinitionThe division of retail banking that deals with lending money to consumers. This includesa wide variety of loans, including credit cards, mortgage loans, and auto loans, and canalso be used to refer to loans taken out at either the prime rate or the subprime rate.Consumer finance has to do with the lending process that occurs between the consumer andalender. In some instances, the lender may be a bank or financial institution. At other times, thelender may be a business that offers in house credit in exchange for the business of the consumer.Consumer finance can include just about any type of lending activity that results in the extension ofcredit to a consumer.Most people have received financial assistance in obtaining desirable products through the use ofconsumer finance methods. In retail banking, the lender extends secured and unsecured loans toconsumers who wish to purchase automobiles, homes, or engage in other activities that requiresubstantial financing, such as remodeling a home. Generally, consumer lending of this type cariessome degree of competition, since the consumer with a solid credit rating can often shop around andsecure superior interest rates and terms for the loan agreement.At the same time, not all forms of consumer finance are in the best interests of the consumer. Inmany parts of the world, institutions are in the business of lending money even to consumers withpoor credit ratings, or who lack a reasonable ability to repay the borrowed funds. This can take theform of credit card offers, loans with extremely high rates of interest included in the finance structureof the loan, and other terms that will be difficult if not impossible for the consumer to meet.As with any type of financial arrangement, it is important for the consumer to understand the exactnature of the commitment that is made as part of any consumer finance strategy. By understandingand accepting the terms and conditions associated with any lending situation, the consumer ispledging that the ability to repay within terms is present, and that the consumer has every intentionof complying with each component or section of the loan agreement. To this end, it is in the bestinterests of the individual consumer to seek out the most desirable arrangements for any type ofconsumer finance, taking care to avoid any situation that will place an undue amount of stress on theresources in the possession of the consumer.