Banking and Finance Services, Functions, Instruments
Banking and Finance Services involve deposits, loans, transactions, and financial products like savings accounts and credit cards. Discover all about Banking and Finance Services!
Jatin Sharma23 Jan, 2024
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Banking and Finance Services: Banks are pivotal in our financial system, primarily involved in accepting deposits and providing loans globally. In India, their functions go beyond these basics, influenced by service focus and organizational structure. Understanding these functions is vital for exams and practical purposes, as candidates are tested on various aspects of banking.
Exploring Banking and Finance Services basics, including functions, types, services, and financial instruments, is key to a comprehensive understanding.What are the Banking and Finance Services?
A bank is a financial institution that has the official approval to take in deposits from people and offer credit services. Alongside these core functions, banks often provide additional financial services such as managing wealth, offering safe deposit boxes, and facilitating currency exchanges. Banks come in various types, each designated to carry out specific functions. The common ones include retail banks, catering to individual customers; corporate banks, focusing on businesses; and investment banks, involved in financial investments. To ensure proper functioning and safeguarding of customers' interests, banks are typically regulated by the national government or a central bank. In the case of India, the Reserve Bank of India (RBI) oversees and regulates all banks and financial institutions, maintaining stability and reliability in the financial sector.Banking and Finance Services Function
Banks in India carry out essential functions, classified into two types: Primary and Secondary. The key activities include:- Accepting deposits
- Lending loans and advances
- Transfer of funds
- Issue of notes/ drafts
- Credit deposits
- Foreign exchange services
Primary Functions of Banks
The core functions of banks revolve around accepting deposits and lending loans and advances. Let's check these banking and finance primary functions:1. Accepting Deposits:
Banks welcome deposits from customers who can withdraw their money as needed. There are different types of accounts—savings, current, and fixed deposits. Savings accounts often earn interest, making them popular among small savers. Current accounts allow multiple transactions in a day, while fixed deposit accounts hold funds for a fixed period, offering a higher interest rate.2. Lending Loans & Advances:
Banks provide funds to those in need, usually farmers, industrialists, and entrepreneurs looking to invest in their ventures. The bank charges interest on these loans, supporting both individual profit and contributing to the country's economic development.3. Issue of Notes/Drafts:
Banks issue currency notes and create alternative exchange methods like drafts and cheques. In India, the Reserve Bank of India (RBI) is responsible for issuing physical currency. Banks facilitate the use of credit instruments, streamlining the transfer of funds through notes, drafts, letters of credit, and cheques, making transactions cost-effective and convenient.4. Credit Deposits:
Banks can generate deposits by lending money to customers. In such cases, the borrower receives a withdrawable deposit when needed. Customers often deposit the borrowed money in the same bank, either voluntarily or as required. These deposits, created through loans, are known as Credit Deposits. Understanding these primary functions sheds light on the pivotal role banks play in managing financial transactions and boosting economic growth.Secondary Functions of Banks
In addition to their primary roles, banks also serve as agents for their customers, performing various banking and finance agency secondary functions are here below:1. Collecting Cheques from Other Banks:
Banks efficiently handle the collection of cheques drawn from other banks, simplifying the process for their customers.2. Accepting and Collecting Bills of Exchange:
Banks engage in the acceptance and collection of Bills Of Exchange , contributing to smoother financial transactions.3. Dealing in Foreign Exchange:
Banks participate in Foreign Exchange activities, aiding in the settlement of overseas debts and supporting international financial transactions.4. Safe Deposit Facilities:
Offering safe deposit facilities, banks provide a secure space for customers to store valuable items and important documents.5. Stock Exchange Trustee:
Banks may serve as trustees in Stock Exchange transactions, ensuring integrity and reliability in financial dealings.6. Assisting RBI in Note Issuance:
Banks collaborate with the Reserve Bank of India (RBI) to maintain the integrity and condition of currency notes, contributing to a safe and reliable monetary system. These agency functions highlight the diverse ways in which banks assist clients in managing their finances, making banking a comprehensive and multifaceted service.Difference between Banking and Finance Services
Check here for the different aspects of Banking and Finance Services:- Diverse Account Options: Banks offer a range of accounts, including checking and savings. Checking accounts facilitate day-to-day transactions, while savings accounts allow customers to accumulate and earn interest on their deposits.
- Loan and Mortgage Services: Banks play a pivotal role in providing financial support through a variety of loans, catering to individual needs like education, home buying, or business expansion. Mortgage services enable aspiring homeowners to realize their dreams.
- Wealth Management Expertise: In the realm of wealth management, banks offer services that go beyond mere transactions. They provide valuable advice, investment strategies, and financial planning to help clients grow and safeguard their wealth.
- Credit and Debit Card Facilities: Credit and debit cards have become indispensable in modern banking. Credit cards allow users to make purchases on credit, while debit cards provide a convenient way to access and spend existing funds in their accounts.
- Overdraft Services: Overdraft services allow customers to temporarily exceed their account balance, providing a safety net during times of financial strain. This flexibility ensures smooth financial operations without the fear of declined transactions.
- Foreign Exchange Expertise: Banks are crucial players in the foreign exchange market, facilitating international transactions. They offer services related to currency exchange, ensuring seamless cross-border financial activities.
- Underwriting of Financial Instruments: Banks often engage in underwriting shares and debentures, assuming the risk associated with these financial instruments. This role contributes to market stability and facilitates capital raising for businesses.
- Safe Custody and Security: Beyond traditional banking, institutions provide safe deposit vaults and lockers for customers to safeguard valuables, important documents, and securities, ensuring their security.
- Social Welfare Initiatives: Some banks actively participate in social welfare programs, contributing to community development. This reflects a broader commitment to societal well-being beyond financial transactions.
- Facilitating Project Reports: Banks assist individuals and businesses in preparing project reports, aiding in the evaluation and execution of various ventures, and contributing to economic growth.
Also Read: Banking and E-Banking
What are Financial Instruments?
Financial instruments, acting as contracts for monetary assets, facilitate buying, trading, and settling. They create a contractual obligation between parties involved in transactions. For instance, when a company buys a bond with cash, there's an obligation on both sides – one provides cash, and the other delivers the bond. Basic examples include cheques, bonds, and securities. These instruments fall into three main categories: cash instruments, derivative instruments, and foreign exchange instruments. Understanding these instruments unlocks the language of finance, simplifying the complex world of banking and finance for everyone.Types of Financial Instruments
Financial instruments come in various types, each playing a unique role in the complex world of banking and finance.1. Cash Instruments:
- Securities: These represent ownership in publicly-traded companies and are bought or traded on the stock market.
- Deposits and Loans: Both involve contractual agreements and are considered cash instruments.
2. Derivative Instruments:
These derive their value from underlying assets like resources, currency, bonds, stocks, or stock indexes.- Synthetic Agreement for Foreign Exchange (SAFE): Guarantees a specified exchange rate over an agreed period.
- Forward: Involves customizable derivatives with an exchange at the contract's end at a specific price.
- Future: Provides the exchange of derivatives on a predetermined future date at a predetermined rate.
- Options: Agreement granting the right to buy or sell derivatives at a set price within a specific period.
- Interest Rate Swap: This involves swapping interest rates on loans in different currencies.
3. Foreign Exchange Instruments:
Represented on the foreign market, these instruments include currency agreements and derivatives.- Spot: Involves currency exchange within a limited timeframe.
- Outright Forwards: Currency exchange is done "forwardly" before the agreed-upon date.
- Currency Swap: Simultaneously buying and selling currencies with different value dates.
Asset Classes of Financial Instruments
In the world of banking and finance, financial instruments can be grouped into two main asset classes, making it simpler to grasp their purpose.- Debt-Based Financial Instruments:
- Equity-Based Financial Instruments:
Also Read: Financial Markets – Money Market vs Capital Market
Moreover, exploring banking functions, services, and financial instruments provides valuable insights into the financial world's intricacies. From deposits to complex derivatives, banks play a crucial role in shaping our economic landscape. Also, PhysicsWallah (PW) is your trusted partner in commerce education, transforming learning through high-quality coaching and innovative methods. We aim to guide students towards academic success, making the educational journey in the field of commerce engaging and effective. Level up your commerce education with PW Commerce Online Course – Join Now for a brighter academic future!| Commerce Related Topics | |
| Planning Process | Functions of Marketing |
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Banking and Finance Services FAQs
What does a bank do with finances?
Banks handle various finance functions, including investing funds for growth, deciding on profit distribution (dividends) to shareholders, raising capital through equity or debt (financing), and ensuring there's enough cash flow for daily operations (liquidity). Also, for more detailed information on Banking and Finance, check the above article.
What are financial instruments and examples?
Financial instruments are tools in finance. Examples include stocks, ETFs, mutual funds, REITs, bonds, derivatives (options, futures, swaps), checks, CDs, bank deposits, and loans. They're used for different financial purposes. Also, for more detailed information on Banking and Finance, check the above article.
What do banking and finance services include?
Banking and financial services cover checking and savings accounts, health savings accounts, money market accounts, loans, credit cards, cash management, lines of credit, and investment services provided by banking organizations. Also, for more detailed information on Banking and Finance, check the above article.
What do financial instruments do?
Financial instruments create obligations. They specify that one party will transfer something to another in the future. These instruments outline conditions for payments and are crucial in financial transactions. Also, for more detailed information on Banking and Finance, check the above article.
What's the essence of banking?
Banking involves managing credit facilities, storing cash, handling investments, and conducting various financial transactions. It's a key driver of economies, directing funds to borrowers with productive investments. Also, for more detailed information on Banking and Finance, check the above article.
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