Banking and Finance Services, Functions, Instruments

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.

What are the Banking and Finance Services?

Banking and Finance Services Function

• Accepting deposits
• Lending loans and advances
• Transfer of funds
• Issue of notes/ drafts
• Credit deposits
• Foreign exchange services

Primary Functions of Banks

1. Accepting Deposits:

2. Lending Loans & Advances:

3. Issue of Notes/Drafts:

4. Credit Deposits:

Secondary Functions of Banks

1. Collecting Cheques from Other Banks:

2. Accepting and Collecting Bills of Exchange:

3. Dealing in Foreign Exchange:

4. Safe Deposit Facilities:

5. Stock Exchange Trustee:

6. Assisting RBI in Note Issuance:

Difference between 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?

Types of Financial Instruments

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:

• 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:

• 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

1. Debt-Based Financial Instruments:

2. Equity-Based Financial Instruments:

Also Read: Financial Markets – Money Market vs Capital Market