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Functions of Banks, Types and Structure

Functions of Banks in India and List of Banks form a very important part of Banking Awareness Syllabus which is included in almost every board exam.

Priyanka Dahima11 May, 2024

Functions of Banks: The Functions of Banks mainly include accepting deposits and giving loans and advances to bank customers. All banks around the world generally serve their customers by taking their money as deposits and lending them money as loans. Apart from this, the bank has other functions that the bank performs like its service and organizational structure. In our blog, you can get the details of the Functions of Banks in India.

Functions of Banks

Knowing the various functions of banks in India is very important not only for the exam but also for practical reasons. Since many government and banking exams include questions about banks' types, roles, and structure, candidates are expected to know about each of them and how banks perform different functions. To understand in detail how banks in India work, we must first learn the basics of banking. The primary functions of banks are divided into two types these are primary and secondary. The main functions of banks in India include:

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

Primary Functions of Banks

Accepting deposits and issuing loans and advances are the two main functions of banks, which are described below:

1. Accepting Deposits

Banks accept deposits from their customers who can withdraw their money at will. Customers can deposit and deposit money in any bank account - savings account, current account, or fixed deposit. A savings bank also pays its customers interest on deposits. Such banks are very popular among small savers. A working account is a current account that can be used several times during the working day. Instead, a fixed deposit account is responsible for keeping deposits for a fixed term, and a higher interest rate is paid for such accounts.

2. Issuance of Loans and Advances

The bank lends money to those in need at a fixed interest rate. Banks give loans mainly to farmers, industrialists, and businessmen who intend to invest in their businesses for profit and promote the economic development of the country.

3. Issue of Notes/Drafts

The bank is also responsible for issuing bills of exchange and creating other convenient means of exchange in the form of bills or checks. In India, RBI is responsible for issuing currency notes and coins. Banks create and facilitate the transfer of credit instruments such as bills, bank drafts, letters of credit, cheques, etc. These tools are very useful to save the use of metallic money and make money transfer cheap and convenient.

4. Credit Deposits

A bank can create deposits by offering loans to its customers. In such cases, the deposit is returned to the borrower and can be withdrawn if necessary. Customers usually deposit money borrowed from a bank in the same bank, either when the bank requires it or to take advantage of a checking account. Such deposits are also called Credit Deposits.

Indian Banking Structure

The Indian banking structure is generally classified into scheduled banks and non-scheduled banks. Scheduled banks are further divided into cooperative banks and commercial banks. Commercial banks include public sector banks, regional rural banks (RRBs), and foreign banks. The table below provides more information about different types of banks in India.

Types of Banks	Aspects
Scheduled Banks	The Reserve Bank of India Act describes them as banks listed in Schedule 2 of the RBI Act, 1934. All RRBs, Indian and foreign commercial banks, and cooperative banks are considered scheduled banks. Scheduled banks must have a minimum paid-up capital and reserves not exceeding INR 25 lakhs..
Non-Scheduled Banks	These banks do not follow the second schedule of the RBI Act, 1934 and hence are not bound by the RBI guidelines. They have to maintain cash reserve (CRR) not with RBI but with themselves. Non-scheduled banks have a paid-up capital of less than INR 5 lakhs.
Commercial Banks	A commercial bank is one that primarily deals with accepting deposits and lending loans to their customers. They are financial entities providing facilities to individuals, businesses, and organizations in the form of current, deposit, and savings accounts. They also provide loans to businesses. They can be either scheduled or non-scheduled.
Public Sector Banks	The government owns the majority of the shares of such banks. The ownership of the government is generally more than 50%. For instance, the government share of the State Bank of India (SBI) is 58.60%, while that of the Punjab National Bank (PNB) is 58.87%. These banks are further classified into Nationalized Banks and State Bank and its Associates.
Private Sector Banks	The majority of the equity is held by private entities, corporations, institutions, or individuals along with the government. Banking in India has been dominated by public sector banks since 1969 when all the major banks were nationalized by the Indian government. After liberalization in the 1990s, banks like ICICI, HDFC, etc. became the new age private sector banks. Currently, there are 22 private-sector banks operational in the country.
Foreign Banks	These banks are compelled to follow the guidelines of both the home as well as the host countries. Such banks tend to be more effective in countries with high taxes and nations where it is easy for international firms to enter the market. Currently, there are a total of 46 foreign banks operational in India.
Regional Rural Banks (RRBs)	These banks were established in 1975 under the RRB Act, 1976 based on the recommendations of the Narasimham Commission. These banks are regulated and supervised by NABARD (National Bank for Agriculture and Rural Development). RRB belongs to three central units. Government (50%), State Government (15%) and Sponsor Banks (35%) A total of 56 RRBs are currently functioning in the country.
Cooperative Banks	These are important forms of carrying out business through mutual understanding. Cooperative banks play a very important role in the rural economy development of the country. The rural cooperative credit sector which accounted for over 50% of the credit disbursed a few years back, now has less than 20% shares.

What is e-banking?

Electronic banking or e-banking uses electronic means to allow customers to access their money. This eliminates the need for the customer to visit the bank to make a transaction. With the growth of the Internet, it has become even easier for customers to use Internet banking services. Internet banking has become convenient for both bankers and customers. Banks have to bear lower transaction costs as well as a significantly lower margin for human error. Fixed costs are also significantly reduced. Customers have better access around the clock and do not have to visit the bank. This helps save the customer time and money. It also removes the geographical distance from certain banking transactions.

Types of Internet Banking

Internet Banking Services

Both monetary and non-monetary transactions can take place over the Internet. Customers can participate in various activities such as transferring money, checking balances and accounts, and paying electricity bills.

Automated Teller Machine (ATM)

An automated teller machine (ATM) is a computerized electronic device that allows customers to withdraw money, exchange personal identification numbers, and (in some cases) deposit money. This eliminates the entire need for a human interface.

Mobile Bank

The Mobile Bank application is a banking web portal that resembles an online bank. The application can be downloaded to the iOS or Android operating system and can be used to access banking services. In addition to the usual services, it can also be used to locate the nearest ATM to the customer.

Debit card

Debit cards allow customers to use money directly from their bank account. In this case, the transaction amount is deducted directly from the account. With a bank card, you can shop online, pay at POS points, and withdraw cash from an ATM. The banking world in India has seen major changes in recent times, which are sure to have far-reaching implications for the sector. Test your knowledge by finding the answers to the following questions.

Functions of Banks FAQs

Q1. What are the Functions of Banks?

Ans. The Functions of Banks are- Accepting deposits Lending loans and advances Transfer of funds Issue of notes/ drafts Credit deposits Foreign exchange services

Q2. What are the Types of Banks?

Ans. The different types of banks in India are – central banks, commercial banks, Specialised banks and Cq

Q3. What is e-Banking?

Ans. We have discussed the complete details of e-Banking including internet banking, ATM, Mobile Banking etc.

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Functions of Banks

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

Primary Functions of Banks

Accepting deposits and issuing loans and advances are the two main functions of banks, which are described below:

1. Accepting Deposits

2. Issuance of Loans and Advances

3. Issue of Notes/Drafts

4. Credit Deposits

Indian Banking Structure

Types of Banks	Aspects
Scheduled Banks	The Reserve Bank of India Act describes them as banks listed in Schedule 2 of the RBI Act, 1934. All RRBs, Indian and foreign commercial banks, and cooperative banks are considered scheduled banks. Scheduled banks must have a minimum paid-up capital and reserves not exceeding INR 25 lakhs..
Non-Scheduled Banks	These banks do not follow the second schedule of the RBI Act, 1934 and hence are not bound by the RBI guidelines. They have to maintain cash reserve (CRR) not with RBI but with themselves. Non-scheduled banks have a paid-up capital of less than INR 5 lakhs.
Commercial Banks	A commercial bank is one that primarily deals with accepting deposits and lending loans to their customers. They are financial entities providing facilities to individuals, businesses, and organizations in the form of current, deposit, and savings accounts. They also provide loans to businesses. They can be either scheduled or non-scheduled.
Public Sector Banks	The government owns the majority of the shares of such banks. The ownership of the government is generally more than 50%. For instance, the government share of the State Bank of India (SBI) is 58.60%, while that of the Punjab National Bank (PNB) is 58.87%. These banks are further classified into Nationalized Banks and State Bank and its Associates.
Private Sector Banks	The majority of the equity is held by private entities, corporations, institutions, or individuals along with the government. Banking in India has been dominated by public sector banks since 1969 when all the major banks were nationalized by the Indian government. After liberalization in the 1990s, banks like ICICI, HDFC, etc. became the new age private sector banks. Currently, there are 22 private-sector banks operational in the country.
Foreign Banks	These banks are compelled to follow the guidelines of both the home as well as the host countries. Such banks tend to be more effective in countries with high taxes and nations where it is easy for international firms to enter the market. Currently, there are a total of 46 foreign banks operational in India.
Regional Rural Banks (RRBs)	These banks were established in 1975 under the RRB Act, 1976 based on the recommendations of the Narasimham Commission. These banks are regulated and supervised by NABARD (National Bank for Agriculture and Rural Development). RRB belongs to three central units. Government (50%), State Government (15%) and Sponsor Banks (35%) A total of 56 RRBs are currently functioning in the country.
Cooperative Banks	These are important forms of carrying out business through mutual understanding. Cooperative banks play a very important role in the rural economy development of the country. The rural cooperative credit sector which accounted for over 50% of the credit disbursed a few years back, now has less than 20% shares.

What is e-banking?

Types of Internet Banking

Internet Banking Services

Automated Teller Machine (ATM)

Mobile Bank

Debit card