Search in Indianmoney's WealthPedia

Home Articles Primary Function of Bank

Primary Function of Bank Research Team | Posted On Saturday, February 21,2009, 08:08 PM

4.6 / 5 based on 17 User Reviews

Primary Function of Bank



Below given are the two primary (basic) functions of banks.

  • Accepting deposits
  • Lending loans 

Bank Deposits:

Accepting deposits is one of the two major activities of the Banks.

Banks are also called custodians of public money. Banks are accepting money as deposit for safe keeping. Banks use this money to earn interest from people who need money by way of loans and they share a part of this interest with the depositors. The percentage of interest depends upon the tenor - length of time for which the depositor wishes to keep the money with the Bank - and the easiness of withdrawal. The thumb rule is, longer the tenor/term, higher the rate of interest and lesser the restrictions on withdrawal, lesser the interest. Deposits are accepted from both domestic and non-resident Indian customers.

The business of the banker is to accept deposits from the customers so that he can lend it to others and earn interest. Depending upon the liquidity position of the market and the size of deposit, the earnings can vary.

Types of Deposit accounts:

Traditionally Indian banks have four types of deposit accounts, such as;
  • Current Accounts
  • Saving Banking Accounts
  • Recurring Deposits
  • Fixed Deposits.


However, in recent years, due to ever increasing competition, some banks have introduced new products by combining the features of above two or more deposits. These are known by different names in different banks.

Bank Loans:

A loan is an arrangement between two parties (Bank & customer) where money is lent by one person (Banker) to another (customer/borrower); this is a legal contract between the lender (creditor) and the borrower (debtor). Lending money is very usual but it (lending) can also include goods, services and even people but this article is dealing with those of a financial nature. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; at the same time it is possible to make 3 or 6 monthly repayments, the usual time period is one month.

When debts are repaid a charge is added to the sum payable called ‘interest' this is how the lender can gain from the service he has provided. For instance, some debts repay the interest first, once this is cleared, the borrowed sum is gradually repaid. The most common type of loan is that where the interest charges are added to the capital sum then the total is divided into equal amounts with a small amount of interest being paid each month.

Even though this is the main function of all financial institutions, they do have other functions as well. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; many other cash raising methods are also exist but this is the simplest.

Arranging a mortgage is little more complicate, the use for which it is required is not flexible and the money can never be used for anything other than buying/building a house or land. However, in this type of loans a form of security is needed before the money is lent. Defaulting on a loan like this might mean that the bank or other lender could repossess the house and then re-sell it; often banks will retain the property until its value increases.

Unsecured loans are available from financial institutions under different styles or marketing packages; if you have an overdraft or credit cards for example, this is exactly what these arrangements are. Normally, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to another.

Mistreatment in the granting of money is known as predatory lending; it usually involves providing cash in order to put the borrower in a position where one can gain advantage over them. Criticism of some credit card suppliers in a number of countries is also made as they issue cards to individuals at extremely high rates of interest in an underhand attempt to keep them paying off for a long period. Always give more importance to read the small print of any financial agreement you are about to sign.

Types of Bank Loan:

A loan is a type of debt; it is basically a temporary provision of money to be repayed with some interest. Banks in India are controlled under Reserve Bank of India.
There are different types of Loan available in market.


What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
Get It now!

This is to inform that Suvision Holdings Pvt Ltd ("") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.