You can BANK on them!

Banking is one of the most commonly used services in the economy. We really can’t imagine an economy without banks, but wait! Do you know why they are so important? And what all services they provide?

Commercial banks play an important role in the economic and financial spheres as they provide systematic distribution and allocation of funds.

It is an essential service that provides the general public with various utilities and financial services. Banks ensure that your money and precious items are kept safe through locker facilities. It also helps in the easy transaction of money. By providing credit, banks help in the opening of businesses, buying homes, cars, etc. 

The two primary functions of a bank are accepting deposits and lending loans. It is an institution where people can deposit their money while earning interest on it and can also borrow money by paying interest on it. 

You may wonder, how does this actually work? Banks keep a certain amount of deposits with themselves and use the rest of the amount to lend money. They keep this reserve of deposits with themselves to pay the depositors who might want to withdraw their money. Let us understand this better with an example:

Imagine two people A and B who deposit Rs 10,000 and Rs, 20,000 respectively in the bank. They earn 4% interest on it. The bank keeps 5% of its total deposits i.e. 5% of Rs.30,000= Rs.1,500 as a reserve. Then, the bank lends the rest of the money and earns interest on it.

The money they give as interest is comparatively lesser than what they charge to the borrowers. 

Thus, Interest paid by borrowers-Interest given to the depositors= the bank’s income.

Do you know what all a bank can do for you? Let’s find out:

ACCEPTING DEPOSITS: We can deposit our money by opening various kinds of bank accounts. We need only some amount of money in our daily lives, hence, the rest of the money can be deposited. Here’s a lesser known fact for you- Banks pay us a 3% annual interest on the money deposited. This facility is also known as demand deposits as we can withdraw the money whenever we want to.

But, do you know which account you should open in order to optimise your money? The three most popular bank accounts are:

  1. Fixed account- In this account, the money is deposited for a fixed period of time. This is suitable for those who want to deposit their money for the long term. Banks offer a higher interest rate of 6-7%, compounded annually. Premature withdrawal can take place by reducing some amount of interest.
  2. Savings account- This account is mainly to encourage savings. The interest rate is decided by the RBI. It is 3% p.a. currently. It has a limit on the number of withdrawals as well. You need to have a balance of Rs.10,000 for availing the cheque facility.
  3. Current account- This account is apt for carrying transactions. Businesses generally opt for this account. Money can be withdrawn from this account without any prior notice. No interest is paid on deposits made in this account.

LENDING OF FUNDS: Banks provide loans and credit in the form of credit cards, overdraft, cash credits, discounting trade bills, consumer credits, etc. The most common loans are car loans, home loans, personal loans, student loans, and mortgages. We need to pay interest on these loans. Most loans are secured by some collateral i.e. an asset that we own. Few of the lending services are explained below:

  • OVERDRAFTS: It means withdrawing an amount of money which is more than the amount available in the bank account. A good credit score will help you get an overdraft easily. There is a certain limit on the amount of overdraft that is allowed. You have to pay interest too while repaying the overdraft. So, spend your money carefully to avoid overdrafts.
  • CASH CREDITS: Banks have a fixed borrowing limit. So the cash credit service allows us to withdraw money (amount being more than our balance) from our current accounts. This has a certain limit depending on our credit history and borrowing limit.
  • DEBIT CARDS AND CREDIT CARDS: Sudden meet-up with friends at a fancy restaurant? Not having sufficient cash in your wallet? Don’t worry. Get a debit/credit card for yourselves and never face this issue again. These cards are plastic money that can be used instead of actual money to make transactions. They are protected by a Personal Identification Number called PIN. The money in your debit card is limited to the amount in your bank account. Whereas the money in your credit card exceeds your deposited amount and it’s a liability that you need to pay for later.

CHEQUE FACILITIES: Remember when you learned how to write numbers in expanded form and weren’t sure how it was useful for you? Well, it is quite useful when you want to use a cheque. A cheque is an important medium of exchange in the modern days. It is a document instructing the bank to pay the amount mentioned to the person’s account in whose name the cheque has been issued to.

CURRENCY EXCHANGE: This means the conversion of physical currency of one country to another country. Without this service, all your foreign trips won’t be possible!

Example: Conversion of rupees to dollars

ATM SERVICES: We all have gone to ATMs more than banks. Say thanks to them, your friend can never say, “Oh, I forgot my wallet!” ATM, i.e. Automated Teller Machine, helps the customers to perform basic transactions without going to the bank itself. These are electronic outlets that help us to withdraw, transfer, and deposit money with the help of our debit or credit card by using our PIN (Personal Identification Number). ATMs are open 24/7. If we use an ATM of another bank in which we don’t have an account, we are usually charged a fee.

E-BANKING: What if you live abroad and require some money from back home? What if you have fallen ill and want to pay your bills without going to the store physically? The solution to all this is virtual banking (E-banking). The banking services are available on the internet. The biggest advantage of this is that it can be done from anywhere, anytime. It is much safer than the traditional banking method. The various services available on E-Banking are bill payments (such as telephone bill, electricity bill), mobile recharge, booking tickets, Electronic Funds Transfer (EFT), tuition fees, shopping, ATM, etc. This enables transactions in a much simplified manner at your fingertips. EFT can be carried out in two ways- NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement).

OTHER SERVICES: Banks provide several other facilities as well like locker facilities, transfer of funds (aka remittance of funds), bill payments, underwriting services, share-trading, collection of dividends and mutual funds.

Knowing about a financial institution will make you more aware and empowered as you get to know about the resources available and how to use them. The modern banking system is more than just lending and depositing money. The variety of services make banks a go-to for any kind of financial issue. Having a bank account is essential to manage our finances and execute a saving plan. These services enable the easy functioning of other industries and sectors too. The need of the hour is to educate ourselves about banks and their services.

Team Investoday