Unit_2

Unit Overview

• Unit 2 covers the functions, types of customers, and banker-customer relationships.

Contents

• Functions of Banks

• Types of Bank Customers

• Banker and Customer Relationship

Functions of Banks

Primary Functions

• Accepting Deposits

  • Mobilizes public funds.

  • Provides safe custody of savings.

  • Offers interest on savings.

• Loans and Advances

  • Provides finances to borrowers, creating liquidity in markets.

Secondary Functions

• Utility Function

  • Helps facilitate banking products.

• Agency Function

  • Acts on behalf of customers in various transactions.

• Fee Services

  • Includes various banking charges and fees.

Types of Deposits

Classification of Deposits

• Demand Deposits

  • Savings Account: Allows withdrawals anytime, low or no interest.

  • Examples include daily expenses and purchases.

• Time Deposits

  • Fixed time deposit, higher interest compared to savings accounts.

  • Requires funds to stay in the account for a designated time.

• Hybrid Deposits

  • Mixes features of different types of deposits (examples include mutual funds).

Specific Deposit Types

Savings Account

• Promotes saving habits, provides flexibility in withdrawals, low-interest rates, minimum balance required, and associated banking facilities.

Current Account

• Used by businesses, allows overdraft facility, incurs charges, acts as a short-term loan.

Recurring Deposit Account

• Fixed sum deposited regularly, higher interest, suitable for salaried individuals, withdrawal only allowed after a curing period.

Fixed Deposit Account

• Also known as Term Deposits, characterized by a fixed tenure and high-interest rates, incurring penalties for early withdrawal.

Hybrid Deposit Account

• Offers a diversified investment portfolio, balancing income and capital appreciation.

Functions of Loans and Advances

• Lending process increases market liquidity and supports economic activity.

Benefits of Lending

• Increased Economic Growth

  • Financing new business investments boosts production and job creation.

• More Jobs

  • Facilitates business expansion and confidence in future investments.

• Improved Access to Credit

  • Maintains stability in the economy and prevents credit crunches.

• Reduced Borrowing Cost

  • Lower interest rates for consumers stimulate spending.

Principles of Lending

• Profitability

  • Ensures enough return on investments.

• Liquidity

  • Loans should be given on quickly marketable assets.

• Safety

  • Borrowers must meet repayment requirements (character, capacity, and security).

• Diversity

  • Spread risks across multiple investments and loans.

• Stability

  • Invest in stable securities to prevent losses.

Types of Lending

Fund-based Credit Facilities

• Overdraft: Short-term unsecured credit, allows withdrawal beyond account balance.

• Cash Credit: Secured short-term loan for businesses to meet working capital needs.

• Demand Loan: Secured loans repayable upon lender's demand.

• Bill Discounting: Financing by selling unpaid invoices to banks for immediate cash.

Non-Fund Based Credit Facilities

• Guarantees: Bank guarantees for debt repayment.

• Letters of Credit: Assurance from banks for payments on behalf of buyers to sellers.

Types of Bank Customers

• Personal Accounts: Individuals opening accounts.

• Sole Proprietary Firms: Businesses wholly owned by one person.

• Partnership Firms: Shared ownership among partners.

• Limited Liability Partnerships (LLP): Offers limited liability to partners.

• Trusts: Managed by trustees for the benefit of others.

• Companies: Governed by the Companies Act, with specific documentation required for opening accounts.

Banker-Customer Relationship

General Relationship

• Debtor and creditor roles: Bank as debtor when holding deposits, creditor when lending.

Special Roles

• Trustee and Beneficiary: Banks acting as trustees secure clients' valuables for safekeeping.

• Agent and Principal: Banks function on customers' behalf for transactions (e.g., bill payments).

• Bailor and Bailee: Banks take possession of securities or goods, ensuring their care.

Termination of Relationship

• Conditions for termination: death of customer, insolvency, court orders, low account balance, etc.