Purpose of Banks

A bank is a financial institution which is involved in borrowing and lending money. Banks take
customer deposits in return for paying customers an annual interest payment. The bank then uses
the majority of these deposits to lend to other customers for a variety of loans. The difference
between the two interest rates is effectively the profit margin for banks. Banks play an important
role in the economy for offering a service for people wishing to save. Banks also play an important
role in offering finance to businesses who wish to invest and expand. These loans and business
investment are important for enabling economic growth.
Main purpose of banks

1. Keep money safe for customers

2. Offer customers interest on deposits, helping to protect against money losing value against
inflation.
3. Lending money to firms, customers and homebuyers.
4. Offering financial advice and related financial services, such as insurance

1. Safety of deposits

Banks are seen as a secure place to deposit money. It would be impractical and risky to keep all
your savings as cash under your bed. In medieval times, people would often pay early banks (e.g.
Knights Templar) to keep their money and assets safe. It also saves people worrying about
money. In the UK, commercial banks are guaranteed by the Bank of England as a lender of last
resort. Therefore, consumers see them as safe places to deposit money.

2. Interest on deposits

Commercial banks pay interest on deposits. For current accounts, this may be very low, but for
saving accounts, the interest rate can be significant. In a period of inflation, interest rates on
deposits are very important for maintaining the real value of your savings. For example, if inflation
is 4% then keeping cash will see the value of savings decrease in value. However, if the bank is
paying an interest rate of 6%, then the real value of your savings will increase. For some
customers, such as pensioners, interest payments on their bank savings can be an important
source of income.

Different types of Bank accounts

Current account is a bank account that allows you to access a range of everyday banking
services, such as receiving money (like your salary, pension or benefits payments), paying bills,
and setting up direct debits and standing orders to make regular payments.
The nature of these accounts differentiates them from savings accounts, which could also be
considered bank accounts but are not generally used directly for receiving and spending cash.
A current account will typically give you a cash and/or debit card and a chequebook and may also
have an agreed overdraft facility (essentially a form of credit should you need it).
Aside from the basics, there are many options to choose from when it comes to how you want to
run your account – which is only natural as everyone has different needs and desires. These are
catered for through a variety of accounts and account features.
 Savings account is an interest-bearing deposit account held at a bank or other financial institution.
Though these accounts typically pay a modest interest rate, their safety and reliability makes them
a great option for parking cash you want available for short-term needs.

Savings accounts have some limitations on how often you can withdraw funds, but generally offer
exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term goal like
buying a car or going on vacation, or simply sweeping surplus cash you don’t need in your
checking account so it can earn more interest elsewhere.

3. Loans

A bank can become more profitable by using a percentage of its deposits to lend to other
customers. If a bank pays 2% on bank deposits but lends money to firms and consumers at 6%,
then it can make a bigger profit on its deposits. A bank just needs to keep sufficient liquidity to
meet the demands of customers to withdraw money.

4. Other features

Banks can also give other features to consumers, such as:

 Instant access to cash (hole in the wall cash machines)

 Advice on financial matters
 Methods to make international payments. Increasingly banks offer electronic transfer of money
through systems

Importance and Role of Banks: - Banking plays an important role in the financial life of a
business, and the importance of banks can be seen from the fact that they are considered as to
be the life-blood of modern economy. Although no wealth is created by Bank, but their essential
activities facilitates the process of production, exchange and distribution of wealth. In this way
they become the effective partners in the process of economic development and growth. In the
words of Stephenson & Britain “Banks are the custodians and distribution of liquid capital, which
is the life-blood of our commercial and industrial activities and upon the prudence of their
administration depend the economic well-being of the nation”.

Importance of Banks for Business

On the basis of these Important Functions of Banks, we may easily describe the importance of
banks in today’s global life.

1. Collections of Savings and Advancing Loans

Acceptance of deposit and advancing the loans is the basic function of commercial banks. On
this function, all other functions depend accordingly. Bank operates different types of accounts
for their customers.

2. Money Transfer

Banks have facilitated the making of payments from one place or persons to another by means
of cheques, bill of exchange and drafts, instead of cash. Payment though cheques, draft is more
safe and convenient, especially in case of huge payments, this facility is a great help for traders
and businessmen. It really enhances the importance of banks for business community.

3. Encourages Savings

Banks perform an invaluable service by encouraging savings among the people. They induce
them to save for profitable investment for themselves and for national interest. These savings
help in capital formation.

4. Transfer Savings into Investment

Bank transfer the savings collected from the people into investment and thus increase the amount
of effective capital, which helps the process of economic growth.

5. Overdraft Facilities

The banks allow the overdraft facilities to their trusted customers and thus help them in
overcoming of temporary financial difficulties.

6. Discounting Bill of Exchange

Importance of banks can be seen through the facility of discounting bill of exchange. Banks
discount their bill of exchange of consumers and help them in the financial difficulties. By
discounting bill of exchange, they able to get the desire amount for investment they want.

7. Financing Internal & External Trade

Banks help merchants and traders in financing internal and external trade by discounting foreign
bill of exchange, issuing of letter of credit and other guarantees for their customers.

8. Act as an Agent

The bank act as a agent and help their customers in the purchase and sales of shares, provision
of lockers payment of monthly and dividends on stock.

9. Issue of Traveler’s Cheques

For the convenience and security of money for travelers and tourists, bank provides the facility of
traveler’s cheques. These cheques enable the travelers and tourists to meet their expenses
during their journey, as these are accepted by issuing bankers, restaurants, and other
businessmen both at home and abroad. No doubt, this is also one of the great functions of banks
and shows the importance of banks for us in more precise ways.

10. General Utility Services

Existence of commercial banks is essential for contribution to general prosperity. Banks are the
main factors in raising the level of economic development of the world. In addition to above-cited
advantages, banks also provide many services of general utilities to the customers and the
general public.
Role of Commercial Banks in the Economy

As we know that main objectives of a commercial bank is to earn profit by the process of accepting
of deposits and advancing loans through different methods. Although these functions are the
basicfunction of commercial banks, but there are a lot more functions which enhances the
importance of banks today.

1. Acceptance of deposits, by opening different kinds of bank accounts

2. Advancing of loans to needy persons through different methods and requirements
3. Provisions of agency and general utility services to his customers
4. Making new investments in different organizations and increasing the productive capacity
of the country
5. Promote capital formation in the country by mobilizing and collection of savings for the
purpose of investments
6. Development of industries in the country according to the requirements of the economy
7. A balanced development in the economy is achieved in different sectors & regions through
the resources of bank funds
8. Development in agricultural production is made possible by providing different kinds of
loans
9. These banks help in reducing reliance in foreign assistance by their efforts in the
mobilization of domestic savings
10. These banks help in the implementation of an effective monetary policy according to the
objective to central bank.
11. Commercial banks also help in the creation and distribution of money through the sales
and purchase of securities.
12. Commercial banks are the custodian and distributor of liquid capital of the country, which
is the life blood of all commercial and economic activities of a country.