Bank is the term for an institution that deals in money. Banks are categorized under two main categories: Commercial banks and Central banks.
Commercial Banks:- Commercial banks are the institution that make short-term loan to business and in the process to generate money.
Characteristics of commercial banks are that they deals in receiving deposit and lending the money and they aims at profit earning.
Functions of Commercial Banks are
The initial function of commercial banks is to take deposit from people that can not make investments of their saving to get profit. To take saving of community bank and offer following types of deposit account:
Saving bank accounts: It is the most popular deposit account used by every individual. The goal of this bank account is to motivate and mobilize the savings of public. The interest rate is lower than fixed deposit. Account holder has ATM and cheque facility.
Fixed deposit accounts: Under this account, money is deposited for fixed time period. The interest rate is much better than all other accounts. Cheque book facility is not available.
Recurring deposit accounts: Money in this account is deposited on regular basis and should not be cashed out prior to maturity. The interest rate is not as much as fixed deposit but more than other account.
Current deposit accounts: These kinds of accounts are managed by entrepreneurs who need to make number of transactions on a daily basis. Interest option is not available under this account. Account holder has the facility of bank overdraft.
Cash credit: It is a kind of loan which can be provided to borrower based on his stock statement and volume of production.
Overdraft: In some cases, bank gives overdraft facility to its customer in which they are permitted to withdraw more than the deposit. Interest is charged from customer on overdrawn accounts.
Discounting the bill of exchange: Under this method, the owner of the bill of exchange can certainly get it discounted by the bank after making a tiny deduction and bank pays remaining value of a bill to the holder.
General utility features
Letter of credit
CENTRAL BANK: It is the pinnacle financial institution of a country monetary system. It controls the nation's monetary policy.
Functions of central Bank
Power to issue currency: It has exclusive power to issue currency.
Controller of credit: It control the credit of the economy via different approaches like quantitative method (CRR, SLR, BANK RATE) and qualitative methods.
Lender of last resort: It means at the time of financial economic crisis, only central bank provides financial help to commercial bank and authorities.