This article throws light upon the top eight roles of a bank. The roles are: 1. The Source of Funds 2. Banks Help Develop Industry and Trade 3. Financial Assistance to Agriculture 4. Financial Help to General Public 5. Financial Intermediation 6. Trust, Liquidity, Safety 7. Provides Information to Credit Reference Agencies 8. Service Quality—Customer Service 9. Liquidity.
Role # 1. The Source of Funds:
The banks are financial institutions which mobilize funds from public and accept as deposits. Since banking companies remain under the strict observation of so many banking regulations of Government and the Reserve Bank of India, people have faith in banks and they keep their savings or surplus money with them for their future needs.
In order to collect more and more deposits different banks introduce many types of deposit schemes to attract the customers. However no deposit scheme can be formulated out of the frame of allowed banking business. Banks also pay interest on the deposits as per the policy of the bank under the guidelines of RBI.
In fact most of the deposits with the banks is the money that remain idle with the people when they keep cash money at home. Once this money is deposited in a bank it provides a financial base by virtue of which bank utilizes this money in giving loans for productive purposes. Without funds no creative or productive activity is possible. Creation funds tent-amounts to creation of capital which serves as the important factor in the growth of any economy.
Role # 2. Banks Help Develop Industry and Trade:
A major portion of bank deposits is utilized for grant loans to Industry and business houses big or small, Banks provide loans for new industries, for expansion and diversification of existing industries and for any type of business which is permitted as per banking regulations. It may be noted that banks are prohibited to provide loans for speculative activities.
When the loan is given the bank charges interest on loan amount as per decided terms of loan. This way bank earns income in form of interest. In turn bank pays interest to its depositors. The browser who takes loans from bank enhance the activities of their industry or business and increase their production or turnover. With the result a cycle of productive activities is created which helps the development of industry and trade.
The credit portfolio of the banks is subject to different regulations and as such banks take due care in granting the loans to keep bad debts at minimum possible level. Some schemes are formulated to help small traders, shopkeepers and every type of permissible business activities where persons of small means can obtain financial assistance from banks and help grow the economy.
Role # 3. Financial Assistance to Agriculture:
The Agriculture field is a special field for which government and RBI provide specific guidelines to banks for extending financial help to Farm and Agricultural lending. As much as certain targets are fixed for banks in the matter of Agricultural lending.
The Agriculture has been treated as a Priority Sector and all the banks are required to lend a specified percentage of their net credits for priority sector. The priority sector has been discussed in detail in a relevant portion of this book.
Role # 4. Financial Help to General Public:
The banks take do care of financial needs of general public as well. Different banks prepare many type of schemes for giving loans to common man. Although these schemes differ from bank to bank but their main thrust revolves round a) Housing Loan Schemes, b) Education Loan, c) Consumer loans like Car Loan d) Personal loan etc.
This way banks help develop the living conditions of the public and by such loans banks help expand the construction and manufacturing sectors to grow in their respective fields.
Role # 5. Financial Intermediation:
For discussing the intermediatory role of a bank we shall have to understand what is intermediation? It is one who acts a go-between or a mediator, a middleman, an agent, a broker. This meaning of intermediation is what that has been explained in the Banking Dictionary by F.E. Perry. From this we derive that the act of intermediation is that of a middleman.
In this way the Role of a bank of accepting the money as deposits from public (those who have the money) and making loans to those who need money (credit). Here public does not know the borrowers and borrowers do not know the actual lenders (The depositors), it is the bank who by intermediation performs the transaction. This function of the banks enable the movement of the capital from surplus source to deficit sector and helps enhancing the productivity of units in need of funds.
Banks help in transferring the funds from one place to another place. When Mr. Jaimeet living in India wishes to make certain payments to Mr. M.L. Dhawan in London he seeks the services of a bank where banks completes the transactions as a middleman. While working as intermetiatory for giving loans banks earn interest and while performing functions other than lending banks charge fees or commission for playing the role of intermediation.
Banks in India are in a better place to function as intermediatories because the public have full faith in banking systems in India and more and more people avail this facility from banks. Being strong mediators banks on one hand helps provide strong capital base to Indian economy and on the other hand people get reliable source for completion of their transactions.
The banks have facilities and systems to be the financial institution which is able to transfer money from one person to another person very easily. In this sense bank plays a very important role of being a part of the payment system of the economy. All other financial institution engaged in business of intermediation also depend on banks in one or the other way.
Banks because of their vide spread network of branches and enjoying the trust of people are considered as the largest financial intermediaries in the world. In this role of intermediations banks provide a strong base for economic prosperity of the country as a whole and different regions and industries depend upon banks.
(i) Risk of Intermediation:
The intermediately role of banks involves certain risks also. It is established fact that individuals (depositors) themselves will perhaps not lend their money directly to any borrower and therefore banks use depositors money for giving loans. In certain cases there may be chances that the banks do not get the repayment of loan given by them by the default of the borrower.
Default of repayment can be due to many reasons like:
a. Failure of business of borrower.
b. Insufficient generation of income.
c. Borrowers debts have gone bad.
d. Receivables are not forthcoming.
e. Natural calamity or mishappenings.
f. Willful default by the borrower.
Banks take due precautions while giving loan but bad debts can never be ruled out. Here the risk of bearing the loss by banks can also be not ruled out. Such risk cannot be faced by individual lenders and hence the importance of banks as intermediatory.
(ii) Liquidity Risk:
For any reason if the repayment of a loan amount is not forthcoming it adversely affects the liquidity position of banks. The intention of the borrower may be good but the basis fact is he is not repaying the loan amount in time and therefore bank has to bear the burden of the gap amount not received back by it.
(iii) The Interest Risk:
The above situation where a loan is not being paid back brings a situation before the bank for making compromises for effecting the recovery. The borrower may be not in a position to pay the interest at the rate which was fixed at the time of giving loan and he insists barks to reduce the rate of interest.
In another situation and in the situation of neck to neck completion a borrower may like to repay the entire loan amount by getting loans from some other institution at lower rate.
In fact every function performed by any bank on behalf of its customers is a function of intermediation, may it depositing money, cheuqes, transfer of money, issuing Drafts, Lending money etc. Money deposited by a customer is lent out to some other customer and on demand is paid back to the depositor.
For detail the overall general functions of Bank starts with opening of an account by the customer for which shall have to understand the structure of bank’s functioning, How to open account and how to become a customer.
Role # 6. Trust, Liquidity, Safety:
In fact Banking is a Business of Trust, Liquidity, Safety, Secrecy and profitability. In order to create a trust among the people and to retain it banks have to adhere to certain banking regulations and certain principles for conducting their business.
Some of these principles are given below:
(i) Trust:
Every bank is required to adopt a code of commitments to customers. For this purpose a Board has been constituted known as “The Banking Codes and Standards Board of India (BCSBI). This Board functions as an independent and autonomous watchdog to monitor and ensure that the Banking Codes and Standards are adhered to in true spirit while delivering the services.
The BCSBI has developed a “Code of Bank’s Commitment to Customers” to:
A) Promote good a fair banking practices by setting minimum standards in dealing with customers.
B) Increase transparency so that customers have better understanding of what they can reasonably expect of the services.
C) Encourage market forces, through competitions, to achieve higher operating standards.
D) Promote a fair and cordial relationship between customers and their banks.
E) Foster confidence in the banking system.
Although the code is a merely voluntary but the commitments made by banks are not merely commitments of the banks to their customers It services like a Charter of Rights of the common man vis-a-vis his bank.
By setting minimum standards of customer services with reliability, transparency and accountability, the Code outlines how banks should deal with their customers and what customers should reasonably expect from Banks.
In addition to above code the Reserve Bank of India has a separate Department of Banking Supervision who on frequent intervals conduct Inspection of the functioning of banks to asses the solvency, liquidity and functional health of banks from time to time.
The main factor is the banking regulations are followed strictly with the result after the banks failures in 30s no major incident has happened of bank runs. In public Sector banks major stake vests with the Government of India and this provides a sense of strong trust of people on banks.
(ii) Safety:
After having gain the trust of people the banks are required to act for the safety of its customers. Customers must feel that their money is safe with banks or banks will keep its commitments for releasing loan money in time. The trust of people depends on the Financial Health of the bank.
Whether Bank is adopting all parameters of credit appraisals and is prudent enough in its business transactions. Earning good profit is a sign of safety for customers. Banks should therefore be able to equip themselves with such specialized knowledge to pre judge the forthcoming risks. After all is a business of handling and management of risks.
So far as safety of deposits is concerned the Government of India has introduced DICGC – Deposit Insurance and Credit Guarantee Corporation which provides protection to public in respect of their deposits (money) with Banks. In case of failure of any bank The DICGC protects deposits of each customer up to Rs. One lack per bank. Not only this DICGC also protects banks in case of some loan becomes bad.
(iii) Profitability:
To earn profits remains the main motive of each and every company or business. The banks are not exception to this fact. In case bank is earning good profit the confidence and trust of people is retained with it. Rather more and more customers are attracted to it. Expanding a business is one tiling and earning a profit is another thing.
If a bank goes on the spree of expansion without analyzing the cost factors it may not earn profit. If bank becomes unprofitable it shall lose the trust of its customers and no customer shall be willing to deal with the bank. The banks should therefore keep themselves always to win the trust of customers by showing good results and earn profits year after year for its survival and existence.
A sound bank is one that shows increased profits in coming times and continues to broaden its customer base. More and more customers and more and more low cost deposits which is very important for any bank to earn profit.
(iv) Secrecy:
During the course of opening an account in a bank, transacting business on behalf of customers and dealing with their financial transactions Banks collect many details personal as well as financial from the customers. Banks keep such information fully confidential and do not reveal such information to any one unless required by law.
Banks are required to declare in its code of commitments to customers that:
That banks will treat all personal and financial information of customers as private and confidential (even if customer remains no longer a customer of the bank) Banks are guided by the following principles and policies.
Banks will not reveal information or data relating to customer’s accounts, whether provided by the customers or otherwise, to anyone, including other companies entities in their group, other than in the following exceptional cases:
a) If banks are required to give information by law.
b) If there is duty towards public to reveal the information.
c) If banks’ interest require them to give the information(for example, to prevent fraud) but banks do not use this as a reason for giving information about customers or their accounts( including name and address) to anyone else, including other companies in their group, for marketing purposes.
d) The banks reveal information only if customers desire and give permission to their bank.
e) If a bank is asked to give banker’s reference about any customer, bank will obtain a written permission from the concerned customer before giving such reference.
f) The banks need to explain to its customers about their rights under the existing ‘legal framework for accessing the personals records about customers held with banks.
g) The banks should not use customers’ personal information for marketing purposes by anyone.
Role # 7. Provides Information to Credit Reference Agencies:
In order to prevent credit frauds and financial health of customers certain information is required by credit reference agencies which they obtain from banks.
In such conditions:
a) While opening an account banks usually explain to its customer about passing information relating to customers’ accounts to credit agencies and also seek such information for counter checks.
b) The banks give information to credit reference agencies about the personal debts owned by banks if;
1) Customers have fallen behind with their payments,
2) The amount owed is not in dispute, and
3) If banks are not satisfied with the proposals made by customers about repaying their debts on receiving the formal demand made by the banks,
c) In these cases bank intimates its customers in writing about its plan to give information about the debts of customers owed to bank to credit reference agencies, at the same time bank also explains the role of credit reference agency and the effect the information provided by the bank can have on the ability of customer to get credit.
d) If a customer has given permission to bank, the bank may give credit reference agencies other information about day-to-day running of his account.
In case banks do not follow the principles of secrecy and impart information about its customer such an act on the part of bank may adversely affect the position of its customers. Moreover revealing information can also be misused by others.
It is therefore duty of banks to ensure absolute secrecy of customer information.
Role # 8. Service Quality—Customer Service:
When we talk about the quality of services it not only banks but every business entity must keep the customer quality at top of their priorities. Some business houses prominently display on their business premises “CUSTOMER SERVICE IS OUR MOTTO”. Even Mahatma Gandhi’s teachings guide us that the customer is our God.
It is therefore clear that banks must maintain high level of customer services particularly when banking is essentially a transaction oriented business that too transactions relating to money and finance where no laxity is tolerated by customers. While dealing in financial, transactions one needs a trusted, transparent and pleasant way of dealing. Customers require a friendly, comfortable and congenial ambience.
Keeping in view the importance of customer services many banks have deputed Customer Care Officers in all the branches whose sole duty is to take care of all the needs of customers and help them completing their transaction as early as possible and as per his desire.
Some other banks have provided single window services where customer is not required to roam from one counter to another counter. His all works whether depositing cash, withdrawing cash, Opening an account or issue of a Demand Draft are done on single window. Some other banks have created Senior Citizen lounge where senior citizens can sit comfortable and the bank staff shall provide all services to them.
A few banks have created special customer services cells.
Reserve Bank of India has made a separate Department known as Customer Services Department which looks after:
The Customer Service Department in RBI was constituted to provide proper focus to the entire range of customer service related activities of banks and the Reserve Bank of India.
The Department started functioning from July 1, 2006 with following objectives:
1. Dissemination of instructions/information relating to customer service and grievance redressal by banks and Reserve Bank of India.
2. Overseeing the grievance redressal mechanism in respect of services rendered by various RBI offices/departments.
3. Administering the Banking Ombudsman (BO) Scheme.
4. Acting as a nodal department for the Banking Codes and Standards Board of India (BCSBI).
5. Ensuring redressal of complaints received directly by RBI on customer service in banks.
6. Liaison between banks, Indian Banks Association, BCSBI, Banking Ombudsman offices and the RBI’s regulatory departments on matters relating to customer services and grievance redressal.
Even other wise with the growth of new technologies particularly information technologies the customers expectations from any organisation have increased. In this world of online services it is not possible to increase the customer base for any bank unless they bring out highly improved methods for improving their customer services.
In other word banks shall have to adopt new marketing concepts in order to retain good customers. The world over Customer Relationship management is taking new shapes every day. Right from generating leads to search new customers, tracking them and trying to bring them in in their folds by sending SMS on their mobile or directly emailing them.
Banking products being marketed in all the banks are almost same. In these circumstances it becomes almost difficult to bring any new customer to a particular bank particularly when customers have become more educated, more equipped with new information technology and at the most more demanding.
A vital point is evolving new methods, new and innovative products and making personal relations to provide utmost satisfaction to customers. Very important thing is that the customers have no time in the busy life of today. They desire quick and efficient services with no iota of delay at any stage.
Gone are the days when bank employees were happy to attend a customer unmindful of reading customer’s behavior. A customer has been attended irrespective of indifferent attitude of bank employees was a matter of satisfaction. The customer was also satisfied that his job has been done by the bank employee without showing any curtsy, respect or a sign of willingness.
During those days it was compulsion of the customers as all banks were bound by the law to do banking within the given frame work and no incentives was allowed. The main reason is that banks were being controlled by big business houses with little access to common public.
With Nationalisation of Banks the situation improved. RBI also liberalized certain norms and provided freedom of working to respective banks. After nationalization a trend for satisfaction of customers emerged. Now customers were attended politely and efforts were made to bring some satisfaction also.
If Economy is to grow banks have also to grow and earn profit. The RBI further liberalized norms and starting allowing Private banks to expand their business. This created situation of competition among banks. It is not easy to compete each other. One has to bring in something new to lead others. A time for Pleasing the customers has emerged.
Now banks started introducing the new services suiting to its customer base but also prescribed standards of services. Not only this a process was also started to review the customer services and bring more improvement by constituting Customers Service committees and collecting opinion of customers.
After the level of pleasing the customers now banks started delighting the customers for which specialized Training programs for employees were arranged. Employees skill enhanced to deal the customers.
Keeping customer in central focus Banks started preparing code of work culture to be adopted by all. They specified their mission towards not only customer services but also for development in stiff competition with other banks leading to a stage of Retaining the customers.
Today thinking is taking new turn. Banks have drawn lines to ensure that no customer goes unsatisfied. 99 satisfied customers may perhaps not help the bank but one unsatisfied customer can do much harm by adverse mouth publicity.
For Retaining the customers banks must bring change in the attitude of front workers. A customer whosever small should be promptly attended, listened and a suitable solution be provided in a polite and cordial manner.
Role # 9. Liquidity:
What is liquidity. It is an immediate capacity to meet one’s financial commitments. The degree of liquidity depends upon the relationship between a company’s cash assets plus those assets which can be quickly turned into cash, and the liabilities awaiting payments, an ability to turn certain assets into the form of cash. Banks are required to keep adequate balance between a bank invested funds (assets) and its financial resources (liabilities).
It should ensure that a bank is at all times able to fund its operations under any conditions and at a reasonable cost. Thus the liquidity is the ability to fund all contractual obligations of the bank, notably lending and investment commitments and deposit withdrawals and liability maturing in the normal course of business.
In other words the liquidity is the ability to fund increases in assets and meet obligations as they become due. The banks should therefore mobilise the sources of income whether interest or non-interest income to the maximum extend to stay in business.