General Utility Services | Secondary Functions of Commercial Banking
In this article we are going to continue to discuss Commercial banking and learned about the General Utility Services and secondary functions of Commercial banks.
Secondary Functions – General Utility Services
The secondary functions of the banks consist of agency functions and general utility functions. In this Article we are going to discuss General Utility Services offered by commercial banks.
Safety Locker facility
Safekeeping of important documents, valuables like jewels are one of the oldest services provided by commercial banks. ‘Lockers’ are small receptacles which are fitted in steel racks and kept inside strong rooms known as vaults. These lockers are available on half-yearly or annual rental basis. The bank merely provides lockers and the key but the valuables are always under the control of its users. Any customer cannot have access to the vault. Only customers of safety lockers after entering into a register his name account number and time can enter into the vault. Because the vault is holding important valuables of customers in lockers, it is also known as ‘Strong Room’.
Payment Mechanism or Money Transfer
Transfer of funds is one of the important functions performed by commercial banks. Cheques and credit cards are two important payment mechanisms through banks. Despite an increase in financial transactions, banks are managing the transfer of funds process very efficiently.
Cheques are also cleared through the banking system. Correspondent banking is another method of transferring funds over a long distance, usually from one country to another. Banks these days employ computers to speed up money transfer and to reduce the cost of transferring funds. Electronic Transfer of funds is also known as ‘Chequeless banking’ where funds are transferred through computers and sophisticated electronic systems by using code words. They offer Mail Transfer, Telegraphic Transfer (TT) facility also.
Travelers Cheques are used by domestic travelers as well as by international travelers. However the use of traveler’s cheques is more common by international travelers because of their safety and convenience. These can be also termed as a modified form of traveler’s letter of credit.
A bank issuing travelers cheques usually have banking arrangements with many of the foreign banks abroad, known as correspondent banks. The purchaser of traveler’s cheques can encase the cheques from all the overseas banks with whom the issuing bank has such an arrangement. Thus traveler’s cheques are not drawn on specific banks abroad. The cheques are issued in foreign currency and in convenient denominations of ten, twenty, fifty, one hundred dollar, etc. The signature of the buyer/traveler is written on the face of the cheques at the time of their purchase. The cheques also provide blank space for the signature of the traveler to be signed at the time of encashment of each cheque.
A traveler has to sign in the blank space at the time of drawing money and in the presence of the paying banker. The paying banker will pay the money only when the signature of the traveler tallies with the signature already available on the cheque.
A traveler should never sign the cheque except in the presence of paying banker and only when the traveler desires to encash the cheque. Otherwise it may be misused. The cheques are also accepted by hotels, restaurants, shops, airlines companies for respectable persons. Encashment of a traveler cheque abroad is tantamount to a foreign exchange transaction as it involves conversion of domestic currency into a foreign currency. When a traveller cheque is lost or stolen, the buyer of the cheques has to give a notice to the issuing bank so that stop order can be issued against such lost/stolen cheques to the banks where they are permitted to be encased.
It is also difficult for the finder of the cheque to draw cash against it since the encasher has to sign the cheque in the presence of the paying banker. Unused travellers cheques can be surrendered to the issuing bank and balance of cash obtained. The issuing bank levies certain commissions depending upon the number and value of travellers cheques issued.
Circular Notes or Circular Letters of Credit
Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of the various branches to which they are addressed. Thus the traveller can obtain funds from many of the branches of banks instead only from a particular branch. Circular Letters of Credit are therefore a more useful method for obtaining funds while travelling to many countries.
It may be noted that travellers’ letters of credit are usually paid for in advance. In other words, the traveller first makes payments to the issuing bank before obtaining the Circular Notes.
Issue “Travellers Cheques”
Banks issue travellers cheques to help carry money safely while travelling within India or abroad. Thus, the customers can travel without fear, theft or loss of money.
Letters of Credit
Letter of Credit is a payment document provided by the buyer’s banker in favor of the seller. This document guarantees payment to the seller upon production of the document mentioned in the Letter of Credit evidencing dispatch of goods to the buyer.
The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in the Letter of Credit. The letter of credit is an important method of payment in international trade. There are primarily 4 parties to a letter of credit. The buyer or importer, the bank which issues the letter of credit, known as opening bank, the person in whose favor the letter of credit is issued or opened (The seller or
exporter, known as ‘Beneficiary of Letter of Credit’), and the credit receiving/advising bank.
The Letter of Credit is generally advised/sent through the seller’s bank, known as Negotiating or Advising bank. This is done because the conditions mentioned in the Letter of Credit are, in the first instance, to be verified by the Negotiating Bank. It is mostly used in international trade.
Acting as Referees
The banks act as referees and supply information about the business transactions and financial standing of their customers on enquiries made by third parties. This is done on the acceptance of the customers and helps to increase the business activity in general.
Provides Trade Information
The commercial banks collect information on business and financial conditions etc. and make it available to their customers to help plan their strategy. Trade information service is very useful for those customers going for cross-border business. It will help traders to know the exact business conditions, payment rules and buyers’ financial status in other countries.
The banks today have ATM facilities. Under this system the customers can withdraw their money easily and quickly and 24 hours a day. This is also known as ‘Any Time Money’. Customers under this system can withdraw funds i.e. currency notes with a help of certain magnetic cards issued by the bank and similarly deposit cash/ cheque for credit to account.
Banks have introduced credit card systems. Credit cards enable a customer to purchase goods and services from certain specified retail and service establishments up to a limit without making immediate payment. In other words, purchases can be made on credit basis on the strength of the credit card.
The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods or services on credit forward a monthly or fortnightly statement to the bank. The amount is paid to these establishments by the bank. The bank subsequently collects the dues from the customers by debit to their accounts. Usually, the bank receives certain service charges for every credit card issued. Visa Card, BOB card are some examples of credit cards.
The commercial banks offer Gift cheque facilities to the general public. These cheques received a wider acceptance in India. Under this system by paying an equivalent amount one can buy a gift cheque for presentation on occasions like Wedding, Birthday.
On behalf of their customers, the banks accept bills drawn by third parties on its customers. This resembles the letter of credit. While banks accept bills, they provide a better security for payment to sellers of goods or drawer of bills.
The commercial banks provide valuable services through their merchant banking divisions or through their subsidiaries to the traders. This is the function of underwriting of securities. They underwrite a portion of the Public issue of shares, Debentures and Bonds of Joint Stock Companies.
Such underwriting ensures the expected minimum subscription and also convey to the investing public about the quality of the company issuing the securities. Currently, this type of services can be provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations.
Advice on Financial Matters
The commercial banks also give advice to their customers on financial matters particularly on investment decisions such as expansion, diversification, new ventures, rising of funds etc.
Today the commercial banks provide factoring service to their customers. It is very much helpful in the development of trade and industry as immediate cash flow and administration of debtors’ accounts are taken care of by factors. This service is again provided only by a separate subsidiary as per RBI regulations.
Balance sheet is a statement of assets and liabilities on a given date. In India, banks have to publish their balance sheets according to the performance i.e., ‘Form A’ given in the III schedule of the Banking Regulation Act, 1949. The study of the balance sheet along with its profit and loss account reveals its financial soundness. A customer has to carefully study these statements to choose his banks. The combined balance sheet of all banks in the country reveals certain economic trends.