Financial And Insurance Activities
The financial and insurance activities industry consists of banking, fund management as well as other economic services such as foreign exchange and investment services.
Examples pertinent to Singapore:
- Investment services
What is Bank?
Banking Is an industry that handles cash credit, and other financial transactions for individual customers and businesses alike. It provides liquidity needed for families and businesses to invest in the future, and is one of the key drivers of the US economy.
A bank is a lawful organization that accepts deposits that can be withdrawn on demand. Banks are institutions that help the public in the management of their finances, public deposit their savings in banks with the assurance to withdraw money from the deposits whenever required.
Bank will also grants loans based on deposits thereby adding to the economic development of the country and well being of the general public. Bank accept deposit from general public and from the business community as well and give two insurances to the depositors
- Safety of deposit
- Withdrawal of deposit, whenever needed.
Banks give interest on deposits which adds to the original deposit amount and is a great incentive to the depositor. This promotes saving habits among the public. It becomes important to understand the major functions of bank.
Functions of Bank
The functions of bank is to collect deposits from the public and lend those deposits for the development of Agriculture, Industry, Trade and Commerce. Bank pays interest at lower rates to the depositors and receives interests on loans and advances from them at higher rates. These are the two functions of Bank
- Primary functions
- Secondary functions
Primary functions of Bank
These are two types of primary functions performed by banks. Banking is the life blood of modern commerce . It has played a very important role in the economic development of all the nations of the world. All banks have to perform two major primary functions namely:
- Accepting of deposits
- Granting of loans and advances
- Accepting of Deposits
The most important function of all the commercial banks is mobilize deposits from the public, providing safe custody of savings and interest on the savings to depositors. People who have surplus income and savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with a bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, the public are motivated to deposit more funds with the bank. There is also safely of funds deposited with the bank.
Bank also known custodian bank public funds. Basically, money accepted as deposit for safe keeping, but since the bank uses the money earn interest from those who need it money, they share a part of this interest with the depositors.
The quantum of interest depends upon the tenure length of time for which the depositor wishes to keep the money with the bank and the ease of withdrawal. The thumb rule is: the longer the tenure, the higher the rate of interest, and the lesser the restrictions on withdrawal, the lesser the interest. Bank accepts different types of deposits from the public such as:
- Saving Deposits
Saving deposits account is the type of bank account which is opened by the people in order to save a part of their income. The rate of interest is quite nominal in saving deposits account.
Saving deposits encourages savings habits among public. It is suitable for salary and wage earners. The rate of interest is low. There is no restrictions on the number and amount of withdrawals. The account for saving deposits can be opened in a single name or in joint names. The depositors just need to maintain minimum balance which varies across different banks. Also, bank provides ATM cum debit card, cheque book, and internet banking facility.
- Fixed Deposits
Fixed deposit are one of the most popular ways to save money. They are a safe investment, offer good returns, and are easy to open. Fixed deposit are Also know as term deposits. Money is deposited for a fixed tenure.
No withdrawal money during this period allowed. In case depositors withdraw before maturity, bank levy a penalty for premature withdrawal. As a lump sum amount is paid at one time for a specific time, the rate of interest is high but varies with the period of deposit.
- Best Fixed Deposit Schemes To Invest In India in 2023
Let us see which bank is best for the fixed deposit investment with their fixed deposit rate here is the table.
Factors To Consider Before Investing in Fixed Deposits
Here are a things you should aware of before choosing to invest in fixed deposits and decide which bank is best for fixed deposits.
- Deposit Limit
- Interest Rates
- Tax Benefits
The first factor to consider is the deposit limit. The deposit limit is the maximum amount bank can offer in a fixed deposit. You will have to pay an upfront fee if you want to open your account with a large balance than the bank allows.
The next thing you need to consider while investing in fixed deposits is the interest rates different banks offer.
The different banks can vary depending on their ratings and financial strength.
For example, some bank charge lower interest rates than others because they have more branches. However, it is necessary to analyze the best fixed deposit rates before making an investment choice.
Another important factor to consider before investing in fixed deposits is liquidity. This means how quickly your money will be available when needed. In case, you should ensure that the bank has enough cash reserves to pay out your fixed deposit when it matures ( after a certain period).
A fixed deposit is a good option if you want to benefit from a tax deduction on your earnings. The Government provides an interest rate deduction in the form of tax, which you can claim as an exemption from income tax. The amount of interest you can claim depends on your income and other factors.
Before investing in the best fixed deposit plan, the tenure of a fixed deposit is one thing you should consider beforehand. Before investing in any financial instruments like fixed deposits, you must know how long your money will remain in the bank for safe keeping and its interest rates.
Current deposit are opened by businessman. The account holders get and overdraft facility on this account. These deposits act as a short term loan to meet urgent needs. Bank charges a high interest rate along with the charges for overdraft facility in order to maintain a reserve for unknown demands for the overdraft.
A current account is also called a demand deposit account, is a basic checking account. Customers deposit money and the deposited money can be withdrawn as the account holder desires on demand.
Current bank account is opened by businessman who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as Demand Deposit Account.
Current account can be opened in co-operative bank and commercial bank. In current account, amount can be deposited and withdrawn at any time without giving any notice. It is also suitable for making payments to creditors by using Cheques. Cheques received from customers can be deposited in this account for collection. Current account holder get one important advantage of overdraft facility.
Features Of Current Bank Account
Main features of current account are as follows;
- Current bank account are operated to run a business.
- It is a non interest bearing bank account.
- It needs a higher minimum balance to be maintained as compared to the savings account.
- Penalty is charged if minimum balance is not maintained in the current account.
- It charges interest on the short term funds borrowed from the bank.
- It is of a continuing nature as there is no fixed period to hold a current account.
- It does not promote saving habits with its account holders.
- There is no restrictions on the number and amount of deposit.
- Banker requires KYC (Know Your Customers) norms to be completed before opening a current account.
- Generally, bank does not pay any interest on current account, Nowadays, some banks do pay interest on current accounts.
A recurring deposit is a special kind of term deposit offered by Indian banks and Post Office which helps people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed deposits.
A certain sun of money deposited in the bank at a regular interval. Money can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring deposits as it provides a benefit of compounded rate of interest and enables depositors to collect a big sum of money. This type of account is operated by salaried persons and petty traders.
- Granting of Loans and Advance
The deposits accepted from the public are utilized by the banks to advance loans to the businesses and individuals to meet their uncertainties. Bank charges a higher rate of interest on loans and advances than what it pays on deposits. The difference between the lending interest rate and interest rate for deposits is bank profit.
Bank offers the following types of Loans and Advances:
- Bank Overdraft
This facility is for current account holders. It allows holders to withdraw money anytime more than available in bank balance but up to the provided limit. An overdraft facility is granted against collateral security. The interest for overdraft is paid only on the borrowed amount for the period for which the loan is taken.
- Cash Credit
A short term loan facility up to a specific limit fixed in advance. Banks allow the customer to take a loan against mortgage of certain property (tangible assets and guarantees). Cash credit is given to any type of account holders and also to those who do not have an account with a bank. Interest is charged on the amount withdrawn in excess of the limit. Through cash credit, a large amount of loan is sanctioned than that of overdraft for a longer period.
Banks lend money to the customer for short term or medium periods of say 1 to 5 years against tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the money either in a lump sum amount or in the form of installments spread over a pre decided time period. Bank charges interest on the actual amount of loan sanctioned, whether withdraw or not. The interest rate is lower than overdraft and cash credits facilities.
- Discounting the Bill of Exchange
It is types of short term loan, where the seller discounts the bill from the bank for some fees. The bank advances money by discounting or purchasing the bills of exchange. It pays the bill amount to the drawer (seller) on behalf of the drawee (buyer) by deducting usual discount charges. On maturity, the bank presents the bill to the drawee or acceptor to collect the bill amount.
Secondary Functions of Bank
Like primary functions of bank, the secondary functions of bank are also classified into two parts:
- Agency Functions
- Utility Functions
Agency Functions of Bank
Banks are the agents for their customers for which they receive some income. Thus, these functions add to the income of banks. Another advantage is that they know the financial position of their customers, hence it has to perform various agency functions as mentioned below:
Transfer of Funds: Transferring of funds from one branch/place to another.
Periodic Collections: Collecting divided, salary, pension, and similar periodic collections on the client’s behalf.
Periodic Payment: Making period payments of rents, electricity bills, etc on behalf of the client.
Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the cheques through the clearing section of its customers.
Portfolio Management: Banks manage the portfolio of their clients. It undertake the activity to purchase and sell the shares and debentures of clients and debit or credit the account.
Utility Functions of Bank
Issuing letters of credit, travelers cheque, etc. Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers. Standing guarantee on behalf of its customers, etc.
- Issuing letters of credit, traveler’s cheque etc.
- Project reports
- Social welfare programmes
- Dealing in foreign exchange
- Providing customers with facilities of foreign exchange dealings
- Underwriting of shares and debentures
- Undertaking safe custody of valueables important
- documents, and securities by providing safe deposit vaults or lockers.