Functions of Banks in India: Importance, purpose, role, types

Features of banking system in India

The main function of a bank is to take deposits and provide loans and advances to the bank customers. Banks all over the world usually serve their customers by accepting their funds in the form of deposits and providing loans. There are also functions that banks perform depending on their services and organizational structure.

What is a bank

A bank is a financial institution licensed to accept deposits and make loans. Other functions of a bank include providing financial services such as asset management, safe deposit boxes and currency exchange. There are different types of banks designed to perform all of the above functions. The most common types of banks are retail banks, corporate banks and investment banks.

In most countries, these banks are regulated by the government or the central bank. In India, all banks and financial institutions are regulated by the Reserve Bank of India (RBI).

Functions of a bank

The basic functions of a bank are broadly categorized into primary and secondary functions. The primary functions of Indian banks are:

  • Receiving deposits;
  • Lending and financing;
  • Movement of funds;
  • Printing of banknotes;
  • Loan deposits;
  • Currency exchange.

Features of banking activities

1. Acceptance of deposits

Banks accept deposits from customers and customers are free to withdraw these funds. Customers can deposit money into any type of bank account, including savings, current and term accounts, and deposit money in the bank.

Savings banks also pay interest to their customers on their deposits. These banks are popular among small depositors. A demand deposit account is an account that can be opened at any time during the business day. Time deposit accounts are designed to hold deposits for a specific period of time and pay higher interest rates.

2. Loans

Banks provide loans to people in need of funds at a fixed rate of interest. Mostly banks lend to farmers, industrialists, entrepreneurs and other people who want to invest money in their business to earn profit and contribute to the economic development of the country.

3. Issuance of bills of exchange and drafts

Banks are also responsible for issuing banknotes and creating low-cost medium of exchange in the form of bills of exchange and checks. In India, RBI is responsible for issuance of bills and coins.

Banks issue and guarantee the delivery of credit instruments such as banknotes, bills of exchange, letters of credit and checks. These financial instruments are very useful for saving metal coins and make the movement of money cheap and easy.

4. Credit Deposits

Banks can create deposits by giving loans to their customers. In this case, the borrower gets a loan and can withdraw it as and when required. Customers often deposit the money they borrowed from a bank with the same bank, either because they need to make a deposit or to access their checking account. Such deposits are also known as loan deposits.

Other functions of the bank include:

  • Collection of bounced checks;
  • Receipt and collection of bills of exchange;
  • Transactions in foreign currency for payment of foreign debt;
  • Cash management;
  • Supervision of stock exchanges;
  • Assisting the RBI in ensuring the safety and soundness of banknote issuance.

SIDBI bank

Banking Structure in India

The banking structure in India is broadly categorized into scheduled and non-scheduled banks. Scheduled banks are also divided into cooperative and commercial banks. Commercial banks include nationalized banks, regional banks (RRBs) and foreign banks.

1. SIDBI (Small Industries Development Bank of India)

SIDBI provides loans to small industries and businesses. Customers in need of loans for small businesses using modern technology and equipment approach SIDBI for financial assistance.

2. EXIM Bank (Export-Import Bank)

The Export-Import Bank of India (EXIM Bank) is regulated as an export credit agency under the Export-Import Bank of India Act, 1981, which replicates the activities of export credit agencies around the world, and is responsible for financing exports and imports of goods from foreign countries. Its activities are subject to regulation.

3. National Bank for Agriculture and Rural Development (NABARD)

NABARD provides all kinds of financial assistance for the development of rural areas, villages, agriculture, handicrafts etc. Therefore, it is considered as the chief regulator of RRBs and cooperative banks in India and is under the jurisdiction of the Ministry of Finance.

4. Small Finance Banks

It is also one of the important forms of banking activities which aims to support small scale industries, marginal farmers and small artisans. They provide credit and financial support to the poor sections of unorganized society.

The activities of these banks are regulated by the RBI. The present microfinance banks operating in the country are AU Microfinance Bank, Suryoday Microfinance Bank, Capital Microfinance Bank, Northeast Microfinance Bank and Jana Microfinance Bank.

5. Payment Banks

A payment bank is a new type of bank prescribed by RBI. These banks only allow deposits up to Rs 1 crore and you cannot apply for a credit card or loan.

Payment banks offer online banking, debit cards, mobile banking and more. Some of the leading payment banks in India are Airtel Payments Bank, NSDL Payments Bank, Jio Payments Bank and Fino Payments Bank.


The Indian banking system plays a vital role in the country's economic development. Banks act as intermediaries between those with surplus funds (depositors) and those who need funds (borrowers).

The Reserve Bank of India (RBI) regulates the banking system in India, ensuring its stability and security. With a diverse range of banks, including public sector banks, private sector banks, foreign banks, and specialized banks, the Indian banking system caters to the needs of various individuals and businesses.


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