Question

Answer the following.

Explain agency functions and utility functions of banks.

Answer 1

Agency functions are the secondary functions performed by commercial banks. Here, a commercial bank acts as an agent or representative of its client.

A. Agency functions performed by banks are as follows:

1. Periodic Collections and Payments: On behalf of the customer, commercial banks collect salary, dividends, interests and any other income which are to be received by customers. Similarly, banks also make periodic payments such as taxes, bills, premiums, rent etc. on the standing instructions given by the customer. The banks charge certain fixed amount in the form of service charges (quarterly or annually) for providing these services.
2. Portfolio Management: Banks also undertake portfolio management service wherein they buy and sell securities such as shares, bonds, and debentures etc. on behalf of clients. The banks send detailed account statement on regular basis and also provide the client with various analysis and recommendation reports. Many clients are opting for such services of commercial banks. 
3. Fund Transfer: Commercial banks undertake various initiatives to make fund transfer hassle free. They provide the facility of transferring funds from one branch to another branch as well as another bank.
4. Dematerialisation: Banks provide dematerialisation facilities to their clients wherein they undertake the electronic transfer of shares in case of purchase or sale. These facilities enable clients to hold their securities in an electronic format.
5. Forex Transactions: Forex is an abbreviation of foreign exchange. A bank may purchase or sell foreign exchange on behalf of its clients. A bank purchases forex from its clients which the clients receive from foreign transactions and sell the forex when the clients need it for overseas transactions. E.g.: When a person wishes to go on a foreign tour, he will contact his bank and ask for currency of that country against Indian rupees. When he is back from his foreign trip and some foreign currency is remaining unspent, he will give it back to the bank and get Indian rupees in return. Utility functions are the secondary functions performed by commercial banks. Here, a bank provides certain facilities or products for the benefits of their clients.

B. These facilities or products are as follows:

1. Issue of Drafts and Cheques: A draft or cheque is an order to pay money from one branch to another branch or another bank. The drafts are issued by banks to account holders and non-account holders while cheques are issued only to the account holders. A commission is charged by banks for issuing draft.
2. Locker Facility: Banks provide locker facilities (safe deposit vaults) to customers for depositing their valuables like jewellery, documents etc. in safe custody of banks. The customer can access these vaults any time during the banking hours.
3. Project Reports: On behalf of clients, banks sometimes prepare project reports and feasibility studies. These reports enable firms to get funds from the market as well as to obtain clearance from government authorities.
4. Gift Cheques: Any person (account holders as well as non-account holders) can obtain a gift cheque by giving equivalent amount to the bank. These cheques or gold coins can be used as a gift on occasions such as wedding, party, birthday etc.
5. Underwriting Services: The banks underwrite the issue of securities issued by companies. If the shares are not fully subscribed, the underwriting bank agrees to take up the unsubscribed portion of the securities.
6. Gold related Services: Many banks provide gold services wherein they engage in commercial buying and selling of gold/gold ornaments from customers on large scale. Some banks also provide advisory services relating to gold funds, gold ETF etc