Unlocking the Agency functions of bank: How Banks Enhance Convenience and Financial Management

Agency functions of bank refer to the services provided by banks to their customers, generating additional income for the financial institutions. These functions offer the benefit of a deeper understanding of customers’ financial positions, enabling a more accurate assessment of their creditworthiness. This fosters close relationships between banks and customers. The services offered by banks under agency functions include:

Payment and Collection of Checks

Apart from facilitating money transfers, banks also engage in the collection of funds for their clients. For example, if you receive a payment through a cheque or demand draft drawn on or payable at a location other than your own, you can deposit it into your account with your local bank and request the collection of the amount.

The bank will send the cheque to its branch at the specified center, collecting the amount for a nominal fee. The cheque or draft amount will be credited to your account, and the fee will be separately deducted. Banks also handle the collection of bills of exchange, both usance and demand, for their business clients.

There are established RBI norms specifying the expected time for collection business, prominently displayed in all banks. If the collection exceeds this stipulated period, the bank is obligated to pay interest on the amount. It is advisable to retain the counterfoil of all deposits made in the bank, as it serves as the only proof of deposit until your amount is credited.

For businesses involving numerous such transactions, opening an account with a bank that has an extensive branch network is recommended. Charges for each of these services vary from one bank to another. When selecting a bank to open an account, it’s crucial to consider these charges as an important factor.

Bills and Promissory Notes

A bill of exchange is a written directive from the drawer to the drawee, instructing the payment of money to the payee. The most common form of a bill of exchange is a cheque, which is a type of bill drawn on a banker and payable on demand. Bills of exchange serve as written instructions from an individual to their bank, ordering the payment of a specified sum to the bearer on a particular date, often in the future. These instruments are primarily utilized in international trade and were historically significant in commerce before the widespread use of paper currency.

Agency functions of bank
Agency functions of bank

On the other hand, a promissory note is a contractual agreement outlining the terms of a promise made by one party (the maker) to pay a designated amount of money to another (the payee). This obligation may arise from a loan repayment or another form of debt. In certain business transactions, such as the sale of a business, the purchase price might involve an immediate cash payment along with one or more promissory notes for the remaining balance. Key details in a promissory note typically include the principal amount, any applicable interest rate, and the maturity date. Provisions regarding the payee’s rights in case of default, which may involve foreclosure of the maker’s interest, can also be outlined. Agency functions of bank

Demand promissory notes, lacking a specific maturity date, are payable at the lender’s request. Generally, the lender provides only a brief notice to the borrower before the payment becomes due. In informal lending arrangements between individuals, the creation and signing of a promissory note are often considered advisable for tax and record-keeping purposes.

Carrying Out Standing Instructions

A standing order is a directive provided by an account holder to their bank, instructing them to regularly transfer a fixed amount to another account. This instruction, also referred to as a banker’s order, is commonly utilized for payments such as rent or mortgage. However, there is a potential risk associated with the possibility of dishonest or inefficient beneficiaries making claims for funds not rightfully owed to them. Agency functions of bank

Serving as a Trustee

Under Section 3 of the Indian Trusts Act, 1882, a trust is an obligation attached to the ownership of property, stemming from confidence reposed in and accepted by the owner or declared and accepted by the owner for the benefit of another. Banks frequently assume the role of trustees, catering to the diverse needs of corporations, government entities, and the general public.

For instance, when a company intends to issue secured debentures, it must designate a financial intermediary as a trustee. The trustee assumes responsibility for the security associated with the debentures and safeguards the interests of the debenture holders. Such an entity requires financial expertise and a reputable standing in the market or society to instill confidence in potential debenture subscribers, making banks the natural choice.

For the general public, banks often provide a service known as “safe custody,” acting as trustees. They also serve as bankers to trustees appointed under the mentioned act. Banking institutions bear special obligations in such accounts, and due diligence is exercised to ensure careful handling of such accounts.

Executor OR Attorney

The administration of a will or settlement necessitates specialized knowledge, and for customers seeking assistance in such matters, banks are often nominated for these intricate roles. In exchange for this service, banks typically charge a nominal fee. Customers choose to involve banks in these responsibilities because banks are impartial entities with no personal motivations for dishonesty. Agency functions of bank

Agency functions of bank FAQ

What are agency functions of banks?

Agency functions of banks refer to the role they play as intermediaries or representatives in various financial and non-financial transactions on behalf of their customers.

What are the common agency functions performed by banks?

Common agency functions include handling the sale and purchase of securities, payment of insurance premiums, collection of dividends, and acting as executors or trustees.

How do banks act as trustees?

Banks act as trustees by managing and safeguarding assets on behalf of individuals, companies, or entities, ensuring compliance with legal requirements.

What is the significance of banks acting as executors?

Banks, when appointed as executors, play a crucial role in executing the will of a deceased person, ensuring the proper distribution of assets and adherence to legal procedures.

Can banks assist in the issuance of securities?

Yes, banks act as intermediaries in the issuance of securities, facilitating processes such as the sale of secured debentures and safeguarding the interests of debenture holders.

Sanjeet Kumar is a graduate of Journalism, Psychology, and English. Passionate about communication - with words spoken and unspoken, written and unwritten - he looks forward to learning and growing at every opportunity. Pursuing a Post-graduate Diploma in Translation Studies, he aims to do his part in saving the 'lost…

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