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Functions of a Bank

Introduction

Understanding the functions of a bank is one of the most basic yet highly scoring areas in Banking Awareness. SBI and IBPS exams frequently ask direct questions on primary and secondary functions of banks.

These questions are usually straightforward and help secure quick marks.

Pattern: Functions of a Bank

Pattern

The key idea is to classify bank activities into primary functions (core banking work) and secondary functions (supporting services).

Step-by-Step Example

Question

Which of the following is considered a primary function of a commercial bank?

Options:

  • A. Issuing debit cards
  • B. Accepting deposits
  • C. Acting as trustee
  • D. Providing locker facilities

Solution

  1. Step 1: Identify core banking activities

    Primary functions are activities without which a bank cannot operate.

  2. Step 2: Separate core and supporting services

    Accepting deposits and lending loans form the foundation of banking.

  3. Step 3: Match with the correct option

    Accepting deposits is a primary function of a bank.

  4. Final Answer:

    Accepting deposits → Option B

  5. Quick Check:

    Without deposits, a bank cannot lend or operate effectively ✅

Quick Variations

• Primary functions → Accepting deposits, Lending loans, Credit creation.

• Secondary functions → Agency services and Utility services.

• Agency functions → Collection of cheques, dividends, acting as agent.

• Utility functions → Locker facility, ATM services, remittance services.

Trick to Always Use

  • Step 1: Ask: “Can a bank exist without this function?”
  • Step 2: If NO → it is a primary function.
  • Step 3: If YES → it is a secondary function.

Summary

Summary

  • Primary functions are the core activities of a bank.
  • Accepting deposits and lending loans are essential banking functions.
  • Credit creation is a key outcome of primary functions.
  • Agency and utility services are classified as secondary functions.

Example to remember:
“Deposit + Loan = Bank’s primary role.”

Practice

(1/5)
1. Which of the following activities directly helps a bank in earning interest income?
easy
A. Granting loans and advances
B. Issuing ATM cards
C. Providing locker facility
D. Collecting dividends on behalf of customers

Solution

  1. Step 1: Identify income-generating activity

    Interest income is earned when banks lend money.

  2. Step 2: Match with core function

    Granting loans and advances allows banks to charge interest.

  3. Final Answer:

    Granting loans and advances → Option A

  4. Quick Check:

    Loans earn interest; services earn fees only ✅
Hint: Interest income always comes from lending.
Common Mistakes: Confusing fee-based services with interest-earning activities.
2. Which of the following is classified as an agency function of a bank?
easy
A. Providing ATM services
B. Collection of cheques on behalf of customers
C. Accepting fixed deposits
D. Granting cash credit

Solution

  1. Step 1: Identify agency role

    Agency functions involve acting on behalf of customers.

  2. Step 2: Match the activity

    Collecting cheques is done by the bank as an agent.

  3. Final Answer:

    Collection of cheques on behalf of customers → Option B

  4. Quick Check:

    Acting on behalf = agency function ✅
Hint: If bank acts for customer → agency function.
Common Mistakes: Treating ATM or deposit activities as agency functions.
3. Which of the following functions results in the creation of additional money in the economy?
easy
A. Providing locker facility
B. Issuing demand drafts
C. Credit creation
D. Acting as custodian of valuables

Solution

  1. Step 1: Identify money expansion

    The question refers to increasing money supply.

  2. Step 2: Recall banking concept

    Credit creation allows banks to create deposits through lending.

  3. Final Answer:

    Credit creation → Option C

  4. Quick Check:

    Loans lead to new deposits in the system ✅
Hint: Money expansion = credit creation.
Common Mistakes: Assuming only central bank creates money.
4. Which of the following is NOT a primary function of a commercial bank?
medium
A. Lending loans
B. Credit creation
C. Accepting deposits
D. Providing locker facility

Solution

  1. Step 1: Recall primary functions

    Primary functions include deposits, lending, and credit creation.

  2. Step 2: Identify supporting service

    Locker facility is a utility service.

  3. Final Answer:

    Providing locker facility → Option D

  4. Quick Check:

    Utility services are secondary, not primary ✅
Hint: If bank can exist without it → not primary.
Common Mistakes: Including customer services as core functions.
5. Which group correctly represents the primary functions of a bank?
medium
A. Accepting deposits, lending loans, credit creation
B. Locker facility, ATM service, remittance
C. Cheque collection, dividend payment, agency work
D. ATM services, credit cards, mobile banking

Solution

  1. Step 1: Recall core banking roles

    Primary functions are essential for banking operations.

  2. Step 2: Match with correct group

    Deposits, loans, and credit creation form the core.

  3. Final Answer:

    Accepting deposits, lending loans, credit creation → Option A

  4. Quick Check:

    These three define basic banking activity ✅
Hint: Deposit → Loan → Credit creation = primary.
Common Mistakes: Selecting customer service-oriented activities.

Mock Test

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