Question

1. How do banks help expand and maintain the economy?

2. What has been the effect of competition between banks?

3. Why are banks regulated and protected by government?

4. What factors should a person consider when choosing an account?

Answer 1

Banks role in expanding & maintaining the economy:

• Banks accept money from the general public and provide it to the needy people to start new business operations which help in the development of the economy.
• Helping the business people to invest beyond their capacity by providing O/D facility.
• Helping public to buy homes by providing housing loans.
• Assisting the government in planning their spending from tax revenues and investing infrastructural projects.
• Banks also offer liquidity facilities to the public and business people by providing demand deposits, credit facilities etc.
• Foreign exchanges also take place easily especially for small companies to enter the world markets is possible with assistance from banks.
• Providing agricultural, industrial loans etc.

Effect of competition between banks:

• A strong banking competition will reduce the margin between borrowing and lending rates.
• There are also chances of bank competition having an impact on the financial stability. Increased competition for deposits will reduce the profits and lower the market power of banks.
• Banks in more competitive environment and high levels of securitization may have riskier loan portfolios.

Banks regulated & protected by government:

• It is necessary to regulate the banks to protect the funds of the general public that are in the form of deposits with the banks.
• To protect the banks from becoming bankrupt, insolvent etc.
• To have a control over pricing like interest rates, bank charges etc.
• To ensure there is proper cooperation activities especially when banks deal with other banks.
• To have a control over foreign exchange transactions especially when there is long term capital movement.

Factors for choosing an account:

• Charges or service fee for making use of the facilities available in that account.
• Whether there is a minimum balance to be maintained or it is a zero balance account.
• If there are any limits on the number of transactions in a particular period.
• If there are online and mobile transacting facilities available.
• Attractive interest rates.
• Overdraft facility availability. This is applicable especially for business people.