Bank Borrowings

Bank Borrowings – Short And Long Terms Borrowings

The banks borrow short and long terms, that means that banks customarily lend at long term to their ultimate borrowers whereas the liabilities they acquire or the assets they give their depositors from whom they obtain their funds are usually payable on demand.

Thus their liabilities are money and their assets are partly near money. The interest they have to pay on their liabilities is therefore less than earned on their assets. The nearer to the money that near money the lower is the income it will yield. The further away from money, the higher is the yield.

The Other Functions Of Banks (Bank Borrowings)

Banks particularly in advanced countries have moved into the field of billing, handling matters for doctors and other professionals as well for the small businesses. Apart from Bank Borrowings, other ways banks function includes the following;

  1. Banks perform such miscellaneous services as the provision of safety vaults or lockers for the safe keeping of valuables, acting as agents for its customers in buying and selling of gold, silver and other securities, trustees and bailers of their customers and supplying information and advice to their customers matters relating to investments. They also issue letters of credit and or procure foreign exchange for the convenience of its customers and in general, performing all those function that have the capacity to bring in profits. In summary, we would then say that the main function of commercial banks involves Bank Borrowings or borrowing to lend. (i) They borrow in the form of deposit, in essence fixed deposits, savings banks deposits and current account deposits the banks lend in three ways, in essence on open account or overdraft. (ii) On loans on the cash credit basis and (iii) by discounting of bills or through purchases.

Since there only form a small proportion of the total volume of money supply. It is the bank deposits on which cheques can be issued that constitute the important source of money. Without the introduction of bank cheque and bank draft, it would be impossible to transact large scale trade between different regions or countries. In all these large transactions, payments usually take the form of cheque and draft or bills of exchange, which are discounted by bank.

In this role too, we discovered that banks are able to make money more on mobile by bringing lenders and borrowers together and by helping to move funds from place to another and from person to another person in a convenient and inexpensive manner through the use of cheques, bills and draft and thus trade and industry flourishes.

  1. The banks promote capital formation in the economy by affording facilities for savings among the people and thus enable small savings which otherwise would have been scattered ineffectively to be accumulated into a large funds. These are made available for investments of various kinds. Economic development depends upon the diversion of economic resources from consumption to capital formation (Bank Borrowings). A higher rate of savings and investment is thus what constitutes capital formation. The role of the banks in this regard varies in its valuable. They remove the deficiency of capital by encouraging thrift, stimulating investment and savings, through the interest they pay on savings and those they charge on lending funds and thus enhance economic development.

By encouraging saving and investments, banks increase the productivity of the resources of the country and thus contribute to general prosperity and welfare of the citizens.

  • Banks encourage the right type of industries or the priority sector of the economy through encouraging the optimum use of resources. It is through the agency of banks that the communities saving automatically flows into channels, which are productive. The banks by their lending activities and credit analysis exercise a degree of discrimination, which not only ensures their own safety but also allows for the optimum utilization of the financial resources of the community

Though their loans both for long and short terms, banks provide funds to the right type of industries to secure labour and other factors of production. This way they help not only the process of industrialization but also the type of economic development chosen by the community. Through the instrumentality of the central bank, bank credits for financial development plans. Credit facilities are channeled to the desired places

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