Functions of a Bank: The Complete 2026 Banking Operations Guide for JAIIB AFB

Understanding the functions of a bank is the very first step to cracking the Banking Operations unit of your JAIIB AFB (Accounting &. Finance for Bankers) paper. Before you can value a balance sheet or pass a journal entry.

You must know exactly what a bank is. What it is legally allowed to do. And how it earns its money.

This 2026 guide breaks the functions of a bank down completely. You will learn the legal definition of banking. The difference between primary and secondary functions.

Every major deposit and loan type. The agency and utility services banks offer. And the full list of permitted para-banking activities.

Read it once with focus. And Banking Operations turns from a confusing list of terms into one of the easiest scoring chapters in your entire JAIIB syllabus.

What Is Banking? The Legal Definition

To master the functions of a bank, start with the law. The term banking is defined under Section 5 of the Banking Regulation Act, 1949.

As per the Act. Banking means accepting deposits from the public for the purpose of lending or investing that deposit money. This deposit money can be repaid on demand or otherwise. It can also be withdrawn by cheque, draft, order or otherwise.

This single definition contains the entire DNA of a bank. A bank takes money from the public. Keeps it safe. And puts it to productive use through loans and investments. All while standing ready to return it when the customer asks.

Sections 6 and 8: What a Bank Can and Cannot Do

A bank draws its power to provide extra services from Section 6 of the Banking Regulation Act. This section allows banks to engage in certain classes of business that are incidental or related to the main banking business.

However. Section 8 of the Act prohibits a bank from buying. Selling or dealing in goods.

There are limited exceptions. A bank may deal in goods when it is realising a security held by the bank. Or in connection with the collection or negotiation of bills of exchange.

For exams. Remember the trio: Section 5 defines banking. Section 6 permits incidental business, and Section 8 restricts trading in goods.

Quick-Facts Table: Banking Regulation Act at a Glance

This table is the highest-yield revision tool in the chapter. Memorise it and you can answer most objective questions instantly.

Section numbers are a favourite of examiners. Always confirm the exact wording on the latest official IIBF notification. The bare Act. As descriptions are often paraphrased in question papers.

Primary Functions of a Commercial Bank

The functions of a bank are broadly split into primary functions. Secondary functions. The two primary functions are the heart of every bank.

1. Accepting Deposits

The primary function of a bank is to accept deposits at a low interest rate. Lend that money out at a higher interest rate. The gap between the two is how a bank makes its core income.

The public is offered several kinds of deposits to suit different needs:

• Demand Deposits — withdrawable on demand. The depositor can take out the money anytime they need it.
• Current Account. Allows the customer to carry out as many transactions as they want. It is generally opened for business entities so they can run daily operations without limits on transactions.
• Savings Deposits. The general public deposits money so the bank keeps it safe. They also earn interest on the balance.
• Term Deposits — a fixed amount is deposited for a fixed period. And a slightly higher rate of interest is paid. The money is locked in.

2. Granting Loans and Advances

The second primary function is lending. Banks deploy the deposits they collect by granting credit. The main forms of loans and advances are:

• Overdraft — a credit facility. Usually for business owners. That lets a customer withdraw more money than the balance in the account. Up to a sanctioned limit.
• Cash Credit. A working-capital facility where businesses are granted short-period advances against current assets. Usually stock and debtors.
• Discounting of Bills. The bank pays money against sales invoices after charging a small fee called discounting charges.
• Loans and Advances. Banks lend money for short as well as long periods. Generally against some form of security.

Secondary Functions of a Bank

Beyond the two primary functions. A modern commercial bank performs a wide range of secondary functions. These are usually grouped into agency functions (done on behalf of the customer). General utility functions (services offered to the public). Below are the key services your AFB syllabus expects you to know.

Agency and Utility Services

• Acting as Referee — banks keep customer information confidential. But if a customer desires. The bank can share their financial position with third parties.
• Collection of Statistics. In India the central banking. Regulatory body collects statistical data. Information so that it can publish data every month.
• Dealing in Securities. Banks deal in securities on their own account or on behalf of customers. For instance when they open a Demat account for a customer.
• Dealing in Foreign Exchange — banks make foreign currency available to customers. Anyone who needs foreign currency can visit their bank to exchange domestic currency for it.
• Derivatives — banks also deal in derivatives, as they provide arbitrage opportunities.
• Foreign Exchange Business — for business units. Banks issue letters of credit so Indian businesses can take advantage of global opportunities.
• Gift Cheques — decorative cheques issued by banks for an extra charge. Used by customers who wish to give presents on special occasions. They can be availed at any branch.
• Letter of Credit (LC). A written guarantee of payment that supports trade between buyers and sellers.
• Locker Facility. Banks provide lockers where customers can keep important documents. Articles for safekeeping.
• Issuing Guarantees — banks provide guarantees on behalf of customers to their suppliers. A service widely used by businesses.
• Prepaid Payment Instruments — a Demand Draft (DD) is a prepaid instrument. The person in whose favour it is drawn can redeem it into their account.
• Remittances. Banks remit money on behalf of customers to other accounts through RTGS. NEFT and other remittance systems.
• Traveller's Cheques. People travelling outside India can obtain traveller's cheques instead of carrying foreign currency.
• Underwriting Securities. Banks sometimes act on behalf of commercial clients to help them issue shares of their companies.

That is a long list, but examiners love to test recognition. Practising recognition-style questions on mock tests is the fastest way to make these services stick.

Para-Banking Activities Explained

Some activities go beyond a bank's daily work of deposits and withdrawals. These are called para-banking activities. They range from the insurance business to portfolio management. Even underwriting bonds.

The major para-banking activities that banks are permitted to undertake include the following:

• Cheque Writing Facility for investors of Mutual Funds / Money Market Mutual Funds
• Equipment Leasing, Hire Purchase Business, and Factoring Services
• Insurance Business
• Investment in Venture Capital Funds
• Money Market Mutual Funds
• Mutual Fund Business
• Pension Fund Management
• Portfolio Management Services
• Primary Dealership Business
• Referral Services
• Sponsors to Infrastructure Debt Funds
• Trading on / Membership of SEBI-approved Stock Exchanges
• Underwriting Activities

These activities are subject to specific RBI conditions, ceilings and approvals. For the exact prudential limits and the current permitted list. Always confirm on the latest official IIBF notification. The relevant RBI master direction.

Primary vs Secondary Functions: A Clear Comparison

Students often blur the line between the two categories. This comparison locks the distinction into memory.

The golden rule for the exam hall: deposits and loans are primary. Everything else is secondary.

How to Study Banking Operations for JAIIB AFB

This chapter rewards structured, layered revision. Here is a practical, exam-ready approach.

1. Anchor the law first. Lock in Section 5 (definition). Section 6 (incidental business) and Section 8 (no trading in goods).
2. Split functions into two buckets. Keep primary (deposits + loans) clearly separate from secondary (agency + utility) functions.
3. Master deposit and loan types. Be able to instantly tell apart current. Savings, term and demand deposits, and overdraft, cash credit and bill discounting.
4. Make a one-line note for each service. A single sentence per service (DD. LC, RTGS, locker, demat) is enough for recognition questions.
5. Memorise the para-banking list. Use a simple mnemonic to recall insurance. Mutual funds, pension, leasing, factoring and underwriting.
6. Test yourself. Finish with timed mock tests so the facts become reflexes, not guesses. Pair them with our free guides for deeper revision.

Common Mistakes to Avoid

A few recurring errors quietly cost students easy marks on this topic. Watch out for these.

• Mixing up the sections. Section 5 defines banking; do not confuse it with Section 6 or 8.
• Confusing overdraft with cash credit. Overdraft is on a running account. Cash credit is against current assets like stock and debtors.
• Calling every deposit a savings deposit. Current, savings, term and demand deposits each have distinct features.
• Treating para-banking as core banking. Para-banking is additional business, not the bank's primary function.
• Assuming banks can freely trade goods. Section 8 prohibits it, except for realising security or handling bills of exchange.

Frequently Asked Questions (FAQ)

What are the two primary functions of a bank?

The two primary functions of a bank are accepting deposits from the public. Granting loans and advances. A bank accepts deposits at a lower interest rate. Lends that money at a higher rate. Earning income from the difference.

Under which section is banking defined?

Banking is defined under Section 5 of the Banking Regulation Act, 1949. It means accepting deposits from the public for the purpose of lending or investing. Repayable on demand or otherwise. And withdrawable by cheque, draft, order or otherwise.

What is the difference between primary and secondary functions of a bank?

Primary functions are the core activities of accepting deposits and granting loans. Secondary functions are supporting agency and general utility services such as remittances. Lockers.

Foreign exchange. Letters of credit and demat services. Which usually earn fee or commission income.

What are para-banking activities?

Para-banking activities are services a bank offers beyond routine deposits and withdrawals. They include insurance business. Mutual fund business. Pension fund management. Portfolio management, equipment leasing, factoring and underwriting, all subject to RBI conditions.

Can a bank deal in goods?

Generally no. Section 8 of the Banking Regulation Act prohibits banks from buying. Selling or dealing in goods. Except where it relates to realising a security held by the bank or to the collection or negotiation of bills of exchange.

Conclusion: Turn Banking Operations Into Guaranteed Marks

The functions of a bank are not just an exam topic. They describe how the entire financial system moves money from savers to borrowers. Keeps the economy running. Understand them deeply and you understand banking itself. Not merely a list of terms.

Keep the core ideas simple: Section 5 for the definition. Deposits and loans as the two primary functions. The long list of secondary services, and the permitted para-banking activities. Revise the comparison tables. Dodge the common mistakes, and back it all up with focused practice.

Do that. And questions on Banking Operations will feel less like a test. More like free marks waiting to be claimed.

Stay consistent. Trust the process. And keep moving forward.

Your success in the JAIIB AFB exam is built one well-studied chapter at a time.

Related Guides

For more on functions of a bank. See the official IIBF circulars. Our chapter-wise free notes on iibf.store.