Consider the following statements: The functions of commercial banks in India include 1. Purchase and sale of shares and securities on behalf of customers 2. Acting as executors and trustees of wills. Which of the statements given above is/are correct?

1. Structure and Classification of Banks in India (basic)

To understand banking in India, we must start with its fundamental architecture. At the top sits the Reserve Bank of India (RBI), the central regulatory body. Below it, the banking system is primarily divided based on legal status into Scheduled Banks and Non-Scheduled Banks. A bank is 'Scheduled' if it is included in the Second Schedule of the RBI Act, 1934. To earn this spot, a bank must demonstrate financial stability—specifically, its paid-up capital and reserves must be at least ₹5 lakh (though modern licensing requirements for new banks are now much higher, often ₹500 crore) and it must satisfy the RBI that its operations are not detrimental to the interest of its depositors Indian Economy, Nitin Singhania (2nd ed.), Money and Banking, p.174-175.

Being a Scheduled Commercial Bank (SCB) comes with both privileges and responsibilities. These banks have the right to borrow money from the RBI for liquidity needs at the Bank Rate or Repo Rate. In exchange, they are legally bound to maintain reserves like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI mandates Indian Economy, Vivek Singh (7th ed.), Money and Banking- Part I, p.81. Non-Scheduled banks, which are now rare in India (mostly limited to a few local area banks), have more restricted operations; for instance, they are generally not permitted to deal in Foreign Exchange Indian Economy, Vivek Singh (7th ed.), Money and Banking- Part I, p.81.

SCBs are further categorized based on their ownership and objective into five main groups:

• Public Sector Banks: Where the government holds a majority stake (e.g., SBI and Nationalised Banks).
• Private Sector Banks: Owned by private shareholding (e.g., HDFC, ICICI).
• Foreign Banks: Registered abroad but operating branches in India.
• Regional Rural Banks (RRBs): Focused on credit for the agriculture and rural sectors.
• Differentiated Banks: Niche players like Small Finance Banks and Payments Banks.

While Commercial Banks aim for profit, Cooperative Banks (Urban and Rural) are governed by the 'cooperative' principle of mutual help. Interestingly, both types (Commercial and Cooperative) can be 'Scheduled' if they meet the RBI's criteria Indian Economy, Vivek Singh (7th ed.), Money and Banking- Part I, p.63.

Feature	Scheduled Banks	Non-Scheduled Banks
Legal Basis	Listed in 2nd Schedule of RBI Act, 1934	Not listed in the 2nd Schedule
RBI Borrowing	Eligible for regular financial assistance/loans	Not eligible for regular assistance
Forex Trading	Permitted	Generally not permitted
CRR Maintenance	Governed by RBI Act, 1934	Governed by Banking Regulation Act, 1949

Sources: Indian Economy, Nitin Singhania (2nd ed. 2021-22), Money and Banking, p.174-175; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.81; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.63

2. Primary Functions: Deposits and Lending (basic)

At its heart, a commercial bank acts as a financial intermediary, bridging the gap between savers (who have surplus funds) and borrowers (who need capital). The Primary Functions of a bank are essentially two-fold: Accepting Deposits and Advancing Loans. Think of a bank as a "dealer in credit." It "borrows" from the public by accepting deposits at a lower interest rate and "lends" that money to businesses or individuals at a higher interest rate. The difference between these two rates is known as the Spread, which represents the bank's core profit margin.

Accepting Deposits is the first primary function. From the bank's perspective, these are liabilities because the money belongs to the customer and must eventually be returned. These deposits are generally classified into two categories based on their "liquidity" (how easily they can be accessed):

• Demand Deposits: These can be withdrawn at any time on demand without prior notice. This includes Savings Accounts and Current Accounts. Because they are easily accessible via cheques, they are often referred to as cheque-able deposits Vivek Singh, Money and Banking- Part I, p.52.
• Time (Term) Deposits: These are held for a specific maturity period (e.g., 1 year or 5 years). Examples include Fixed Deposits (FDs) and Recurring Deposits (RDs). While they offer higher interest rates, they cannot be withdrawn prematurely without a penalty Vivek Singh, Money and Banking- Part I, p.53.

The second primary function is Advancing Loans. Banks do not keep all the deposited money idle; they use a significant portion to provide credit to the economy. This is done through various methods such as Term Loans (fixed duration), Cash Credit (against a credit limit), and Overdrafts (allowing a customer to withdraw more than their balance). In India, Scheduled Commercial Banks (SCBs) are regulated under the Banking Regulation Act, 1949, which provides the framework for these lending operations to ensure financial stability Nitin Singhania, Money and Banking, p.174.

Feature	Demand Deposits	Time Deposits
Withdrawal	On demand, any time.	Only after a fixed period (maturity).
Interest Rate	Low or Nil.	Relatively Higher.
Cheque Facility	Available (Cheque-able).	Generally not available.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.52-53; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Money and Banking, p.174; Macroeconomics (NCERT Class XII 2025 ed.), Money and Banking, p.50

3. Legal Framework: Banking Regulation Act, 1949 (intermediate)

To understand how banks operate in India, we must look at their 'Constitution' — the Banking Regulation Act (BRA), 1949. Before this Act, the banking sector was fragile; between 1913 and 1917, India faced a massive banking crisis, and by the end of 1949, 588 banks had failed Nitin Singhania, Money and Banking, p.176. To stop this bleeding and protect depositors, the government passed the Banking Companies Act in 1949, which was later renamed the Banking Regulation Act. It provides the Reserve Bank of India (RBI) with the legal teeth to supervise, control, and even liquidate banks if necessary. One of the most critical aspects of this Act is that it defines exactly what a bank can and cannot do. Beyond the core business of accepting deposits and lending, Section 6 of the Act allows banks to engage in 'secondary' or 'agency' services. These include buying and selling shares/securities on behalf of customers, acting as trustees or executors, and providing safe custody services. If a bank wants to engage in a new type of business, it must usually ensure the Act permits it. In 1969, the Act was further strengthened with 'Social Control' measures to ensure that credit wasn't just flowing to large industries but also to priority sectors like agriculture Nitin Singhania, Money and Banking, p.176. A unique complexity arises with Cooperative Banks. While the BRA came into force in 1949, it was only applied to cooperatives in 1966 Vivek Singh, Money and Banking- Part I, p.82. This created a 'Duality of Control' where the RBI manages the 'banking' side, but the government manages the 'administrative' side.

Area of Control	Regulated By	Governing Law/Power
Banking Functions (Licensing, Amalgamation, Liquidation)	Reserve Bank of India (RBI)	Banking Regulation Act, 1949
Management & Administration (Elections, Recruitment, Audit)	State/Central Registrar of Co-op Societies	State/Central Cooperative Societies Act

Sources: Indian Economy, Nitin Singhania, Money and Banking, p.173-176; Indian Economy, Vivek Singh, Money and Banking- Part I, p.82-85

4. Connected Concept: NBFCs vs. Commercial Banks (intermediate)

To understand the Indian financial landscape, we must distinguish between Commercial Banks and Non-Banking Financial Companies (NBFCs). While both act as financial intermediaries—taking money from those who have it and lending it to those who need it—their operational boundaries and regulatory safety nets differ significantly. Think of banks as the 'core' of the financial system and NBFCs as 'specialized players' that fill the gaps left by traditional banking.

The most fundamental difference lies in how they handle your money and the Payment and Settlement System. Unlike commercial banks, NBFCs cannot accept demand deposits (like your standard savings or current accounts where you can withdraw money anytime). Consequently, NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves Indian Economy, Nitin Singhania, Money and Banking, p.187. While banks are the traditional gateway for payments, the RBI has recently allowed non-bank entities to cooperate or compete in the digital payment space as technology providers or retail electronic payment services, though they still require specific permissions separate from a banking license Indian Economy, Vivek Singh, Money and Banking- Part I, p.70.

Another critical layer is investor protection and regulation. If a commercial bank fails, your deposits are protected up to ₹5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, this Deposit Insurance Facility is NOT available to depositors of NBFCs Indian Economy, Nitin Singhania, Money and Banking, p.187. Furthermore, while banks must strictly maintain reserve ratios like CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), NBFCs are generally not required to maintain these specific ratios Indian Economy, Nitin Singhania, Money and Banking, p.187.

In recent years, the regulatory gap has narrowed to ensure financial stability. For instance, since July 2019, the RBI Act 1934 was amended to allow the RBI to supersede the Board of NBFCs in the public interest, a power it previously held only over banks Indian Economy, Vivek Singh, Money and Banking- Part I, p.67. Additionally, to provide more operational flexibility, various categories like Asset Finance and Loan Companies have been merged into a single NBFC-Investment and Credit Company (NBFC-ICC) Indian Economy, Nitin Singhania, Money and Banking, p.185.

Feature	Commercial Banks	NBFCs
Demand Deposits	Accepted	Not Accepted
Cheque Facility	Can issue cheques on itself	Cannot issue cheques on itself
Deposit Insurance	Available (DICGC)	Not Available
Reserve Ratios	Strict CRR & SLR required	Generally not required

Sources: Indian Economy, Nitin Singhania, Money and Banking, p.185, 187; Indian Economy, Vivek Singh, Money and Banking- Part I, p.67, 70

5. Connected Concept: Specialized Banking & Financial Inclusion (intermediate)

In the vast landscape of Indian banking, Universal Banks (like SBI or HDFC) often struggle to reach the very edges of our economy—the small farmer in a remote village or the street vendor in a bustling city. To bridge this gap, India evolved a strategy of Financial Inclusion through Specialized Banking. This isn't just about opening accounts; it's about providing the "last mile" credit, insurance, and payment facilities to those historically ignored by the formal system.

The journey began significantly in 1975 with the establishment of Regional Rural Banks (RRBs). Think of RRBs as a hybrid: they combine the local feel and familiarity of cooperatives with the professional resource mobilization of commercial banks. Their primary mandate is to develop the rural economy by providing credit to small farmers, agricultural laborers, and artisans Vivek Singh, Money and Banking- Part I, p.82. A unique feature of RRBs is their ownership structure—they are shared between the Central Government (50%), the State Government (15%), and a Sponsor Bank (35%) Nitin Singhania, Money and Banking, p.179. Unlike normal banks that have a 40% Priority Sector Lending (PSL) target, RRBs must direct 75% of their lending to priority sectors.

In the modern era, the RBI introduced Differentiated Banks—specifically Small Finance Banks (SFBs) and Payments Banks. While they might sound similar, their DNA is quite different. Small Finance Banks are essentially "mini" universal banks; they can do almost everything a big bank does (accepting all types of deposits and giving loans) but on a smaller scale and for a specific target group Nitin Singhania, Money and Banking, p.189. On the other hand, Payments Banks are high-tech transaction engines. They focus on remittances and payments but are strictly prohibited from lending money or issuing credit cards Nitin Singhania, Money and Banking, p.191.

Feature	Small Finance Banks (SFBs)	Payments Banks (PBs)
Deposits	Can accept all (Current, Savings, FD, RD)	Only Demand Deposits (Savings/Current)
Lending	Can give loans	Cannot give loans
Credit Cards	Can issue	Cannot issue

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.82; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.179, 189, 191

6. Secondary Functions: Agency and Utility Services (exam-level)

While the primary purpose of a commercial bank is to bridge the gap between savers and borrowers — a process often called financial intermediation — modern banks do much more to remain competitive and serve their customers. These additional roles are categorized as Secondary Functions, which are further divided into Agency Services and General Utility Services. Unlike core lending, which earns interest, these secondary functions often generate non-interest income or fee-based revenue for the bank.

Agency Services are those where the bank acts as an 'agent' on behalf of its customer (the 'principal'). In this capacity, the bank follows specific instructions to manage the customer's financial affairs. This includes the purchase and sale of securities (like stocks and bonds), collection of checks or dividends, and making periodic payments like insurance premiums or rent. A specialized agency role is acting as a Trustee or Executor, where the bank manages a customer’s estate or assets according to a legal will or trust deed. This fiduciary responsibility ensures that a person's financial wishes are carried out professionally.

General Utility Services, on the other hand, are broader services provided to the general public to facilitate trade and personal security. Common examples include providing Safe Custody (Lockers) for valuables and issuing Letters of Credit (LCs) or Guarantees to support international trade Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.164. While primary functions focus on the 'spread' between deposit and loan rates Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.38, these secondary functions turn the bank into a one-stop financial supermarket.

Feature	Agency Services	General Utility Services
Nature of Relationship	Agent-Principal relationship.	Service provider-Customer relationship.
Key Examples	Acting as Executor, Buying/Selling shares, collecting dividends.	Locker facilities, Letters of Credit, Foreign Exchange.
Objective	Executing tasks on behalf of a specific client.	Providing convenience and security facilities to the public.

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.164; Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.38

7. Fiduciary Roles: Trustees, Executors, and Securities (exam-level)

Beyond the core functions of accepting deposits and advancing loans, commercial banks act as agents for their customers, performing duties based on a relationship of trust, known as a fiduciary relationship. One primary agency service is the purchase and sale of securities. When a customer wants to invest in shares, bonds, or government securities, the bank acts as an intermediary, executing these transactions on the customer's behalf and often managing their Demat accounts. This falls under the secondary functions of a bank, specifically categorized as investment or agency services Indian Economy, Nitin Singhania (ed 2nd 2021-22), Financial Market, p.254.

Another sophisticated fiduciary role is acting as Trustees and Executors. An Executor is a person (or institution) appointed to carry out the instructions of a deceased person's Will, ensuring that assets are distributed to the rightful heirs. A Trustee, on the other hand, is legal entity appointed to manage and hold assets for the benefit of a third party (the beneficiary). Banks are often preferred for these roles because they offer continuity, professionalism, and impartiality that an individual might lack. These activities are distinct from the bank's own balance sheet operations, as the bank is managing the customer's wealth rather than its own liabilities Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.39.

Role	Primary Responsibility	Nature of Service
Agent	Buying/Selling shares, collecting cheques/dividends.	Intermediary Service
Executor	Administering a deceased person's estate/Will.	Fiduciary Duty
Trustee	Holding/Managing property for a beneficiary.	Fiduciary Duty

These services are vital for modern wealth management. While basic banking involves managing cash reserves to pay depositors Understanding Economic Development, Class X, NCERT (Revised ed 2025), MONEY AND CREDIT, p.41, these fiduciary roles allow banks to earn fee-based income, diversifying their revenue streams beyond interest margins.

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Financial Market, p.254; Macroeconomics (NCERT class XII 2025 ed.), Money and Banking, p.39; Understanding Economic Development, Class X, NCERT (Revised ed 2025), MONEY AND CREDIT, p.41

8. Solving the Original PYQ (exam-level)

Having mastered the distinction between primary and secondary functions of banking, you can now see how these building blocks converge in this question. While the core of banking involves accepting deposits and granting loans, the agency services you studied are crucial here. These services allow banks to act as intermediaries or agents for their clients. Since commercial banks in India operate as diversified financial entities, they extend beyond simple cash transactions to manage a client's broader financial and legal portfolio, a concept rooted in the functional diversity of modern banking as discussed in NCERT Macroeconomics.

To arrive at the correct answer, (C) Both 1 and 2, you must evaluate each statement through the lens of fiduciary responsibility. Statement 1 is a classic agency function where the bank executes buy/sell orders for shares and securities, essentially acting as the customer's representative in capital markets. Statement 2 involves the bank acting as a trustee or executor, meaning they legally manage a person's estate or assets according to a will. Because the Banking Regulation Act, 1949 permits banks to engage in these "non-core" but essential financial activities, both statements are factually and legally accurate descriptions of their routine operations.

The common trap in this question lies in a narrow interpretation of what a bank does. Many candidates mistakenly choose (A) because they assume legal roles like executorship belong solely to law firms or specialized trust companies. UPSC frequently tests whether you understand that commercial banks are not just "money houses" but service providers. Remember: if a task involves acting on behalf of a customer to facilitate financial or asset management, it almost certainly falls under the expansive umbrella of secondary banking functions.