CDS (II) 2022 General Knowledge · Question 50 of 120

Correct — C, Acceptance of income tax payments. The test for an agency function is simple: whose money is it, and whose obligation is being settled? When a bank takes an income tax payment across its counter, the money is not a deposit it owes back to the customer and it is not a loan it is making; the bank is collecting the Government's revenue on the Government's behalf and handing the taxpayer a challan as proof. It is acting for someone else — an agent. That is the same family of work as collecting cheques and bills for a customer, paying insurance premiums and utility bills by standing instruction, buying and selling securities on a customer's order, and acting as executor or trustee of a will. All the other three options are the bank acting for itself, on its own balance sheet.

• (a)Acceptance of deposits — Taking deposits is the first of the primary functions, not an agency service. The money becomes a liability of the bank, which owes it back with interest and is free to lend it out. The bank is a principal here, not anybody's agent.
• (b)Investment of surplus funds — Investing surplus funds is the bank managing its own treasury — buying government securities, meeting the statutory liquidity requirement, parking idle cash. The gain or loss lands on the bank's own books, so no agency relationship arises.
• (d)Providing overdraft facilities — An overdraft is credit: the bank lends its own money by letting a current account go below zero, and charges interest for it. Lending is the second primary function, the mirror image of accepting deposits.

Commercial bank services are conventionally sorted into three boxes. Primary functions are the two that define a bank — accepting deposits (current, savings, fixed, recurring) and lending (loans, cash credit, overdraft, discounting of bills), along with the investment of its own funds. Agency functions are jobs the bank does for a customer or for the Government as their agent, usually for a commission: collection and payment of cheques, bills, taxes, premiums and dividends, purchase and sale of securities on instruction, and acting as trustee, executor or attorney. General utility services are the rest — lockers, letters of credit, foreign exchange, remittances and merchant banking.

Worth being honest about the ground under this question: the primary-agency-utility split is a textbook classification used in commerce and economics teaching, not a statutory scheme laid down in the Banking Regulation Act, so the exam is testing a vocabulary rather than a law. What makes the vocabulary usable is the principal-versus-agent test above. Run each option through it and only one survives: the tax payment is the only transaction in the list where the bank is handling somebody else's money to discharge somebody else's obligation. In practice this is exactly how direct taxes reach the exchequer in India — you pay at an authorised bank branch or its online counterpart, and the bank passes the collection on to the Government.

• Primary functions of a commercial bank: accepting deposits and lending; overdraft and cash credit are forms of lending.
• Agency functions are performed for a customer or for the Government, typically against a commission, and include collection of cheques and bills, payment of taxes and insurance premiums, and dealing in securities on a customer's order.
• General utility services include safe-deposit lockers, letters of credit, foreign exchange dealing and remittance facilities.
• UPSC has separately confirmed that Indian commercial banks buy and sell securities for customers and act as executors and trustees of wills — both classic agency work.

• Reading 'acceptance' in option (c) as if it were the same as 'acceptance of deposits' in option (a); the word is the same, the relationship is not.
• Treating investment of surplus funds as an agency service because it involves securities — it is agency work only when the securities are bought on a customer's instruction and for the customer's account.
• Assuming the classification comes from statute; it is a teaching taxonomy, so argue from the principal-versus-agent test rather than from a remembered list.

Usually as a one-of-four sorting item — pick the agency function, or pick the one that is not a primary function — and occasionally as a two-statement item on what banks may do for customers.

• practice — not a real PYQ

  Which one of the following is a general utility service rather than an agency function of a commercial bank?

  • (a)Collection of cheques on behalf of a customer
  • (b)Provision of safe-deposit lockers
  • (c)Payment of insurance premium by standing instruction
  • (d)Acting as executor of a customer's will

  Answer(b) Provision of safe-deposit lockers — a facility offered to the public at large, not a job done as somebody's agent.

• practice — not a real PYQ

  Discounting of bills of exchange by a commercial bank is best classified as

  • (a)an agency function
  • (b)a general utility service
  • (c)a primary function of lending
  • (d)a statutory obligation

  Answer(c) a primary function of lending — the bank pays out its own funds now against a bill maturing later, which is credit.