Using napkins properly is part of the table manners everyone should know. It takes more than just dabbing at your mouth while eating spaghetti or some other messy food.
First of all, cloth napkins are used whenever the dinning occasion is more formal or when this kind of atmosphere is aimed to be created. Paper napkins are normally used during less formal meals.
Cloth napkins are still widely used and available in several sizes, each size tailored to a specific use (the simple rule is this – the more food is going to be served, the larger the napkin: beverage napkin is smaller than luncheon napkin which is smaller than dinner napkin).