Introduction to Banking

What is Bank?

Bank is a lawful organization which accepts deposits that can be withdrawn on demand. It also tends money to individuals and business houses that need it.

Bank Definition

Banking Company is one which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwiseIndian Banking Companies Act
The oxford dictionary defines a bank as “an establishment for custody of money received from or on behalf of its customers. It’s essential duty is to pay their drafts on it. It’s profits arises from the use of the money left employed by themDictionary Meaning of the Word ‘Bank’
The oxford dictionary defines a bank as “an establishment for custody of money received from or on behalf of its customers. It’s essential duty is to pay their drafts on it. It’s profits arises from the use of the money left employed by themDictionary Meaning of the Word ‘Bank’
an institution which trades in money, establishment for the deposit, custody and issue of money, as also for making loans and discounts and facilitating the transmission of remittances from one place to another”.The Webster’s Dictionary
A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when it required by them for useProf. Kinley

Types of Banks

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. on the basis of functions, the banking institution may be divided into following types:

Central Bank

A central bank functions as the apex controlling institution in the banking and financial system of the country. It functions as the controller of credit, banker’s bank and also enjoys the monopoly of issuing currency on behalf of the government.

A central bank is usually control and quite often owned, by the government of a country. The Reserve Bank of India (RBI) is such a bank within an India.

Commercial Banks

It operates for profit. It accepts deposits from the general public and extends loans to the households, the firms and the government. The essential characteristics of commercial banking are as follows:

  • Acceptance of deposits from public
  • For the purpose of lending or investment
  • Repayable on demand or lending or investment
  • Withdrawal by means of an instrument, whether a cheque or otherwise.

Another distinguish feature of commercial bank is that a large part of their deposits are demand deposits withdrawable and transferable by cheque.

Development Banks

It is considered as a hybrid institution which combines in itself the functions of a finance corporation and a development corporation. They also act as a catalytic agent in promoting balanced and viable development by assuming promotional role of discovering project ideas, undertaking feasibility studies and also provide technical, financial and managerial assistance for the implementation of project.

In India ‘Industrial Development Bank on India’ (IDBI) is the unique example of development bank. It has been designated as the principal institution of the country for co-ordinating the working of the institutions engaged in financing, promoting or development of industry.

Co-operative Banks

The main business of co-operative banks is to provide finance to agriculture. They aim at developing a system of credit. Agriculture finance is a special field.

The co-operative banks play a useful role in providing cheap exit facilities to the farmers. In India there are three wings of co-operative credit system namely:

(i) Short term, (ii) Medium-term, (iii) Long term credit.

The former has a three tier structure consisting of state co-operative banks at the state level. At the intermediate level (district level) these are central co-operative banks, which are generally established for each district. At the base of the pyramid there are primary agricultural societies at the village level.

The long term exit is provided by the central land development Bank established at the state level. Initially, these banks used to advance loans on mortgage of land for the purpose of securing repayment of loans.

Specialized Banks

These banks are established and controlled under the special act of parliament. These banks have got the special status. One of the major bank is ‘National Bank for Agricultural and Rural development’ (NABARD) established in 1982, as an apex institution in the field of agricultural and other economic activities in rural areas.

In 1990 a special bank named small industries development Bank of India (SIDBI) was established. It was the subsidiary of Industrial development Bank of India. This bank was established for providing loan facilities, discounting and rediscounting of bills, direct assistance and leasing facility.

Indigenous Bankers

That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages.

Rural Banking

A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. The polices of financing of these banks have been designed in such a way so that these institution can play catalyst role in the process of rural development.

Saving Banks

These banks perform the useful services of collecting small savings commercial banks also run “saving bank” to mobilise the savings of men of small means. Different countries have different types of savings bank viz. Mutual savings bank, Post office saving, commercial saving banks etc.

Export – Import Bank

These banks have been established for the purpose of financing foreign trade. They concentrate their working on medium and long-term financing. The Export-Import Bank of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central government.

Foreign Exchange Banks

These banks finance mostly to the foreign trade of a country. Their main function is to discount, accept and collect foreign bulls of exchange. They also buy and self foreign currencies and help businessmen to convert their money into any foreign currency they need. Over a dozen foreign exchange banks branches are working in India have their head offices in foreign countries.


Types of Banking

Banking is described as the business carried on by an individual at a bank. Today, several forms of banking exist, giving consumers a choice in the way they manage their money most people do a combination of at least two banking types.

However, the type of banking a consumer uses normally based on convenience. These are different types of banking through which consumer can attach to it:

Walk-in-Banking

It is still a popular type of banking. As, in the past, it still involves bank tellers and specialized bank officers. Consumers must walk into a bank to use this service normally, in order to withdraw money or deposit it, a person must fill out a slip of paper with the account and specific monetary amount and show a form of identification to a bank letter.

The advantage of walk in Banking is the face to face connection between the banker and a letter. Also unlike drive thru and ATM banking, a person can apply for a loan and invest money during a walk in.

Drive thru Banking

It is probably the least popular form of banking today, but is still used enough by consumers to create a need for it. It allows consumers to stay in their while and drive up to a machine equipped with container, chute and intercom. This machine is connected to a bank and is run by one or two bank letters.

A person can withdraw or deposit money at a drive thru. He must fill out a slip with his account and specific monetary amount and put it in the container. The container travels through the chute to the bank letter, who will complete the banker’s request. This is where the intercom comes into play. The bank teller and banker use it to communicate and discuss the specific banking request.

ATM Banking

It is very popular because it gives a person 24 hour access to his bank account. Walk in and drive thru banking does not offer this perk. In order to use an ATM, a person must have an ATM card with personal identification number (PIN) and access to an ATM machine.

Any ATM machine can be used, but charges apply if the ATM machine is not affiliated with the bank listed on the ATM card. By sliding an ATM card into an ATM machine, it is activated and then through touching buttons on the machine, a consumer is able to withdraw or deposit money.

Online Banking

It allows a person to get on the internet and sign into their bank. This process is achieved with the use of a PIN, different from the one used for the ATM card. By going website of a bank and entering it, a consumer can get into his account, withdraw money, deposit money, pay bills, request loans and invest money.

Online banking is growing in popularity because of its convenience. These different types of banking give a consumer the power of choice and also give them a comfortable banking system that gives them a convenient choice.


Importance of Banks

Banks play an important role in the economic growth of a country. In the modern set up, banks are not to be considered dealers in money but as the leaders of development.

The importance of bank for a country’s economy can be explained in following ways:

  • Banks by playing attractive interest rate on deposits try to promote thrift and savings in an economy. The investment of these savings in productive channel results in capital formation.

  • The scattered small savings in the country can be put to optimum use by commercial banks. Banks utilize this amount by giving loans to industrial houses and the government. By providing funds to the entrepreneurs, bank help in increasing productivity of capital.

  • Banks help in remitting money from one place to another. The cheque, bank draft, letter of credit, bills, hundies enable traders to transfer large sums of money from one place to another.

  • By their ability to create credit, the banks have placed at the disposal of the nation a large amount of money. The bank can increase the supply of money through credit creation.

  • With the growth of banking activity, employment opportunity in the country has increased to a considerable extent.

  • The banks help in capital formation in the country. A high rate of saving and investment promote capital formation.

  • Money deposited in the bank and other precious items are now absolutely safe. For keeping valuables, banks are providing locker facilities. Now people are free from any type of risks.

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