Banking and Credit: Meaning of Bank and Banking, Functions of a Bank (For CBSE, ICSE, IAS, NET, NRA 2022)

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A ‘Bank’ is a very important institution in the modern society. Note that when society realized the benefits of using money as a medium of exchange, it also felt the need to store money in a safe place. This ‘safe place’ ultimately evolved over time into a bank, which deals with money in various ways. People make visit to a bank for various purposes, such as- to deposit their surplus money, to withdraw money from their account in order to make payments in cash, to take loan etc. In the economy banks play a very important role of facilitating the production, distribution and business activities.

Meaning of Bank and Banking

A bank is an institution which accepts money from public as deposits and gives loans to them. Banking refers to accepting for the purpose of lending or investment of deposits of money from the public, payable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.

Functions of a Bank

From the meaning as given above the functions of a bank are clearly understood.

The primary functions of a bank are as follows:

Accepting Deposits from Public

A bank accepts monetary deposits from public which include individuals, groups, business firms etc. It should be noted that when somebody wants to deposit money in the bank, the bank accepts the money by opening an account in the name of the depositor. The bank gives an account number to the depositor. Whenever the depositor wants to deposit money again, he or she has to mention the account number so that the bank will keep that money in that account. If the depositor withdraws money from his/her account, then the bank deducts that money from the depositor՚s account. On the other hand, bank gives interest on certain types of deposits of the public. Note that, the bank issues cheque books to its depositors. Cheques are used by the depositors to withdraw money from the bank and making payments to any party through the bank.

Giving Loans

People borrow money because they want to buy something today or do some business for which there is not enough money with them at present. But they have the ability to repay that money in future. Goods, such as, television, refrigerator, washing machine, car etc. are expensive items. Similarly, purchase or construction of house requires lots of money. For all these things, bank provides a loan. Bank also gives loan to start business.

Keeping Valuable Materials

There is another function performed by a bank. The bank also keeps valuable things of people such as Jewellery, property documents etc. Normally, people want to keep valuables I safe custody which is provided by the bank in the form of ‘locker facility’ .

Meaning of Credit

credit is created through the act of lending and borrowing. Credit is defined as the claim to receive payments. When a bank gives loans to people, then the bank becomes a lender and the person who takes loan from the bank is called a borrower. When bank gives loan today it also makes arrangements to recover the same from the person in future. This means that the bank can claim the money from the borrower in future.

The Process of Credit Creation

the bank always keeps some fraction of its total deposits in the form of cash from which it keeps giving money to people who come to withdraw it. This fraction is given in percentage term. What percentage of the total deposit has to be kept as cash? Well, this is decided by the banking authority of the country. The cash amount is kept as reserve for making cash payments to public who come to the bank to withdraw money. We call the fraction of the total deposit to be kept in the form of cash as cash reserve ratio. Once the bank calculates the amount to be kept as cash on the basis of cash reserve ratio, it deducts the amount from the total deposits and uses the rest of the amount to give loans to the borrowers. With this act of the bank, the process of credit creation starts from here.

Various Types of Banks in India

In India there are following types of banks:

Various Types of Banks in India

Reserve Bank of India (RBI)

RBI is the head of the banking system in the country. This means that all other banks such as, commercial or cooperative or development banks, follow the rules and regulations made by RBI. Its head quarter is in Mumbai. RBI՚s main function is to issue currency notes. The paper currency of various denominations are issued by the RBI. function of RBI is that it acts as banker to the government. In India both central and state governments take loan from RBI and deposit their money with RBI.

Commercial Banks

  • There are some commercial banks which are under the public sector, for example-
  • State Bank of India (SBI) , Punjab National Bank (PNB) , Bank of India (BOI) , Indian Bank, Canara Bank, Bank of Baroda (BOB) etc.
  • There are other commercial banks which are under private sector such as- ICICI Bank, Yes Bank, HDFC Bank etc. These banks are privately run. The aim of a commercial bank is to earn profit by charging rate of interest on loans and fees for various services such as issuing draft, transferring money etc.

Cooperative Banks

In India there are many banks which are run by cooperative societies and are governed by the laws of the state in which they are operating.

Such banks are of two types:

  • agricultural (or rural) and
  • non - agricultural (or urban) .

agricultural or rural areas cooperative banks provide credit for farming, cattle, fishery etc. In urban areas the cooperative banks provide credit for self-employment activities, small scale industry, purchase of durable goods such as television, refrigerator etc. and personal finance.

Development Banks

  • To achieve economic development for the country, investment in industries and infrastructure is required. To make such thing possible there are development banks in India. These banks provide credit for a long period to private business companies and public sector units who want to establish industries and create infrastructure.
  • Some example of development banks are Industrial development bank of India, Industrial Financial corporation of India and State Finance Corporations etc.

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