Banking and Credit: Bank Definition and Functions of a Bank

Get top class preparation for IAS right from your home: Get complete video lectures from top expert with unlimited validity: cover entire syllabus, expected topics, in full detail- anytime and anywhere & ask your doubts to top experts.

Download PDF of This Page (Size: 165K)

In everyday life we do something to earn some money to satisfy our needs. Out of our earnings we save some money for our future. At the same time, we borrow money for our expenses when we are planning to purchase house, car, laptop etc. Either to save our money or to borrow money we visit a common place every time. That we call as Bank.

Bank Definition

  • A bank is an institution which accepts money from public as deposits and gives loans to them. Banks are liable to pay deposited money on demand of depositor. Also, Bank earn money by charging interest on lending money (lending interest rate is higher than interest rate given on savings).

  • Bank is a licensed financial institution which can accept money from public as deposits.


The person who deposits his surplus as savings in bank. Depositor could be an individual or a group of people or a business firm. Depositor will get some interest for his savings in bank. Basically, the rate of interest on savings is around 4% per annum.


  • The person who take loan from banks for his extra expenditures. Borrower could be an individual or a group of people or a business firm. Borrower should have credit worthiness in order to get loan from banks. Borrower need to pay the principal amount along with predetermined interest rate. Basically, the interest rates vary based on kind of loan we are taking, and it could be p.a onwards.

  • Note: Either to deposit money or to take loan we need to open an account with respective bank. Banks will provide an account number. Account number is a unique number provided to every customer of that bank. It is numerical in nature and the number of digits may vary from bank to bank. (e.g. SBI is providing 11-digit number and Andhra bank is providing 15-digit number.)

Functions of a Bank

Image result for Functions Of A Bank

Image Result for Functions of a Bank

Image result for Functions Of A Bank

1. Accepting Deposits from Depositors: Depositor can deposit money by visiting the bank and filling the depositing form by mentioning account number. If the depositor withdraws money from his / her account, then the bank deducts that money from the depositor’s account. Also, 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.

2. Giving loans to Customers: The bank gives loans to public who want to borrow and who has the capability to repay that loan amount in future. Banks are providing personal loans to individuals in the form of home loan, vehicle loan, education loan, agricultural loan etc. Also, banks provide loan to business firms to expand their business, to meet day-to-day operations, to start new business.

3. Security Provider to assets: The bank also keeps valuable things of people such as jewelry, property documents etc. Banks are providing “Safety Lockers” to keep those valuables safely.

Banks are not just providing the above-mentioned functions. They are doing many other functions along with those primary functions in order to meet customers requirement.

Benefits to Customers from Banks

  • Customers can keep their money safe and also earn some return in the form of interest.

  • Customers can take loans for their personal purpose or for business purpose.

  • Customers can avail different products and services offered by banks.

  • Banks making life easier than earlier.

Criticism on Banks

  • Customers thought that most of the banking facilities are available for rich people and businesses.

  • Customers need to provide collaterals for getting loans. Basically, procedure for accepting loans is little bit complex.

  • Customers are unaware of most of the products and services which are being provided by banks.

Benefits to Banks for Doing Bank Business

  • Banks are pooling individual’s savings and lending them out as loans. By this they are earning profit in the form of lending interest.

  • Banking is an emerging industry and have lot of impact on entire economy of country.

Challenges Faced by Banks

  • Cut-throat competition in banking (due to liberalization, privatization and globalization)

  • Problem of Non-Performing Assets. It’s very difficult to identify credit worthy customers. This is a big challenge to all bank companies. The amount of NPAs is going up every time.

How Much Loan Can be Provided by Banks?

  • Banks accepts money as deposits and lends it as loans. Banks are not supposed to give out entire deposited money as loans. Banks are subjected to maintain certain amount of money with the bank to meet depositor’s demand. The minimum reserves are based on Cash Reserve Ratio.

  • Cash Reserve Ratio (CRR) is the percentage of deposits needed to be kept in cash with the bank in order to meet depositor’s demand. The CRR is fixed by Reserve Bank of India (RBI).

Meaning of Credit

Credit is defined as the claim to receive payments and it is created through the act of lending and borrowing. When bank gives loan today it also makes arrangements to claim the money from the borrower in future along with some interest. Accordingly, the bank is able to expand its deposits. This is called credit creation by the bank.

Frequently Asked Questions (FAQs)

Developed by: