What is Banking ?

What is Banking ?

What do you mean by Banking?

A bank is an institution, which deals in money and credit. It collects deposits from the public and supplies credit.  It is a body of persons (whether incorporated or not) who carry on the business of banking.

The major participants of the Indian financial system are as below:

          1. Commercial banks, the Financial Institutions (FI)
          2. Surrounding term-lending institutions.
          3. Investment institutions.
          4. Specialized financial institutions and the state-level development banks.
          5. Non-bank Financial Companies (NBFC’ s) and other market intermediaries such as the stockbrokers and moneylenders.

History of Banking

  • Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major govt. ownership.
  • RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. Consequently, the amendment of Banking Regulation Act in 1933 saw the entry of new private sector banks.

 Different Types of Banks in India

Reserve Bank of India (R.B.I)

  • This is the central bank of India. It was established in April 1935 to act as the central bank of the British Govt. ruling in India. It was nationalized in 1949, and since then, it has been functioning, as a state owned central Bank. The Central Board of Directors consisting of 15 members manages it. The chief executive authority of the Bank is the Governor, assisted by three Deputy Governors. Its head office is in Mumbai and has branches in Kolkatta, Bangalore, New Delhi, Chennai, Kanpur and Nagpur.

Commercial Banks

  • These Banks are meant for the financial help of the traders of the country. Modern Commercial banks are described as dealers in debts. These banks borrow money from those who have surplus funds to save and lend money to those who need funds for commercial purposes. Therefore, accepting deposits and giving loans are the main functions of commercial banks. There are two types of commercial banking structure in India.
            1. Scheduled Commercial Banks
            2. Unscheduled Commercial Banks

Scheduled Commercial Banks

  • Scheduled commercial banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule, which satisfy the criteria laid down vide section 42. This sub sector can broadly be classified into:
            1. Public Sector
            2. Private Sector 

Public sector banks

  • Public Sector Banks have either the Govt. of India or Reserve Bank of India as the majority shareholder. This segment comprises of State Bank of India (SBI) and its subsidiaries (e.g., State Bank of Bikaner and Jaipur) and other nationalized Banks.

The Private Sector Banks

  • Private Sector Banks are those which are regulated through a system of regulations, licenses, controls and other legislative Acts as framed by the Govt. of India.  Axis  Bank, ICICI Bank, HDFC Bank etc.

Unscheduled Commercial Banks

Unscheduled Commercial Banks are those, which were not included in the second schedule of the Reserve Bank of India Act, 1934.

Industrial Banks

  • These banks are expected to provide long-term financial assistance to industrial concerns. In our country, industrial banks are in the form of specialized financial institutions, viz.,
          1. Industrial Finance Corporation of India (IFCI)
          2. State Financial Corporations (SFC)
          3. Industrial Development Bank of India (IDBI) etc.
  • These banks provide not only finances but also guide on technical and managerial problems. These banks also underwrite shares and debentures issued by industrial undertakings.

Co-operative Banks

  • These banks are formed on the principles of co-operation. These banks extend credit facilities to farmers and small-scale industrial concerns. These banks supply short-term loans to farmers in rural areas against the security of land, crops, and other goods.
  • These banks also offer loans to cottage and small-scale industries at a low rate of interest.
  • There are two main categories of the co-operative banks. Short-term lending co-operative banks – within this category there are three sub-categories of banks viz. state co-operative banks. District co-operative banks and Primary Agricultural co-operative societies.
  • Long term lending oriented Co-operative Banks – within the second category, there are banks at three levels – state level, district level and village level.

Banking Services


  • Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand and or otherwise and with drawable by cheques, draft and order or otherwise.
  • Another activity, which is assuming increasing importance, is transfer of money – both domestic and foreign from one place to another. This activity is generally known as “remittance business” in banking parlance.
  • The Foreign exchange business is largely a part of remittance. Although it involves buying and selling of foreign currencies.

The banking activities can be classified as:-

          1. Accepting Deposits from public/others (Deposits)
          2. Lending money to public (Loans)
          3. Transferring money from one place to another (Remittances)
          4. Acting as intermediaries
          5. Keeping valuables in safe custody

Banking Functions

Accepting Deposits:

  1. Collection of deposits is one of the main functions of a commercial bank. A commercial bank provides the facility to open different kinds of deposit accounts with various facilities to suit the needs of various depositors. Deposits are received from the public in the following three forms:
  2. Savings Deposit Account: This is an account where money can be deposited and withdrawn freely by an individual in his name or jointly. The main objective of this account is to promote savings habit of middle and low-income group people. In some cases, bank authorities may open savings account in favour of a charitable institution also.
  3. Current Deposit Account: This is an account where money can be deposited and withdrawn freely by an artificial person. Under this account, there is no restriction to limit the number of withdrawals. Generally, no interest is paid on such deposits.
  4. Fixed Deposit Account: This refers to the account wherein money is deposited for a fixed period and cannot be withdrawn before the expiry of the said period. This period usually varies from three months to seven years or even more. Interest on fixed deposits is generally much higher than the interest on savings deposit account depending on the time and reserve bank regulation. 

Granting of Loans and Advances 

Granting of credits in different forms is one of the main functions of a bank. Commercial banks lend money to businessmen and other persons in the following forms:

  1. Loans: A loan is a lump sum advance sanctioned for a specified period. Loans are generally granted against the security of assets or on the personal security of the borrower. A loan may be repayable either in lump sum or in installments.
  2. Cash Credits: It is an arrangement wherein a bank allows its customers to borrow money up to a certain limit against some tangible securities (or Guarantees). The borrower can draw the amounts from his account as and when he needs and can pay back. Interest is charged on the amount actually drawn by the borrower.
  3. Overdraft: It means giving money in excess of the deposits of the depositors. It is an arrangement wherein a bank allows its customers (having a current account) to overdraw on their accounts up to a specified limit. Interest is charged on the money actually overdrawn during the period.
  4. Discounting of Bills: Bank undertakes to discount the bills of exchange receivable by their customers. Under this arrangement, the bank encashes the bills of customers before their maturity. It is a convenient medium for traders to secure working funds. Banks provide this facility to their customers in consideration to discounting charges (i.e.: – Interest from the date of discounting up-to the date of maturity of the bill).

Other Functions

  • Agency functions: A bank serves as an agent of its customers in several ways. A commercial bank performs the following agency functions as per instructions from its customers:
  • Collection of cheques and bills: Banks collect cheques, bills, promissory notes, etc., on behalf of their customers. Banks usually charge a small commission for this service from their customers.
  • Payment of Insurance premium: Banks undertake to pay insurance premium on behalf of their customers and accordingly the bank debits the customers account. A small commission is usually charged for this service from their customers.
  • Purchase and sale of Securities: Banks undertake to buy and sale shares, debentures, bonds, Govt. securities etc. on behalf of their customers. Banks usually do not charge anything from the customers for this service.
  • Transfer of funds: Banks provide remittance facilities (i.e.: – transfer of funds) from one place to another by means of bank drafts or telegraphic transfers. The bank charges commission for rendering this service.
  • Acting as trustee, executor etc: Banks often act as trustee, executor and administrator on behalf of its customers. Banks can discharge this responsibility more efficiently than other agencies because of their specialised knowledge in these fields.
  • Serving as guarantor: Banks serve as guarantor in financial and credit transactions on behalf of their customer
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