Bank is an institution that deals in money and credit. It accepts deposits from those who have funds to spare and grants loans and advances to those who are in need of funds for various purposes. Thus, banking refers to the various services provided by banks, such as acceptance of deposits, grant of loans and advances, and other supplementary services.
Importance of Banking
Capital Formation: Deposits accepted by banks are channelised as loans and advances for industrial and trading activities to business organisations. Thus, banking indirectly converts savings into investment leading to capital formation and development of economy.
Services to Business: Banking helps business through a variety of services such as providing long-term and short-term finance, arranging remittance of money, collection of cheques and bills etc., assisting in raising of capital by acting as underwriters and merchant bankers and so on.
Reduces Use of Currency: Banks enable depositors to make payment by cheque, which is transferable by endorsement and delivery. Besides, travellers can carry travellers’ cheques, credit cards, etc. issued by banks instead of liquid money. Thus, use of currency is considerably reduced.
Mobilisation of Savings: Banks allow savings to be deposited in different types of accounts such as Current Account, Savings Bank Account, Fixed Deposit Account, etc. The facilities of withdrawal as and when desired, and payment of interest on deposits encourage people to save money and put it in the banks.
Benefits to Rural Economy: Rural branches of banks play a useful role in mobilising savings in rural areas and provide loans to farmers and artisans at concessional rates and on priority basis. This helps the rural economy in a big way.
Balanced Development of Economy: Banks identify areas that need special assistance for industrial development and provide them the necessary help. Similarly they also identify backward regions and help in their economic development by providing them adequate funds at reasonable rates. Banks thus, help backward areas in industry and balanced regional development.
Development of Credit Policy: Credit policy is a pre-requisite for economic development. The central bank of a country develops a proper monetary policy by determining the bank rate and regulate the money supply in the larger interest of the economy and the pace of its development.
Types of Banks
There are various types of banks operate in India to meet the diverse financial needs of customers. One may need money for short period of time, whereas others need it for longer period. A businessman may require funds for trading purposes whereas another may need it for setting up of a big manufacturing unit. Sometimes government also needs money and credit.
- Commercial bank
- Co-operative bank
- Development bank
- Specialised bank
- Central bank
1. Commercial Bank
Commercial Banks are banking institutions that accept deposits from the public and grant short-term loans and advances to their customers. Now-a-day, the commercial banks have also started giving medium-term and long-term loans to trade and industry. Commercial banks may be
- public sector banks
- private sector banks
- foreign banks
In public sector commercial banks, the majority stake is held by the Government of India or Reserve Bank of India. Examples of such banks are: State Bank of India, Bank of Baroda, Syndicate Bank, Dena Bank, etc.
In case of private sector banks, the majority of share capital of the bank is held by private individuals. These banks are registered as public limited companies. Example of such banks are: Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd., ICICI Bank Ltd. Kotak Bank, HDFC Bank Ltd. etc.
Foreign banks are incorporated in foreign countries and operate their branches in India. Example of such banks are: Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, ABN-AMRO Bank, etc.
2. Co-operative Bank
When a co-operative society engages itself in banking business it is called a Co-operative Bank. The co-operative banks generally grant loans for productive purposes as well as for other purposes. The rate of interest charged is usually low. These banks are also subject to control and inspection by Reserve Bank of India. There are three types of co-operative banks:
- Primary Credit Societies
- Central Cooperative Banks
- State Co-operative Banks
3. Development Bank
Development banks are the financial institutions which provide medium and long-term loans to industry. Rapid development of industries in India after independence requiring huge financial investment and promotional efforts led to the establishment of these institutions. Development banks assist the promotion, expansion and modernisation of industries.
Besides providing medium and long-term finance, these banks also subscribe to the capital issues of industrial undertakings. They also provide technical advice and assistance, if needed. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.
4. Specialised Bank
There are some banks which engage themselves in some specific area or activity and are thus, called specialised banks. Export Import Bank of India (EXIM Bank), Small Industries Development Bank of India (SIDBI), National Bank for Agricultural and Rural Development (NABARD) are examples of such banks.
5. Central Bank
In every country a bank which is entrusted with the responsibility of guiding and regulating the banking system is known as the Central Bank. Such bank is an apex bank and acts as the highest financial authority. In India, the central banking authority is the Reserve Bank of India. It does not deal directly with the members of public. It acts as bankers’ bank, maintains deposit accounts of all other banks and advances money to banks as and when needed. It regulates the volume of currency and credit, and has the powers of control and supervision over all banking institutions.
The Reserve Bank of India also acts as government banker and maintains the record of government receipts, payments and borrowings under various heads. It advises the government on monetary and credit policy, and plays an important role in fixation of the rate of interest on bank deposits and bank loans. It is the
custodian of currency reserves consisting of foreign exchange, gold and other securities. Another important function of the Reserve Bank of India is the issue of currency notes and regulation of the money supply.
Types of Bank Accounts
1. Saving Deposit Account
These deposits are aimed to encourage habit of savings among people. Interest is allowed on minimum daily balance. Rate of interest is allowed on these deposits is lower than that on FDs. A passbook is issued to the account holder which indicates the amount deposited and withdrawals made as well as the balance in the account holder’s account.
2. Current Deposit Account
Current Deposit Account provides facilities to industrialists and businessmen to deposit or withdraw the money as and when they need. Money can be withdrawn at anytime by means of cheque. There is no restriction on making deposits in such account. No interest is allowed on this account balance. However, overdraft facilities are provided on current accounts. Current deposits are also called ‘Demand Deposits’ as they are payable on demand by the depositors. A passbook is also issued to the account holder.
3. Fixed Deposit Account
A fixed amount is deposited for a specified time period in case of a Fixed Deposit (FD) Account. e.g. one year, three years, five years etc. After the expiry of the fixed period, the deposit is repayable with interest. A higher rate of interest is offered on fixed deposits. The rate of interest varies with the period of deposit. Fixed Deposits are also called ‘time Deposits’ or ‘Long-term Deposits’. Banks do not provide passbook and cheque book facilities on fixed deposit accounts. The rate of interest in fixed deposit is more than the rate of interest in saving account and depends on the duration for which deposits have been made.
4. Recurring Deposit Account
In Recurring Deposit Account, the account holder is required to deposit a specified sum of money every month for specified time period e.g., five years, seven years, ten years etc. At the end of the period, the accumulated amount together with interest earned is paid to the account holder. Withdrawals before maturity not allowed. In this type of account, cheque book facility is not available to account holders. Recurring deposits also called ‘cumulative time deposits’. A passbook issued to account holder showing the deposit made every month. Rate of interest offered by bank on recurring accounts is more than the rate of interest on saving account.