Meaning of Bank
'Bank' is a financial institution that accepts deposits and channels the money into lending activities.
‘Banking’ as an activity involves acceptance of deposits and lending or investment of money.
Role/Importance of Banking
Banks provide funds for the business and play an important role in the development of a nation.
- Acts as an intermediary
It acts as an intermediary between people having surplus money and those requiring money for various business activities.
2. Economic Development
It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which leads to balanced economic development in the country.
3. Capital Formation:
Deposits accepted by banks are converted into loans and advances for industrial and trading activities to business organizations. This way, banking converts savings into investment leading to capital formation and development of economy.
4. Services to Business:
Banking helps business through a variety of services like providing long-term and short-term finance, arranging remittance of money, collection of cheques and bills etc., helping in raising of capital by acting as underwriters etc.
5. Reduces Use of Currency:
Banks enable depositors to make payment by cheque, travelers’ cheques, credit cards etc. issued by banks instead of liquid money. Thus, associated problems of use of currency are considerably reduced.
6. Mobilization of Savings:
Banks allow savings to be deposited in different types of accounts such as Current Account, Savings Bank Account, Fixed Deposit Account, etc. carrying different interest rates as their income which encourage people to save money and put it in the banks.
7. Raising the standard of living
It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.
8.Benefits to Rural Economy:
Rural branches of banks play a useful role in mobilizing savings in rural areas and provide loans to farmers and artisans at concessional rates and on priority basis. This helps the rural economy.
9. Balanced Regional Development:
Banks identify areas that need special assistance for industrial development and identify backward regions and help in their economic development by providing them adequate funds at reasonable rates.
10. Development of Credit Policy:
The central bank of a country develops a proper monetary policy by determining the bank rate which further affects interest rate and credit policy in the country that ultimately leads to effect on economic development of the country.
11. Facilitates Foreign trade
It also facilitates import export transactions. Reserve Bank of India regulates all the import and export transactions and facilitates bringing foreign exchange to be used for country's economic development.
Types of banks
There are various types of Banks that operate in India. On the basis of functions, the banking institutions in India may be divided into the following types:
- Central Bank
- Commercial Banks
- Development Banks
- Co-operative Banks
- Specialised Banks:
- Central Bank
Central Bank is the bank which is responsible for guiding and regulating the banking system of a country. It does not deal with the general public.
The Reserve Bank of India is the central bank of our country.
Main functions of Central Bank are:
- It acts essentially as Government’s banker.
- It serves as Bankers' bank.
- The Central Bank provides guidance to other banks in case of any problem.
- The Central Bank maintains records of Government revenue and expenditure.
- It also advises the Government on monetary and credit policies and decides on the interest rates for Bank deposits and Bank loans.
- It also determines foreign exchange rates.
- Central Bank is responsible for the issue of currency notes and regulating their circulation in the country by different methods.
2. Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. They also give medium-term and long-term loan to business enterprises and some other uses.
Types of Commercial Banks:
Commercial banks are of three types i.e., Public sector banks, Private sector Banks and foreign Banks.
- Public Sector Banks:
These are banks where majority of the share capital is held by the Government of India or Reserve Bank of India. Examples: State Bank of India, Corporation Bank, Bank of Baroda, Punjab National Bank, Canara Bank, Bank of India and Oriental Bank of Commerce, etc.
- Private Sectors Banks:
In case of private sector banks majority of share capital of the Bank is held by private individuals. Examples: ICICI Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, ING Vysya Bank, etc.
- Foreign Banks:
Foreign Banks are registered and have their headquarters in a foreign country but operate their branches in our country. Examples: Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, etc.
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Development Banks:
Development Banks provide financial assistance in the form of medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Example: Industrial Finance Corporation of India (IFCI) and State Financial Corporation (SFCs).
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Co-operative Banks:
These banks are formed by persons belonging to the same local or professional community or sharing a common interest, under the Co-operative Societies Act. Co-operative banks provide a wide range of banking and financial services to their members. The society has to obtain a license from and follow the guidelines issued by the Reserve Bank of India.
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Specialised Banks:
Banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity are called specialised banks. Examples: EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity.
a) Export Import Bank of India (EXIM Bank):
EXIM bank provides the required support and assistance to set up a business for exporting products abroad or importing products from foreign countries for sale in our country. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.
b) Small Industries Development Bank of India (SIDBI):
SIDBI provides finance to establish a small-scale business unit or industry, by way of loan on easy terms. It also finances modernisation of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries.
c) National Bank for Agricultural and Rural Development (NABARD):
It is a central or apex institution for financing agricultural and rural sectors like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.