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What are Banks?

Banking is a fundamental branch of commerce and banking institutions are essential for the economy which facilitate trade. Banks take up an important space and position in the modern business. No country can make commercial and industrial progress without a well organised and well structured banking system.
Banks provide with the facility for deposit, encourage the habit of savings, mobilize idle funds and channelise them into productive uses.
Banks also provide facilities for safe custody, investment of money and transfer. They provide short term and long term Finance to business entities.

A bank may be defined as a company which collects money from the public in the form of deposits and lends the same to borrower in the form of credit. It is an institution that provides facilities for safe keeping, lending and transfer of money.

As per the Banking Regulations Act, 1949, “banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.

Banks are also described as dealers in money and credit as they accept deposits and lend the same. The mechanism is as such when a bank accepts deposit it purchases the money at a certain prevailing rate of interest, however, when it lends the same it sells money at a higher rate of interest the difference between the two is the profit made by the bank.

“An organisation whose principle operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.” R.P. Kent

Banks are joint stock companies which receive deposit from the public, they provides short term and medium term loans to customers. These banks carry on all kinds of banking functions within the framework of the Banking Regulations Act, 1949.
Bank of Calcutta, is the oldest commercial bank of India which was established in the year 1806. Further it was renamed as the bank of Bengal. Currently known as the State Bank of India (SBI).
The State Bank of India (SBI) is the largest Commercial Bank in India.

Types of Banks:

Central Bank: The central bank acts as the apex financial institution. Serves as a leader of the banking system and the money market. It exercises supervision and control over all other banks in the country, acts as a banker’s Bank. The Reserve Bank of India is the central bank of our country. The RBI frames the country’s monetary policy and occupies a central position in the banking system.

Commercial Banks: Commercial banks accept deposits from the general public and lends the same in the form of loans and advances for the purpose of generating profits. There are several commercial banks in a country. It is a banker to the general public.

Industrial Banks: These banks grand finance to industries for a medium term or long term periods, also known as development banks or Development and Financial Institutions. The examples which come under the industrial banking sector.

Industrial development Bank of India (IDBI),
Small industries development Bank of India (SIDBI),
Industrial Finance corporation of India (IFCI0

Merchant Banks: Various merchant banking functions like underwriting of securities, dealing with securities like issuing of securities, broking for companies.

Exchange Banks: As the name suggests, these banks provide foreign currency and other related facilities to importers and exporters. They provided services for collecting and supply information about foreign customers remittance of funds from one country to another. The Export Import Bank of India (EXIM) is an example of exchange banks.

Agriculture Banks: These banks provide credit to farmers against the security of land hence, they are also known as Land Development Banks. The National Bank for Agricultural and Rural Development (NABARD) is an example of agricultural banks.

Indigenous Banks: The money lenders in villages and small towns come under this category. These lenders generally charge high rates of interest.

Cooperative Banks: They accept deposits and grant loans to their members at concessional rate of interest. The primary aim is not to maximize the profit but to provide the facilities to its members.

Functions of Commercial Banks:

The main functions of a commercial bank are accepting deposits and granting credit. The subsidiary functions are agency functions and the general utility functions.

Accepting Deposit: Accepting deposits is the main and primary function of a commercial bank. It accepts deposit from the public for the purpose of making further loans and advances.

Safe custodian: people deposit their money in banks for the safe of safety of their money and earning interest.

Credit: Commercial banks lend money in the following ways:

Loans and advances: A specific amount is granted for specified period of time, the borrower may withdraw the entire amount in lump sum or in installments. Loans are generally granted against the collateral security.
Cash credit: The bank generally grants this credit to the borrower to borrow up to a specified limit. Interest is charged on the amount actually withdrawn.
Overdraft: Overdraft facility is available only to current account holders. Customer was a current account with the bank can we draw more than the amount standing to his credit up to a specified limit.
Discounting of bills: Bank help customers discount bills before the date of its maturity against a certain commission.

Agency functions: Banks may perform certain agency functions for its customers against standing instructions:

Collection of cheques, bills, dividends, interest etc.
Payment of cheques, bills, rent, interest, various premiums, subscriptions.
Trading of financial securites.
Acts as a trustee or executor in financial affairs.

Utility Function:

Transfer of money from one branch to another.
Safe custodian of valuable assets.
Entering into underwriting agreements of capital issues.
Providing with foreign exchange.Issuing reports on the creditworthiness of customers.
Issuing financial information to customers.
Dealing with bills of exchange.
Providing with various consultation services with regards to investment and other fiscal matters.