Banking System





The financial system is complex in structure and function throughout the world. It includes many different types of institutions: branch banks, insurance companies, mutual funds, stock and bond markets, and so on... all of which are regulated by government. The financial system channels billions of dollars per year from savers to people with productive investment opportunities.

Banking System

A healthy economy requires a financial system that moves funds from people who save to people who have productive investment opportunities. But how does the financial system make sure that your hard-earned savings get channeled to the productive investor rather than to non-productive investor?

The operations of Bank Branches (how they acquire, use, and manage funds make a profit) are roughly similar throughout the world. In all countries, banks are financial intermediaries in the business of earning profits.

What is a Bank?

The modern term ‘bank’ comes from the ‘banco’ or merchant’s bench in the marketplaces of medieval Italy: money dealing was conducted from a portable bench, which would be publicly broken in the event of failure of the merchant’s business - the origins of the concept of bankruptcy. But banking as an activity is much older. In ancient times the temple was likely to be the location of much of what we would recognise as banking business. In Mesopotamia, money could be borrowed at interest from the temple; in Greece, sanctuaries and temples were often the store house or place of safe custody for bullion and valuables; and in Jerusalem money-changers located in the temple precinct would exchange currency and allow interest on deposits with them.

The code of laws devised by Hammurabi, King of Babylon, between 2084BC and 2081 BC included references to charging interest on loans and a right of privacy in lending transactions.

These early examples include some of the ingredients of what have come to be regarded as the key characteristics of banking: taking money on deposit and lending. And the location within temples and their precincts would have provided another important ingredient - an air of security. Recognizable ‘bankers’ appeared again in the middle ages, financing trade and wars, including the crusades, although as Tyree notes, `it was not until comparatively modern times that the deposit of funds by the wider community with a banker who was then expected to use the funds at his or her discretion for commercial lending was established.

The historically close association of banking with trade means that the Law Merchant - a body of rules reflecting the custom of merchants which was once administered separately from the common law – is an additional historical source of what is now included in banking law.

Bank Branch and Banking

Bank is an institution which deals in money and credit. It accepts deposits from the public and grants loans and advances to those who are in need of funds for various purposes. Banking is an activity which involves acceptance of deposits for the purpose of lending or investing. In addition to accepting deposits and lending funds, banking also involves providing various other services along with its main banking activity. These are mainly agency services, but include several general services as well.

A banker is one who undertakes banking activities, accepting deposits and lending money for different purposes. The Banking Regulation Act, 1949 defines banking as an activity of accepting funds from the public for the purpose of lending or investment.

Banking provides safe, efficient and convenient mode of payment for goods in inland trade as well as in foreign trade. Banking helps business firms to overcome the problem of finance by lending money as and when required. Banks accept deposits and lend money. The other services of banks are: discounting of bills, collection of cheques, acting as agent. A bank accepts deposits on various accounts such as fixed deposit, savings, recurring deposit, and current. Loans are granted through over-draft, cash credit, loans and advances, discounting of bills.

Other services of banks include collection of payments on cheques, bills, drafts etc., sending money from one place to another, buying and selling securities, payment of insurance premium, issuing travellers cheques, providing locker system, and providing information on credit worthiness. Banks are of various types: commercial, agricultural, indigenous, rural, cooperative, exchange, central, etc. In fact banking is the lifeline of business.

Role of Branch Bank

Banking provides funds for business as well as personal needs of individuals. Hence the role of Banking has a significant function in the society. Look at some of the roles of Banking:

  • Branch Bank encourages savings habit amongst people and thereby makes funds available for productive use.
  • Branch Bank acts as an intermediary between people having surplus money and those requiring money for various business activities.
  • Branch Bank facilitates business transactions through receipts and payments by cheques instead of currency.
  • Branch Bank provides loans and advances to businessmen for short term and long-term purposes.
  • Branch Bank also facilitates import export transactions.
  • Branch Bank helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country.
  • Branch Bank helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.

The Basics of Banking

  1. Savings accounts means number of withdrawals per quarter and amount of withdrawals per transaction in ATM
  2. Overdraft is allowed generally by banks in Current accounts
  3. A bank’s Fixed Deposits is characterized by Interest rate as agreed with the customer at the time of the deposit, Fixed period of the deposit and Periodical payment of interest
  4. Fixed deposits cannot be Transferred to third parties
  5. A Recurring Deposit account requires the customer to Deposit a fixed amount at specified intervals for a specified period
  6. Principal functions of banks are accepting deposits, Lending and investing & Non-fund business and remittance services
  7. Demand Deposits are those which can be withdrawn On Demand
  8. Current account deposits are not entitled to Interest
  9. In Saving account deposits, interest is paid on Minimum balance in the account between 10th to last day of month

The Essential Features Of Banking Activities

Accepting deposits from public and lending or investment of such deposits

Incidental to the activities of accepting deposits for lending or investing, banks undertake activities like:

  • Promoting and mobilizing savings of the public;
  • Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility, and transfer of funds from one place to another;
  • Providing agency services to customers, such as collection of bills, payment of insurance premium, purchase and sale of securities, etc., and other general services, such as issue of travellers’ cheques, credit cards, locker facility, etc;

Money deposited with the bank is assured as far as its safety is concerned. Further the depositor is allowed to withdraw it whenever required. Banks allow interest on deposits. Such interest helps in the growth of funds deposited with the bank. Thus the rate of interest provided on deposits acts as an incentive to the depositors.

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