Banks as institutions which channel people's savings into productive loans and investments. Thus banking mainly refers to deposits and loans. A broader definition of banking is any financial institution that receives, collects, transfers, pays, exchanges, lends, invests, or safeguards money for its customers. Investment banks, financing companies, and money lenders are just some of the institutions that have engaged in banking.
A bank is a business. But unlike some businesses, banks don’t manufacture products or extract natural resources from the earth. Banks sell financial services such as car loans, home mortgage loans, business loans, checking accounts, credit card services, certificates of deposit, and individual retirement accounts.
Concept of Banking
Some people go to banks in search of a safe place to keep their money. Others are seeking to borrow money to buy a house or a car, start a business, expand a farm, pay for college, or do other things that require borrowing money.
Where do banks get the money to lend? They get it from people who open accounts and maintaining it. Banks act as go-between for people who save and people who want to borrow. If savers didn’t put their money in banks, the banks would have little or no money to lend.
Your savings are combined with the savings of others to form a big pool of money, and the bank uses that money to make loans. The money doesn’t belong to the bank’s president, board of directors, or stockholders. It belongs to you and the other depositors. That’s why bankers have a special obligation not to take big risks when they make loans.
What is the Meaning of Banking?
Banking plays such a major role in channeling funds to borrowers with productive investment opportunities, this financial activity is important in ensuring that the financial system and the economy run smoothly and efficiently. As a result of different kinds of banks in existence nowadays, it would be difficult, or at least cumbersome, to formulate a definition of banking which connotes the diverse activities of all kinds of banks. Some of the definitions can be formulated here:
The Meaning of Banking - 1: A person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honoring cheques drawn upon them from time to time by the customers to the extent of the amounts available on the current accounts.
The Meaning of Banking - 2: Chamber's Twentieth Century Dictionary defines a bank as an "institution for the keeping, lending and exchanging, etc of money.
The Meaning of Banking - 3: According to Crowther, "The banker's business is to take the debts of other people to offer his own in exchange, and thereby create money." A similar definition of the meaning of Banking has been given by Kent who defines a bank as "an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure."
The Meaning of Banking - 4: Sayets, on the other hand, gives a still more detailed definition of a bank thus: Ordinary banking business consists of changing cash for bank deposits and band deposits for cash; transferring bank deposits from one person or corporation (one 'depositor') to another; giving bank deposit in exchange for bills of exchange, government bonds, the secured or unsecured promises of businessmen to repay, etc.
Illustrating The Meaning of Banking
A savings deposit held by one person can provide the funds that enable the bank to make a mortgage loan to another person. The bank has, in effect, transformed the savings deposit (an asset held by the depositor) into a mortgage loan (an asset held by the bank). Another way this process of asset transformation is described is to say that the bank “borrows short and lends long” because it makes long-term loans and funds them by issuing short-dated deposits.
Thus a bank is an institution, which accepts deposits from the public and in turn advances loans by creating credit. It is different from other financial institutions in that they cannot create credit though they may be accepting deposits and making advances.
Who Is Customer of A Bank?
According to RBI, a customer of a bank will be one of the following:
- A person or entity that maintains an account and/or has a business relationship with the bank.
- One on whose behalf the account is maintained (i.e. the beneficial owner).
- Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc., as permitted under the law.
- Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.