A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in deposits, and it lends money to those who need it. Different Authors and Economists have given some structural and functional definitions of banks from different angles.
Where the word “Bank” came from
The history of the banking industry is long and vast, and Finance is the lifeblood of trade, commerce, and industry. The development of any country mainly depends upon the banking system. The term bank is either derived from the old Italian word “Banca” or the French word “Banque,” both mean a Bench or money exchange table.
In the olden days, European money lenders or money changers displayed (show) coins of different countries in big heaps (quantity) on benches or tables for lending or exchanging. Nowadays, the banking sector acts as the backbone of modem business.
Definitions of Bank
- Oxford Dictionary defines a bank as “an establishment for custody of money, which it pays out on customer’s order.”
- According to R.S. Sayers, “Banks are institutions whose debts are commonly accepted in final settlement of other peoples debts.”
- According to Peter Rose, “Bank is financial intermediary accepting deposits and granting loans.”
- According to F.E. Perry, “Bank is an establishment which deals in money, receiving it on deposit.”
- According to Cairn Cross, “Bank is an intermediary financial institution which deals in loans and advances.”
- According to R.P. Kent, “Bank is an institution which collects idle money temporarily from the public and lends to other people as per need.”
- According to P.A. Samuelson, “Bank provides service to its clients and in turn receives perquisites in different forms.”
- According to W. Hock, “Bank is such an institution which creates money by money only.”
Meaning of Bank
From the above definitions, bank means it is a financial institution which;
- Feals with money; it accepts deposits and advances loans.
- It also deals with credit; it has the ability to create credit, i.e., the ability to expand its liabilities as a multiple of its reserves.
- It is a commercial institution; it aims at earning profit.
- It is a unique financial institution that creates demand deposits that serve as a medium of exchange, and as a result, the banks manage the country’s payment system.
Finally, we can say that bank is an organization where people and businesses can invest or borrow money, change it to foreign money, etc. or a building where these services are offered.
Characteristics / Features of a Bank
A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange, and safe deposit boxes.
Characteristics/features of a bank are;
- Dealing in Money
- Acceptance of Deposit
- Giving Advances
- Payment and Withdrawal
- Agency and Utility Services
- Profit and Service Orientation
- Connecting Link
- Banking Business
- Name Identity
The main characteristics/ features of a bank are discussed below:-
1. Dealing in Money
The bank is a financial institution which deals with other people’s money, i.e., the money given by depositors.
A bank may be a person, firm, or company. A banking company means a company that is in the business of banking.
3. Acceptance of Deposit
A bank accepts money from people in deposits that are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.
4. Giving Advances
A bank lends out the money in loans to those who require it for different purposes.
5. Payment and Withdrawal
A bank provides an easy payment and withdrawal facility to its customers in checks and drafts. It also brings bank money into circulation. This money is in the form of checks, drafts, etc.
6. Agency and Utility Services
A bank provides various banking facilities to its customers. They include general utility services and agency services.
7. Profit and Service Orientation
A bank is a profit-seeking institution with having service-oriented approach.
Functions Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services, and activities of a bank.
9. Connecting Link
A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who require money.
10. Banking Business
A bank’s main activity should be to do banking business that should not be subsidiary to any other business.
11. Name Identity
A bank should always add the word “bank” to its name to enable people to know that it is a bank and deals in money.
Functions of Banks
The functions of banks are briefly highlighted in the following diagram or chart.
- Primary Functions of Banks.
- Accepting Deposits.
- Saving Deposits.
- Fixed Deposits.
- Current Deposits.
- Recurring Deposits.
- Granting of Loans and Advances.
- Cash Credits
- Discounting of Bill of Exchange
- Accepting Deposits.
- Secondary Functions of Banks.
- Agency Functions.
- Transfer of Funds.
- Collection of checks.
- Periodic Payments.
- Portfolio Management.
- Periodic Collections.
- Other Agency Functions.
- General Utility Functions.
- Issue of Drafts, Letter of Credits, etc.
- Locker Facility.
- Underwriting of Shares.
- Dealing in Foreign Exchange.
- Project Reports.
- Social Welfare Programs.
- Other Utility Functions.
- Agency Functions.
A. Primary Functions of Banks
The primary functions of a bank are also known as banking functions. They are the main functions of a bank. These primary functions of banks are explained below.
1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of different types, such as
- Saving Deposits: This type of deposit encourages saving habits among the public. The rate of interest is low. At present, it is about 4% p.a.
- Fixed Deposits: The lump sum amount is deposited at one time for a specific period. A higher rate of interest is paid.
- Current Deposits: This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid.
- Recurring Deposits: This type of account is operated by salaried persons and petty traders. Withdrawals are permitted only after the expiry of a certain period. A higher rate of interest is paid.
2. Granting of Loans and Advances
The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The types of bank loans and advances are:
- Overdraft: This type of advance is given to current account holders. It is sanctioned to business people and firms. An overdraft facility is granted against collateral security.
- Cash Credits: The client is allowed cash credit up to a specific limit fixed in advance. The cash credit is given against the security of tangible assets and or guarantees. The advance is given for a longer period, and a larger loan amount is sanctioned than that of overdraft.
- Loans: It is normal for the short term, say a period of one year, or medium-term, says a period of five years. Nowadays, banks do lend money for the long term. Loans are normally secured against tangible assets of the company.
- Discounting of the bill of exchange: The bank can advance money by discounting or by purchasing bills of exchange, both domestic and foreign bills. The bill is presented to the drawee or acceptor of the bill on maturity, and the amount is collected.
B. Secondary Functions of Banks
The bank performs some secondary functions, also called non-banking functions. These important secondary’ functions of banks are explained below.
1. Agency Functions
The bank acts as an agent of its customers. The bank performs several agency functions, which includes:-
- Transfer of Funds: The bank transfers funds from one branch to another or from one place to another.
- Collection of checks: The bank collects the money of the checks through the clearing section of its customers. The bank also collects money from the bills of exchange.
- Periodic Payments: On standing instructions of the client, the bank makes periodic payments regarding electricity bills, rent, etc.
- Portfolio Management: The banks also undertake to purchase and sell the shares and debentures on behalf of the clients and accordingly debits or credits the account. This facility is called portfolio management.
- Periodic Collections: The bank collects salary, pension, dividend, and other periodic collections on behalf of the client.
- Other Agency Functions: They act as trustees, executors, advisers, and administrators on behalf of their clients. They act as representatives of clients to deal with other banks and institutions.
2. General Utility Functions
The bank also performs general utility functions, such as,
- Issue of Drafts and Letter of Credits: Banks issue drafts for transferring money from one place to another. It also issues letters of credit, especially in the case of import trade. It also issues travelers’ checks.
- Locker Facility: The bank provides a locker facility for the safe custody of valuable documents, gold ornaments, and other valuables.
- Underwriting of Shares: The bank underwrites shares and debentures through its merchant banking division.
- Dealing in Foreign Exchange: The commercial banks are allowed by.RBI to deal in foreign exchange.
- Project Reports: The bank may also undertake to prepare project reports on behalf of its clients.
- Social Welfare Programs: It undertakes social welfare programs, such as adult literacy programs, public welfare campaigns, etc.
- Other Utility Functions: It acts as a referee to the financial standing of customers. It collects creditworthiness information about clients of its customers. It provides market information to its customers, etc. It provides travelers’ check facilities.
Importance of Banks
Banking plays an important role in financial life, and the importance of banks can be seen from the fact that they are considered the lifeblood of the modem economy.
Although bank creates no wealth, their essential activities facilitate production, exchange, and distribution of wealth. In this way, banks become effective partners in the process of economic development and growth.
11 importance of banks are;
- For Business.
- Savings and Advancing Loans.
- Money Transfer.
- Encourages Savings.
- Transfer Savings into Investment.
- Overdraft Facilities.
- Discounting Bill of Exchange.
- Financing Internal & External Trade.
- Act as an Agent.
- Issue of Traveler’s Check.
- General Utility Services.
Let’s try to understand these;
1. For business
Based on these important functions of Banks, we may easily describe the importance of banks in today’s global life.
2. Savings and Advancing Loans
Acceptance of deposits and advancing the loans is the basic function of commercial banks.
3. Money Transfer
Banks have facilitated payments from one place or person to another utilizing check, bills of exchange and drafts, instead of cash.
4. Encourages Savings
Banks perform an invaluable service by encouraging savings among the people. These savings help in capital formation.
5. Transfer Savings into Investment
Bank transfer the savings collected from the people into investment and thus increases the amount of effective capital, which helps the process of economic growth.
6. Overdraft Facilities
The banks allow the overdraft facilities to their trusted customers and thus help them in overcoming temporary financial difficulties.
7. Discounting bill of exchange
The importance of banks can be seen through the discounting bill of exchange. Banks discount their bill of exchange of consumers and help them in the financial difficulties.
8. Financing Internal & External Trade
Banks help merchants and traders finance internal and external trade by discounting a foreign bill of exchange, issuing letters of credit, and other guarantees for their customers.
9. Act as an Agent
The bank acts as an agent and helps its customers purchase and sell shares, provision of lockers, payment of monthly, and dividends on stock.
10. Issue of Traveler’s check
For the convenience and security of money for travelers and tourists, the bank provides traveler s checks.
11. General Utility Services
The existence of commercial banks is essential for contributing to general prosperity. Banks are the main factors in raising the level of economic development of the world.
A bank is a Financial Intermediary.
A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds, and pension funds.
Financial intermediaries offer some benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking, and asset management.
A bank is one of the major financial intermediaries because banks move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business.
For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate, and other assets.
Banks connect borrowers and lenders by providing capital from other financial institutions and the Federal Reserve. Insurance companies collect premiums for policies and provide policy benefits. A pension fund collects funds on behalf of members and distributes payments to pensioners.
Deposit is the Blood of Bank, and the bank is the blood of country’s economy.
Money can be compared with the blood of the bank.
As long as blood remains in circulation, all the organs in the body will remain sound and healthy. If blood is not adequately supplied to any organ or part of the body, then that part will be starved of nutrients and oxygen and will become useless.
In the same way, as long as money remains in circulation, all the banks in a society’ will remain economically sound and healthy. If money is not adequately supplied to the bank, then the bank loses its existence from society.
Similarly, a bank can be compared with the blood of society.
As long as all the banks in society remain economically sound and healthy, society will gradually develop towards prosperity and solvency.
So, in reality, the deposit is the blood of a Bank, and the bank is the blood of a country’s economy.
Stephenson & Britain defined banks, “Banks are the custodians and distribution of liquid capital, which is the lifeblood of our commercial and industrial activities and upon the prudence of their administration depends on the economic well-being of the nation.”
A bank is a financial institution that collects society’s surplus cash and gives a part of that as a loan to investors for earning profit. So, a bank is an intermediary institution that makes a relationship between the owner of surplus savings and the investor of deficit capital.
The bank is an institution that is registered by the central bank and mainly perform the following activities;
- receives the current deposit and give the withdrawal facilities to clients through a check
- receives term deposit and pay interest on it
- discounting notes, approving loans, and investing in government and other credit instruments
- collect the check, draft, and notes, etc.
- issue draft and cashier’s check
- notification of depositors’ check
- act as a trustee following government permission.
We knew before that a bank is what a blank doc. These activities of banks are changing with the change of time. Logically, banking activities will change with the change of culture, time, and perception of people in a country. So, it isn’t easy to give a valid & precise definition that fits all situations.
In this process, banks earn profit by receiving interest from the borrowers who want to take short-term and or long-term loans and make relatively lower interest payments to the depositors to provide their funds for use by the bank. By honoring the demand of time, banks are using various types of credit products. In this way, the risk associated with using paper currency or metallic coins is properly managed.