A bank is a financial institution that primarily accept deposits and lend money in the form of loans and other credit services. It can be simply defined as an institution accepting deposits, providing loans, paying checks and offering multiple financial services. It works like financial intermediary for safeguarding, exchanging, transferring and lending of money. The primary role played by banks is connecting the people with excess funds such as investor and depositors with those seeking funds like firms needing loan or individuals. A Bank is a connection in between customers with capital deficits and customers with capital surplus. The overall funds received by banks as deposits are channelled into lending activities either directly in the form of loans or indirectly through capital markets.
Bank is also a business but unlike other businesses, banks do not manufacture any goods or extract natural resources from earth. They sell financial product and services such as credit card services, business loan, car loan, home loan, certificates of deposit, checking accounts and individual retirement accounts. Banking institutions play an efficient role in smooth functioning of economy and financial system of country, as they channelize the idly lying funds to borrowers with productive investment opportunities.
Types of Banks
Various type of Banks is as discussed below: –
Central bank is the apex banking body of country that regulates and take care of all bank mechanisms within it. It is one monitoring and controlling all other banks operating in the country. Every country has a central bank and in India, it is Reserve Bank of India (RBI). It serves as a bank for government in many situations, manages the monetary policy, and guides other bank and financial institutions. In addition to all this, it also issues currency and take care of all financial affairs and system in country.
The commercial banks are the banks established under Banking Companies Act, 1956 operating in both rural as well as urban areas. These banks perform the function for public of accepting deposit and extending loans. The loans provided by bank served as their investments intended to earn profits. Commercial banks are of three types: Public sector banks, Private sector banks and Foreign banks. These banks mainly serve the motive of receiving deposits, granting credit and financing the trade of country. Examples of commercial banks operating in India are State Bank of India, HDFC Bank, United Bank of India, ICICI Bank, Canara Bank etc.
Cooperative banks are the one organized under state government act, and offers short-term credit to agriculture sector and other allied activities. The main aim of these banks is promotion of social welfare via providing subsidized loans. In India, the cooperative banks are established under State Cooperative Societies Act, granting easy credit to the members of cooperative banks. These banks are organized into 3 tier structure: Tier 1 (State Level)- State Cooperative Banks (regulated by RBI, State Govt, NABARD), Tier 2 (District Level)- District/Central Cooperative Banks, and Tier 3 (Village Level)- Primary Agriculture Cooperative Banks. Various cooperative banks operating in India are: Ahmedabad Mercantile Cooperative Bank, New India Cooperative Bank Limited etc.
Specialized banks are the banks that are established for special purposes. These banks came into existence with specific target of serving the particular sector or industry. Specialized banks may focus on export-import or offer financial services to some special industries. Few examples under specialized banks are: SIDBI (Small Industrial Development Bank of India) provide loans to small-scale businesses, NABARD (National Bank for Agricultural and Rural Development) offer financial support for rural, village and agricultural development, and EXIM (Export and Import Bank) Bank provide loans to foreign countries importing or exporting goods.
Regional Rural Bank
Regional Rural Banks are unique type of commercial bank lending credit facilities to agriculture and rural economy at concessional rates. These banks are founded in 1975 and regulated by Regional Rural Bank Act, 1976. Regional rural banks are also known as RRB’s and are join venture in between Central government, State government and Commercial Banks. They mainly operate to offer banking facilities for peoples belonging to rural population. Some examples of RRB are Bihar Gramin Bank in Bihar under UCO bank’s sponsorship, Andhra Pragathi Grameena Bank in Andhra Pradesh under the sponsorship of Syndicate Bank, etc.
Industrial Banks are bank advancing loans to industrial undertakings for long period of time. Big industries need capital for longer period in order to buy heavy machinery and equipments. Industrial bank offers this type of Mock capital. These banks have large amount of capital of their own and receives deposits for longer periods, therefore are in a well-position to advance long-term loans. In India, there are few industrial banks. The central government established Industrial Finance Corporation of India in 1948, and its activities since then have greatly enlarged. States have also set up State Financial corporations for the development of industrial enterprises.
Roles performed by Banks
The roles performed by banks are well-discussed in points given below:
Banks play an effective role in capital formation that is very crucial for the economic development of country. They mobilize the small savings of large number of peoples through their branches all over the country and made it available for productive purposes. The idle lying savings of individual are injected into economy for various development projects.
Creation of Credit
The commercial banks create credit to offer more and more funds for development projects across the country. With the help of their function of offering loan and advances, banks are able to create credit that results in increased production, sales and prices, employment, and thereby leads to faster economic development.
Regulation of monetary supply
Financial institutions like Central bank manages the supply of money in economy in order to maintain stability and control inflation. Central Bank adopts various measures for regulating the liquidity in economy such as increasing or decreasing repo rate, buying and selling government securities, cash reserve ratio and open market operations, etc. The availability of right amount of liquidity within the economy ensures smooth functioning leading to long-term growth and development.
Channelizing funds to productive investments
Banks do not serve only the purpose of capital formation but also channelizes the funds towards productive investments. The small savings of people that banks receive as deposits are lend in the form of loans and credit for productive purposes. The pooled savings of public should be distributed among varied sectors of economy in order to enhance the productivity of nation.
Finance to Government
The banks provide finance to both central as well as state government in multiple scenarios. Government is acting like a promoter of industries in developing and underdeveloped nations for which large amount of funds are needed. Banking institutions provide long-term credit to government via putting their funds into government securities and short-term finance services through buying treasury bills.
The main activity of banks is to carry out banking business that should not be subsidiary to any other business. Financial institutions like commercial banks assist their customers via offering them saving and deposit services. In addition to this, they too offer credit facilities such as bank overdraft services to their customers to cater their need for short-term funds. Various type of loans like home loans, education loan, personal loans and car loans are too offered by commercial banks to their customers.
Banks provide distinct type of insurance services to their customers that leads to mobilization of savings and investment towards productive activities. They provide shield against different types of losses and casualties to investors, in return for a premium charged on regular basis. The banks with the help of different insurance schemes assure investors against their life or any particular asset at time of need. In simple words, it can be said that they transfer the risk of loss of their customers to themselves.
Bankers as Employers
They serve as big employer providing jobs to large number of peoples at their multiple branches across the country. Banking industry has grown to larger extend after the nationalization of big banks. The branches are now opened in every town and villages that ultimately results in creation of large employment opportunities. Additionally, banks are also improving people via training and educating for occupying varied post at their offices.
Encouraging right type of Industries
The banks encourage the development of right type of industries in country. They do proper evaluation of business for identifying their activities, prior to advancing any loan or credit facilities. This way loans are given to right type of persons and the one involved in unethical or wrong practices are not provided any credit services. In this manner, they contribute a lot in rapid industrialization and economic development of country.