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Meaning of Banking
Banking is a business activity which involves accepting money from public in the form of deposits and lending it as loans for earning profit. Banking institutions mainly serves the purpose of safeguarding people’s money or fulfilling their fund requirements by providing them loan facilities. These institution pay interest on deposit to savers and charges higher rate of interest from borrowers.
Difference between these two rates of interest is the bank profit. Apart from accepting and lending money, banks also provide many other services such as lockers, ATM services, online fund transfers, cheque payments, foreign currency exchange, issuing debit/credit cards etc. Banks accept deposits from public under different categories of accounts like saving account, current account, fixed deposit and recurring deposit account.
In the same way, these institutions lend money to public as overdraft facility, personal loan, business loan and mortgaged loan. Banking institutions play a key role in economic development of country as it is ensures liquidity of funds by movement of funds among people.
Objectives of Banking
Safeguard Deposits
Bank serves the main purpose of accepting deposits from public and safeguarding it. It guarantees the safety of funds to customers for depositing their money in their accounts.
Provide Loans
It advances loan to customers at both short-term and long-term basis as per their needs. Bank provides loans out of the deposit that they receive and charges interest on the amount from customers.
Encourage Savings
Banking institutions have an efficient role in encouraging saving habits among people. It motivates people for saving and depositing their earnings in bank accounts by paying them a fixed rate of interest on their deposited amount regularly.
Capital Formation
Banking accelerates the capital formation rate within the country. It extends credit to various sectors of the economy from time to time which helps in uninterrupted continuation of all growth and development activities. Different industries and businesses approach banks for fulfilling their financial needs.
Currency Issue
Banking organizations does the purpose of issuing currency which is served as a legal tender in country. Central bank of our country (i.e. RBI) prints and issues all currency notes for the public.
Enhances Living Standards
It assists the people in improving their quality of life by providing them credit. Bank enables customers in purchasing high quality and costly goods on credit basis or hire purchase system.
Generates Employment
Banking organizations also helps in generating large employment opportunities within the country. It helps companies in extending their activities by providing them credit as per their needs. This will result in increase in human resource requirement for various positions. In addition to this, a large section of economy is working within the banking sector.
Importance of Banking
Bring Economic Stability
Banking sector plays a crucial role in attaining the economic stability. They are the one who assists in controlling the depression and inflation phases. During depression, banks adopt cheap money policy and increase the flow of money in economy. Whereas at the time of inflation, it follows strict money policy to decrease the flow of money. It increases the interest rate on borrowings to control the people’s spending during inflation.
Creates Money
Banks generates money in an economy by advancing loans to all those who are in need of funds. It is one which grants credit out of the money collected by it from public. These institutions aim at maintaining sufficient flow of funds.
Facilitates Trade
It helps in doing both internal and external trade. Banks enable merchants in conducting trade by provide them proper payment facility, issuing letter of credit, discounting bill of exchange and providing them other guarantee documents.
Money Transfer
It enables people to transfer their funds rapidly even to far distant places. It has facilitated the payment system by providing various instruments such as draft, cheque and bill of exchange. Payment done via these instruments is more safe and convenient instead of paying in cash.
Transfer Savings Into Investment
Banking serve as the medium of transferring money from those who have excess of it to those who are in need of it. It collects people savings and provides loan out of these savings to entrepreneurs and companies for their expansion programs. Bank converts the people’s ideal lying funds into productive means.
Ensures Liquidity
Maintaining a proper liquidity in the economy is another important role played by banks. Banks regulate the money flows by adopting an efficient monetary policy. During inflation it decreases the money supply whereas at the time of deflation it increases the flow of money.
