INDEX

S.NO. PARTICULARS PAGE NO.

1. Introduction and Meaning of Bank 1-3

Origin of the word ‘Bank’ 3-6

2.

3. Characteristics of Indian Banking System 6-7

Functions of Commercial Banks- Primary Functions 7-9

4.

5. Modes of Short Term Financial Assistance 9

6. Functions of Commercial Banks- Secondary Functions 10

7. Agency Functions and General Utility Functions 10-11

8. Conclusion 12
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INTRODUCTION
Meaning
A bank is an institution, usually incorporated with power to issue its promissory
notes intended to circulate as money (known as bank notes); or to receive the
money of others on general deposit, to form a joint fund that shall be used by the
institution, for its own benefit, for one or more of the purposes of making temporary
loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin,
bullion, credits, and the remission of money; or with both these powers, and with
the privileges, in addition to these basic powers, of receiving special deposits and
making collections for the holders of negotiable paper, if the institution sees fit to
engage in such business.

Banking in the modern sense of the word can be traced to medieval and early
Renaissance Italy, to the rich cities in the north like Florence, Lucca, Siena, Venice
and Genoa. The Bardi and Peruzzi families dominated banking in 14th century
Florence, establishing branches in many other parts of Europe. One of the most
famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in
1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St.
George), was founded in 1407 at Genoa, Italy.

In ancient India there is evidence of loans from the Vedic period (beginning 1750
BC). Later during the Maurya dynasty (321 to 185 BC), an instrument called adesha
was in use, which was an order on a banker desiring him to pay the money of the
note to a third person, which corresponds to the definition of a bill of exchange as
we understand it today. During the Buddhist period, there was considerable use of
these instruments. Merchants in large towns gave letters of credit to one another.
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The definition of a bank varies from country to country. Under English common law,
a banker is defined as a person who carries on the business of banking, which is
specified as:

 conducting current accounts for his customers,

 paying cheques drawn on him/her, and
 collecting cheques for his/her customers.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the
law in relation to negotiable instruments, including cheques, and this Act contains a
statutory definition of the term banker: banker includes a body of persons, whether
incorporated or not, who carry on the business of banking'. Although this definition
seems circular, it is actually functional, because it ensures that the legal basis for
bank transactions such as cheques does not depend on how the bank is organized
or regulated.

The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in mind that they
are defining the business of banking for the purposes of the legislation, and not
necessarily in general. In particular, most of the definitions are from legislation that
has the purposes of entry regulating and supervising banks rather than regulating
the actual business of banking. However, in many cases the statutory definition
closely mirrors the common law one.

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit,
direct debit and internet banking, the cheque has lost its primacy in most banking
systems as a payment instrument. This has led legal theorists to suggest that the
cheque based definition should be broadened to include financial institutions that
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conduct current accounts for customers and Notes enable customers to pay and be
paid by third parties, even if they do not pay and collect checks.

H.L. Henry defined a banker as, “One who in the ordinary course of business honours
cheques drawn upon by persons from and for whom he received money on current
account”. This definition is very restrictive in the sense that any person or institution
engaged in the business of attracting deposits may be called as bank.

Kinley’s definition, “A bank is an establishment which makes to individuals such

advance of money as may be required and safely made and to which individuals
entrust money when not required by them for use”.

The definition of R.S. Sayers, however, reveals the true character of a modern bank.
In his words, “Banks are institution whose debts usually referred to as bank deposits
are commonly accepted in final settlement of other people’s debts”.

Under British Law, “A banker is one who in the ordinary course of his business,
honours cheques drawn upon him by persons from and for whom he receives money
on current accounts”. (Dr. Herbert L. Hart)

Under Indian law, Banking Regulation Act of India, 1949, “Accepting, for the purpose
of lending or investment, of deposits of money from the public, repayable on
demand or otherwise and withdrawal by cheque, draft and order or otherwise”
(Section 5b)

Origin of the Word ‘Bank’

The name bank is derived from the Italian word banco “desk/bench”, used during
the Renaissance by Florentine’s bankers. These bankers used to make their
transactions above a desk covered by a green tablecloth.
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There are traces of banking activity even in ancient times. In fact, the word traces
its origins back to the ancient Roman Empire, where moneylenders would set up
their stalls in the middle of enclosed courtyards called macella on a long bench called
a bancu. It is from here that the words banco and bank are derived.

As a money changer, the merchant at the banco did not invest much money but
merely converted the foreign currency into the only legal tender in Rome that is the
Imperial Mint.

In simple terms, a bank is an institution that accepts various types of deposits and
then advances money in form of loans to people requiring it.

Money and credit provide the pivot (axle) around which all the economic activities
revolve. Banks are institutions, which accept deposits and use these funds to grant
loans. Banks collect the surplus funds of millions of individual savers who are widely
scattered. The money so collected is channelised to the investors i.e. people asking
for loans for further investment purposes.

Banks help in money growth and capital formation. They are reservoirs of resources
for economic growth and development of the nation. They help in building the
infrastructure, boosting the agriculture, setting up industries and aid to global trade.
Thus, a bank, by discharging its functions effectively enhances the productive and
industrious capacity of the nation and boosts the pace of growth. Banks are the heart
of the financial system.

Financial sector reforms were initiated in India in early 90s with a view to improving
efficiency in the process of financial intermediation; these reforms have facilitated
greater choice for consumers, who have become more discerning and demanding,
compelling banks to offer a broader range of products through diverse distribution
channels. The traditional face of banks as mere financial intermediaries has since
altered and risk management has emerged as their defining attribute. The Indian
financial system is identified with two set of institutions viz. regulators and
intermediaries. Regulatory Institutions are statutory bodies assigned with the job of
monitoring and controlling different segments of the Indian Financial System (IFS).
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These institutions are given adequate powers through the vehicle of their respective
Acts to enable them to supervise the segments assigned to them.

It is the job of the regulator to ensure that the players in the segment work within
recognized business parameters maintain sufficient level of disclosure and
transparency of operations and do not act against the national interests. At present,
there are two regulators directly connected to Indian financial system. They are
Reserve Bank of India and Security and Exchange Board of India. Intermediary
financial institutions include banking and non banking financial institutions. The
banking financial institutions participate in the economy’s payments mechanism,
i.e., they provide transaction services, their deposit liabilities constitute a major part
of the national money supply, and they can, as a whole, create deposits or credit,
which is money. Banks, subject to legal reserve requirements, can advance credit by
creating claims against themselves. Other financial institutions can lend only out of
resources put at their disposal by the savers.

Conventionally, they raised their resources in the form of bonds subscribed by RBI,
Public Sector Enterprises, Banks and others. With the drying up of concessional long-
term operations funds from the Reserve Bank in the early 1990s, financial
institutions have increasingly raised resources at the short end of the deposit
market.

This segment broadly consists of commercial banks and cooperative banks. Non-
banking Financial Institutions carry out financing activities but their resources are
not directly obtained from the savers as debt. Instead, these Institutions mobilize
the public savings for rendering other financial services including investment. All
such institutions are financial intermediaries and when they lend, they are known as
Non-banking Financial Intermediaries (NBFIs) or investment institutions.

Apart from these NBFIs, another part of Indian financial system consists of a large
number of privately owned, decentralized, and relatively small-sized financial
intermediaries. Most work in different, miniscule niches and make the market more
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broad-based and competitive. While some of them restrict themselves to fund-

based business, many others provide financial services of various types. The entities
of the former type are termed as “Non-bank Financial Companies (NBFCs)”. The
latter type is called “Non-bank Financial Services Companies (NBFSCs)”.

The commercial banking structure in India consists of two major set of players
scheduled commercial banks and unscheduled banks. The scheduled commercial
banks constitute those banks which have been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this
schedule which satisfy the criteria laid down vide section 42 (60) of the Act. This sub
sector broadly consists of private sector banks, foreign banks. The banking sector is
dominated by Scheduled Commercial Banks (SCBs).

Characteristics of Indian Banking System

From the meaning and nature of banks mentioned in earlier section, the
characteristics/features of a bank may be listed as follows:

1. Dealing in Money: Bank is a business activity which deals with other people’s
money i.e. getting money from depositors and lending the same to borrowers.

2. Banking Business: A bank is a financial institution which does banking activities of

selling financial services like home loans, business loans, lockers, fixed deposit etc.
In order to enable people to confirm that it is a bank and is dealing in money, for
easy identification, a bank should add the word “bank” as its last name.

3. Acceptance of Deposit: A bank accepts money from the people in the form of
deposits where there is an obligation to refund deposits on demand or after the
expiry of a fixed tenure as they feel it is a safest place to deposit money.

4. Lending Money: A bank provides advance money in the form of loans to needy
persons for promotion & development of business, purchase of home, car etc.
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5. Easy Payment and Withdrawal Facility: Payment & Withdrawal of money can be
made through issuance of cheques & drafts, ATM, Online Fund Transfer without
the need for carrying money in hand. A bank provides easy payment and
withdrawal facility to its customers in the form of cheques, drafts, ATM’s and ETF.

6. Motive of Profit with Service Orientation: A Bank has a motive of employing funds
received as deposits from the public in a profitable manner with service oriented
approach.

7. Linking Bridge: Banks collect money from those who have surplus money and give
the same to those who are in need of money. It acts as a trust/custodian of funds of
its customers.

8. Ever increasing Functions: Banking is an evolutionary concept. There is

continuous expansion and diversification as regards the functions, services and
activities of a bank.

9. Banking Business: A bank’s main activity should be to do business of banking

which should not be subsidiary to any other business.

10. Name Identity: A bank should always add the word “bank” to its name to enable
people to know that it is a bank and that it is dealing in money.

Functions of Commercial Banks

The functions of commercial banks are divided into two categories:

(i) Primary functions, and

(ii) Secondary functions including agency functions.

(i.) Primary Functions

The primary functions of a commercial bank include:
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(a) Accepting deposits; and

(b) Granting loans and advances;

(a) Accepting Deposits: The most important activity of a commercial bank is to

mobilize deposits from the public. People who have surplus income and savings find
it convenient to deposit the amounts with banks. Depending upon the nature of
deposits, funds deposited with bank also earn interest. Thus, deposits with the bank
grow along with the interest earned. Example: If the rate of interest is higher, public
are motivated to deposit more funds with the bank. There is also safety of funds
deposited with the bank.

(b) Grant of Loans and Advances: The second important function of a commercial
bank is to grant loans and advances. Such loans and advances are given to members
of the public and to the business community at a higher rate of interest than allowed
by banks on various deposit accounts. The rate of interest charged on loans and
advances varies depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits and the rate
charged on the loans is the main source of a bank’s income.

(i) Loans: A loan is granted for a specific time period. Generally,

commercial banks grant short-term loans. But term loans, that is, loan for more than
a year, may also be granted. The borrower may withdraw the entire amount in lump-
sum or in installments. However, interest is charged on the full amount of loan.
Loans are generally granted against the security of certain assets. A loan may be
repaid either in lump-sum or in installments.

(ii) Advances: An advance is a credit facility provided by the bank to its customers.
It differs from loan in the sense that loans may be granted for longer period, but
advances are normally granted for a short period of time. Further, the purpose of
Notes granting advances is to meet the day to day requirements of business. The
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rate of interest charged on advances varies from bank to bank. Interest is charged
only on the amount withdrawn and not on the sanctioned amount.

MODES OF SHORT TERM FINANCIAL ASSISTANCE

Banks grant short-term financial assistance by way of cash credit, overdraft and bill
discounting.

i) Cash Credit: Cash credit is an arrangement whereby the bank allows the borrower
to draw amounts upto a specified limit. The amount is credited to the account of the
customer. The customer can withdraw this amount as and when he requires.
Interest is charged on the amount actually withdrawn. Cash credit is granted as per
agreed terms and conditions with the customers.

ii) Overdraft: Overdraft is also a credit facility granted by bank. A customer who has a
current account with the bank is allowed to withdraw more than the amount of
credit balance in his account. It is a temporary arrangement. Overdraft facility with
a specified limit is allowed either on the security of assets, or on personal security,
or both.

iii) Discounting of Bills: Banks provide short-term finance by discounting bills that is,
making payment of the amount before( the due date of the bills after deducting a
certain rate of discount. The party gets the funds without waiting for the date of
maturity of the bills. In case any bill is dishonoured on the due date, the bank can
recover the amount from the customer.
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Secondary Functions

Besides the primary functions of accepting deposits and lending money, banks
perform a number of other functions which are called secondary functions. These
are as follows:

(a) Issuing letters of credit, travellers’ cheques, circular notes etc;

(b) Undertaking safe custody of valuables, important documents, and securities by

providing safe deposit vaults or lockers;

(c) Providing customers with facilities of foreign exchange;

(d) Transferring money from one place to another; and from one branch to another
branch of the bank;

(e) Standing guarantee on behalf of its customers, for making payments for purchase
of goods, machinery, vehicles etc;

(f) Collecting and supplying business information;

(g) Issuing demand drafts and pay orders; and

(h) Providing reports on the credit worthiness of customers.

Agency Functions and General Utility Functions

You have already learnt that the primary activities of commercial banks include
acceptance of deposits from the public and lending money to businessmen and
other members of society. Besides these two main activities, commercial banks also
render a number of ancillary services. These services supplement the main activities
of the banks. They are essentially non-banking in nature and broadly fall under two
categories:

1. Agency services, and

2. General Utility Services
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1. Agency Services: Agency services are those services which are rendered by
commercial Notes banks as agents of their customers. They include:

(a) Collection and payment of cheques and bills on behalf of the customers;

(b) Collection of dividends, interest and rent, etc. on behalf of customers, if so

instructed by them;

(c) Purchase and sale of shares and securities on behalf of customers;

(d) Payment of rent, interest, insurance premium, subscriptions etc. on behalf of

customers, if so instructed;

(e) Acting as a trustee or executor;

(f) Acting as agents or correspondents on behalf of customers for other banks and
financial institutions at home and abroad.

2. General Utility Services: General utility services are those services which are
rendered by commercial banks not only to the customers but also to the general
public. These are available to the public on payment of a fee or charge. They include:

(a) Issuing letters of credit and travellers’ cheques;

(b) Underwriting of shares, debentures, etc.;

(c) Safe-keeping of valuables in safe deposit locker;

(d) Underwriting loans floated by government and public bodies;

(e) Supplying trade information and statistical customers;

(f) Acting as a referee regarding the financial status;

(g) Undertaking foreign exchange business.

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CONCLUSION
Therefore we can say that, A Bank is a financial institution that provides banking and
other financial services to their customers. It is an institution which provides
fundamental banking services such as accepting deposits and providing loans. Banks
are a subset of the financial services industry. In every country, bank represents main
pillar of financial stability. Beside financial intermediaries, banks play an important
role as national financial institutions in everyday life.

Today banks deal with differnet personality, different consumer behavior, manners
and cultures. Bank deal with different types of customers who have different
opportunities, financial capabilities, personalities, egos, social characters, different
tastes and by any other aspects thy are absolutely different from one to another.

Banks are important institutions in any country. They are Financial Pillar of any
country. They help in circulation of money, along with providing safe deposit
facilities to citizens. They also provide loan to its customers, which is one of the
necessity for development. No country can sustain without having proper Banks.