Origin of Bank, Meaning and Definition, Features of Banks

Bank is a financial institution that accepts deposits from the public, provides loans, and offers various financial services such as wealth management, investment, and currency exchange. Banks act as intermediaries between savers and borrowers, ensuring the efficient allocation of funds in the economy. They play a crucial role in economic stability and growth by facilitating transactions, offering credit, and managing risks. In India, banks are regulated by the Reserve Bank of India (RBI) to ensure financial stability and protect the interests of depositors. Types of banks include commercial banks, cooperative banks, and specialized institutions like development banks.

Definitions:

• According to R.S. Sayers, “Banks are institutions whose debts are commonly accepted in final settlement of other peoples debts.”
• Oxford Dictionary defines a bank as “an establishment for custody of money, which it pays out on customer’s order.”
• 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 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 Cairn Cross, “Bank is an intermediary financial institution which deals in loans and advances.”
• According to W. Hock, “Bank is such an institution which creates money by money only.”

Origin of Bank:

The origin of banking in India traces its roots to ancient times when financial activities were carried out through moneylenders and merchant guilds. During the Vedic period (1500-500 BCE), practices of lending and borrowing were prevalent, and the concept of “srenis” (merchant guilds) emerged. These guilds facilitated trade, and their members acted as bankers by providing loans and credit.

The modern banking system in India, however, evolved during the British colonial period. The first bank established in India was the Bank of Hindustan, founded in 1770 in Calcutta (now Kolkata). Though it failed in 1830, it marked the beginning of formal banking activities. In 1806, the General Bank of India was established, followed by the Bank of Bengal in 1809, which eventually merged into the Imperial Bank of India in 1921 (later known as the State Bank of India).

The pivotal moment in India’s banking history came in 1935 with the founding of the Reserve Bank of India (RBI). The RBI was established as the central banking institution to regulate the monetary and credit system, ensuring economic stability and growth. In post-independence India, the banking sector underwent significant reforms, most notably the nationalization of banks in 1969. This was aimed at making credit more accessible to the rural and underserved populations.

Since then, the Indian banking system has grown and diversified, with the introduction of private sector banks (like HDFC and ICICI), foreign banks, and regional rural banks, all regulated by the RBI, fostering a modern and robust banking ecosystem.

Features of Banks:

1. Accepting Deposits

One of the primary functions of banks is accepting deposits from individuals, businesses, and institutions. Banks offer various types of deposit accounts, such as savings accounts, current accounts, and fixed deposits. These deposits provide a safe place for customers to store their money while earning interest on certain types of accounts, such as savings and fixed deposits. This feature makes banks a trusted institution for safeguarding funds.

2. Providing Loans and Credit

Banks lend money to individuals, businesses, and governments, facilitating investment and consumption. The loan types include personal loans, home loans, education loans, business loans, and agricultural loans. Banks charge interest on these loans, which is a major source of income for them. By lending money, banks stimulate economic growth, enabling the expansion of businesses, homeownership, and personal development.

3. Financial Intermediation

Banks act as intermediaries between savers and borrowers. They pool the savings from individuals who deposit money and then lend it to those who need funds. This process helps in the efficient allocation of resources, fostering economic growth. Banks, by offering a return on deposits and earning interest from loans, create a symbiotic relationship between those who save and those who borrow.

4. Risk Management

Banks help in managing and mitigating various types of financial risks. Through services such as insurance, derivatives, and hedging, banks provide protection to both individuals and businesses from unforeseen risks, such as economic downturns, natural disasters, or market fluctuations. By spreading and diversifying risks, banks contribute to financial stability in the economy.

5. Facilitating Payments

Banks provide a variety of payment services, making it easier for individuals and businesses to transfer funds. This includes cheque services, Electronic Funds Transfers (EFT), Real-Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), and online banking. These payment methods are integral to trade, commerce, and personal financial management, reducing the need for physical cash transactions and promoting a digital economy.

6. Currency Issuance

In India, the Reserve Bank of India (RBI) issues currency notes, but commercial banks play a key role in ensuring the circulation and distribution of currency. Banks provide customers with the required denomination of currency for daily transactions. They also manage the withdrawal and deposit of cash, ensuring an efficient cash flow within the economy.

7. Wealth Management and Investment Services

Banks offer a wide range of wealth management services, including investment advice, portfolio management, and the sale of investment products such as mutual funds, bonds, and fixed deposits. They also provide retirement planning and tax-saving products. These services help customers grow their wealth and plan for the future, offering guidance and access to diverse investment opportunities.

8. Regulation and Security

Banks are regulated by central authorities such as the Reserve Bank of India (RBI) in India, ensuring they maintain financial stability, sound lending practices, and consumer protection. Banks are also required to adhere to strict guidelines related to capital adequacy, liquidity, and risk management. The regulatory framework ensures the security of deposits and minimizes the risk of bank failures.