After reading this article you will learn about:- 1. Meaning of Banks 2. Functions of a Bank 3. Types.

Meaning of Banks:

A bank (German word) means a joint stock fund. A bank denotes a financial institution dealing in money. A bank is an institution that is prepared to accept deposits of money and repay the same on demand. The system of banking is very old and the same was prevalent in Greece, India and Rome.

A banker (i.e., person or a corporation) deals in credit and money i.e. it accepts deposits from those who want to commit their wealth to safety and earn interest thereon, and lends money to the needy through cheques and advances and loans of various sorts.

Functions of a Bank:

A bank performs the following functions:


(a) It accepts deposits from the customers, who can take back their money at will. A saving bank also pays interest to customers on their deposits and is popular with small savers.

Customers can leave their cash with the bank as Saving Account, Current Account or a Fixed Deposit Account.

Customers deposit their money in Saving Bank Account to save a part of their current incomes to meet their future needs and also intend to earn an income from their savings (bank interest). For the depositor, the number of withdrawals over a period of time and the total amount of one or more withdrawals on any date, are however limited.

A Current Account on the other hand is running account which may be operated upon any number of times during a working day. There is no restriction on the number and amount of with-drawls. The bank does not pay any interest; rather it takes incidental charges from the depositor on such accounts in some cases.


In a Fixed Deposit Account, the deposits are made for a fixed period (say 36 months) and a higher rate of interest is paid to the depositor.

(b) A bank lends money to needy people at a certain interest rate. Banks give loan to agriculturists, industrialists and businessman who invest it in their ventures to their own profit and to the economic advancement of the country.

(c) A bank issues notes and creates other inexpensive media of exchange-a note or a cheque. The issue of notes is entrusted to the Reserve Bank of the country.

Credit instruments such a bank note, bank drafts, cheques and letters of credit are created by Banks. These things economise the use of metallic money and make the transmission of money over long distances cheap and convenient.


(d) The deposits may be created by the bank itself by giving loans to its customers, in which case the borrower is credited with a deposit account with draw able when needed. The money borrowed from the bank is usually deposited in the same bank by the borrowers either because the bank insists on it or because of the advantages of current account deposit. Such deposits are known as Credit Deposits.

(e) Other functions of a bank are:

(i) The collection of cheques drawn on other banks.

(ii) The acceptance and collection of bills of exchange.


(iii) Dealing in foreign exchange to assist the settlement of overseas debts.

(iv) Stock Exchange trustee and executor business.

(v) Safe deposit facilities.

(vi) Making standing order payments.


(vii) Supplying change and assisting the central bank/Reserve bank in keeping the note issue in good condition.

Types of Banks:

The Indian Banking System consists of:

(a) The indigenous Banking System.

(b) The Modern Banking System:


(i) Commercial Banks.

(ii) State Bank of India.

(iii) Exchange Banks.

(iv) Central Bank.


(v) The Reserve Bank of India.

(a) The Indigenous Banking System:

The indigenous bankers are usually a family concern.

Their main functions are:

a. To advance loans against ornaments, land etc.

b. To deal in Hundies.

c. To receive deposits.

(b) The Modern Banking System:


(i) Commercial Banks:

Most of the banks in India are Commercial banks, e.g., Punjab National Bank, Allahabad Bank, United Commercial Bank etc. Such banks deal in short-term credit. They collect the surplus balances of the individuals and finance the temporary needs of commercial transactions. A commercial bank borrows money from individuals by accepting deposits on current account saving account, fixed deposits and miscellaneous deposits and then it lends money to Industrialists and Traders.

As a principle, the commercial bank:

(a) Supplies circulation capital rather than fixed capital,

(b) Gives loans for short period only,

(c) Does not involve itself too much with one industry only, because if that industry fails, the bank’s assets may become frozen.


(ii) The State Bank of India:

The Imperial Bank of India established on January 27,1921 was renamed as the State Bank of India on July 1,1955 after passing of the State Bank of India Act, 1955. The State Bank of India has its central office in Bombay and seven local head offices in Calcutta, Madras, Bombay, Delhi, Hyderabad, Kanpur and Ahmedabad.

The main functions of the State Bank of India are:

(i) The bank borrows money from public by accepting deposits.

(ii) It lends money to industrialists, farmers and Traders for short periods.

(iii) It provides financial assistance to importers and exporters.


(iv) It undertakes foreign exchange business.

(v) It collects cheques, drafts, bill of exchange, dividends, interest, salaries and pension on behalf of customers.

(vi) It maintains safe deposit vaults.

(iii) Exchange Banks:

Whereas commercial banks finance the internal trade of the country, the Exchange banks finance its foreign trade. Exchange banks of our country will have their head office located outside India.

The functions of Exchange banks are:


(ii) To supply finance for imports and exports.

(ii) To purchase and discount bills of exchange drawn by Indian exporters and also collect on maturity the proceeds of bills drawn on Indian Importers for goods purchased by them.

(iii) To act as referees, collecting and supplying information about the foreign customers, etc.

A few foreign exchange banks in India are:

(i) The National and Grindlay Bank.

(ii) Lloyds Bank.


(iii) The Mercantile Bank.

If an exporter in Bangalore requires finance to move goods from Bangalore to Bombay port and from there to New York, he may enter into agreement with an exchange bank for financing the movement of his goods.

(iv) Central Banks:

Central Bank of a country is an apex monetary and banking institution that controls the supply of currency in that country. Central bank is entrusted with the duty of regulating the volume of currency and credit in the country. Central bank controls the banking structure of country. Central bank controls and regulates the monetary, banking and credit policies of the country.

Central bank determines the quantum of money which should be circulated in the country. Central bank performs general banking and agency services for the Government. All the banks keep reserves with the Central Bank and banking policies in the country are framed by it. Whereas the object of a commercial bank is to earn profit, a central bank stimulates growth of the country.

Whereas a commercial bank deals with public directly, a central bank deals with commercial banks and other institutions and the government of the country. The central bank is the custodian of the foreign exchange reserves of the country. The central bank controls and regulates credit and currency with a view to stabilize prices in the country. The central bank pumps in more money when the market is short of cash and pumps out money when there is an excess of credit.

(v) The Reserve Bank of India:

Reserve Bank of India was established as the central bank of the country on April 1,1935, though the idea existed since 1836. As the Central bank of the country, the Reserve Bank is the banker to the banks also. The Reserve Bank regulates the entire banking system of the country.

It regulates the issue of bank notes and the keeping of reserves with a view to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage. It has also been given the power to pursue on appropriate credit policy. It has control over the cash reserves of the commercial banks. The Reserve Bank has also been given the power to issue license to the banking companies in the country.

The Reserve Bank is required to remove structural instability of the banking system and to provide leadership to the money market. The Reserve Bank was nationalised with the passing of an act in 1948. The entire share capital of the bank was acquired by the Central Government w.e.f. Jan 1,1949 and the Reserve Bank started functioning as a state-owned and state-controlled institution.

The affairs of Reserve Bank are controlled by the Central Board of Directors consisting of twenty members. There are one Governor, four deputy governors, fourteen Directors and one Govern­ment official nominated by the Central Government.

For performing its function, the Reserve Bank consists of the following departments:

(a) Issue department. It has the sole right of note issue which must be backed by gold and sterling securities to the extent of 40%.

(b) Banking department. It is authorized to accept money on deposit without interest, to purchase, sell and rediscount trade bills and bills against Government securities maturing within 90 days and bills against agricultural crops maturing within 9 months; to purchase and sell to member banks, sterling and to regulate credit in the interest of trade and industry.

(c) Exchange control department. It controls foreign exchange transaction and maintains a stable rate of exchange.

(d) Department of Banking Operations and Development extends banking facilities to semi-urban areas and keeps solving the problems of rural finance.

(e) Industrial Finance Department has been entrusted with all matters pertaining to industrial finance including the activities of state financial corporations.

(f) Research and Statistics Department acts as an agency for the collection and dissemination of financial information and statistics in India and abroad.

(g) Legal Department gives legal advice on various matters referred to it by other departments of the bank.

(h) Departments of Financial Companies regulates the acceptance of deposits by non-banking companies.

(i) Department of Accounts and Expenditure maintains and supervises Reserve Bank’s accounts in the Issue and Banking Department.

(j) Inspection Department carries out periodic internal inspection of different offices and departments of the Reserve Bank.

(k) Department of Administration and Personnel deals with general administration, training of staff and employer-employee relations.

(l) Secretary’s Department deals with policy matters relating to open market operations, floatation of Government loans and treasury bills and the Reserve Bank’s dealings with international financial organisations.