After reading this article you will learn about:- 1. Origin and Development of Bank 2. Meaning and Definition of Bank 3. Classification 4. Functions 5. Advantages or Importance.

Origin and Development of Bank:

There is no unanimity of opinions about the origin of the word ‘Bank’. According to some monetary experts, the word ‘Bank’ is derived from ‘Banco’. ‘Bancus’, ‘Banque’ or ‘Banc’ all of which mean a bench upon which the early money­lenders used to display their coins and transact business across the bench in the market place. Banks in past used to be known as seths, shroffs, goldsmiths, etc.

Banks are indispensable in every walk of life. Banks are the nerve centre of trade, commerce and business of an economy. Banking plays a very important role in the economic development of all the nations of the world. In fact, banking is the life-blood of commerce.

Meaning and Definition of Bank:

A bank as understood in the present day world in simple language is an institution which deals in money. Broadly speaking, banks draw surplus money from the persons who are not using it at the time and lend to those who are in a position to use it for productive purposes.


The important definitions of ‘Bank’ are given below:

1. According to Prof. Sayers – “Bank is an institution whose debts (bank deposits) are widely accepted in settlement of other people’s debts to each other.”

2. According to Dr. H.L. Hart, “A bank is one cho, in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money.”

3. According to Findlay Shiras, “Bank is as a person, firm or company having a place of business where credits are opened by the deposit or collection of money or currency subject to be paid or remitted upon drafts, cheques or orders or where money is advanced or loaned or stocks, bonds, bullion and bills of exchange and promissory notes are received for discount and sale.”


4. According to Crowther, “A banker is a dealer in debts, his own and of others.”

5. According to Kinley, “Bank is an establishment which makes to individuals such advances of money or other means of payment as may be required and safely made and to which individuals entrust money or means of payment when not required by them for use.”

6. According to Banking Regulation Act, 1949, “The word banking as “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and with draw able by cheque, draft, order or otherwise.”

From the above definitions of bank we come to the conclusion that bank is an institution which deals in cash and credit.

Classification of Banks:

Commercial banks are the most important type of these institutions. Besides the commercial banks there are central bank, industrial banks, co-operative banks, etc. These different institutions conduct their operations in a different manner.


The banking institutions can be classified into following types on the basis of their functions:

1. Commercial Banks:

These are the most common and important type of banking institution. A commercial bank is a monetary institution which serves the interest of its depositors by providing with security vaults for the surplus resources and, on the other hand, makes profits by investing its resources in the productive measures by extending loans.

Commercial banks may be owned by the government or they may be run in the private sector. For instance, 20 major commercial banks are nationalised in India. The other private sector banks are organised on the lines of a Joint Stock Company. Commercial banks are therefore dealers in loanable funds of the community.

2. Industrial Banks:


These banks have come up for the promotion of new industrial concerns. Industrial banks or investment banks provide medium and long-term loans and also supply fixed capital to the industrial concerns by subscribing to the shares and debentures of the industrial enterprises. Indian Finance Corporation and Investment Corporation of India are the examples of industrial banks in India.

3. Exchange Banks:

Exchange banks are those banks which deal in foreign exchange, that is, to convert the rupee into foreign currencies and vice versa. Dealings in foreign exchange are also handled by the commercial banks. In our country, dealings in foreign exchange are conducted by the foreign exchange banks as well as Indian commercial banks.

4. Co-Operative Banks:

Co-operative banks have been set up to meet the requirements of very poor farmers and small scale industrial concerns.

These banks are classified in two groups, such as:


(i) Central Co-Operative Banks:

Members of these banks can be individual or the societies. These banks can get capital resources from their shares, from public deposits and also get loans from the State Co-operative Banks.

(ii) State Co-Operative Banks:

These banks are also called ‘apex banks’. Their area of operation extends over a state. These banks get short and medium- term loans from the Reserve Bank of India. The co-operative banks play a very useful role in agriculture credit.

5. Land Mortgage Banks:


These banks provide long-term credit to farmers and agriculturists against the security of their land. The loan is extended for the purchase of tools, implements, equipments and for financing permanent improvements with a view to increase yield from land. These banks raise their resources in the form of shares and by issuing of long-term debentures.

6. Central Bank:

At present there in no country in the world, which has not set up a Central Bank of its own. A Central Bank is so-called because it occupies a central position in the monetary and banking system of a country and is the highest financial authority. It is the apex bank and the statutory institution in the money market of a country.

In India, it is named Reserve Bank of India. The main function of this bank is to regulate and supervise the whole banking system. It is banker’s bank and controller of credit in the country. Now a day’s Central Bank in every country has been given the sole right of note-issue. It is a lender of last resort and custodian of foreign balances of the country.

According to Prof. Dudly Johnson, “A Central Bank is an institution charged with the responsibility of regulating the supply and cost of money in the interests of the general public.”

7. Saving Banks:


These institutions have been set up to promote the savings of the middle income group of the society. In our country, postal saving banks arc a good example of such banks. These banks collect the small savings of the public and operate savings accounts. Savings accounts are also operated by the Indian commercial banks.

8. Indigenous Banks:

These banks have been called by different nams in different parts of the country, such as, seths, shroffs, mahajans, sahukars, chettis, etc. The indigenous bankers generally lend money and finance the internal trade of our country. The rate of interest is comparatively higher.

9. Regional Rural Banks:

Rural banks, meant for the development of rural economies, have been established by the Central Government at the request of commercial banks who have sponsored such proposal and are called the Sponsor Banks. Each rural bank will have an authorised capital of Rs. 1 crore and issued and paid-up capital of Rs. 25 lakhs. These banks grant loan to small farmers, small entrepreneurs and agricultural labourers.

Functions of a Bank:

The functions/services of a bank may be categorised in the following heads:

1. To Receive Deposits:

To receive money from the public is an important function of a bank. There are many people who have surplus funds but cannot use their funds profitably or ideally. They deposit these surplus funds with the bank.

Deposits are received by the banks in the following three forms:


(i) Fixed Deposits:

Fixed deposits are known as Time Deposits. Under fixed deposits money is deposited for a fixed period and cannot be withdrawn before the expiry of the time as decided by the customer. These deposits fetch comparatively higher rate of interest.

(ii) Current Deposits:

These are mainly concerned with businessmen who have to visit the bank every now and then for the purposes of money transactions. Current deposits can be withdrawn any time by any amount. Generally no interest is paid on such deposits.

(iii) Saving Bank Deposits:

The main objective of saving deposits is to encourage saving among the persons. The rate of interest on such deposits is 5 percent. Some banks have placed restrictions on the number of withdrawals but others permit free withdrawal policy.

2. To Lend Money:


This is one of the important functions of a bank. It is also the chief source of profit to most of the banks. Banks accept deposits from those who have surplus money and grant loans and advances to those who need them. Banks charge comparatively higher rate of interest on the amount advanced as a loan.

Loans are advanced by the bank in the following forms:

(i) Cash-Credits:

Banks may advance cash-credits. This system of granting cash-credits is very popular in Scotland. According to H.D. Macleod, “Cash-credit is to Scotland what the river Nile is to Egypt, a fertilizer.” Cash-credits in India are not given against the personal security of the borrower. On the other hand, cash- credits are based on the promissory notes of the borrowers backed by the collaterals like shares, stocks, bonds or goods.

(ii) Overdrafts:

It is a temporary help being extended by the banks. ‘Overdraft’ means giving money in excess of the deposits of the depositor. Secured overdrafts are granted against several types of securities. The interest is charged on daily overdrawn balances.


(iii) Loans and Advances:

Banks also advance loans to businessmen, consumers, farmers-, etc. In case of a loan, a specified amount is sanctioned by the bank to the customer. The borrower is required to pay interest on the entire amount of loan from the date of sanction.

(iv) Discounting of Bills and Hundies:

The bank may also lend by discounting bill of exchange. Discounting a bill of exchange amount to the advancing of a loan against a promise to pay in future. This is the most popular method of lending by the commercial banks as the loans are self-liquidating.

3. Agency Functions:

Apart from lending and investing activities, the banks perform a number of useful services for their customers. In doing so, banks act as agents to their customers.

These services include the following:


(i) The banks remit funds on behalf of their clients, by mail transfer or drafts.

(ii) The banks also collect and pay the cheques, bills, promissory notes, dividend warrants, subscriptions, rents, insurance premium and other periodical receipts and payments of their clients.

(iii) Banks also sell and purchase shares, stock, debentures and bonds etc. on behalf of their customers.

(iv) Commercial banks also act as executors, trustees and attorneys for their customers.

(v) Banks also help their customers to get refund of income-tax, if any.

4. Other Functions:

In addition to the above functions being performed by commercial banks, a large number of other functions called ‘miscellaneous services’ are also being rendered by these banks.


They are:

(i) Issuing of letters of credit to their customers to help and enable them to go abroad.

(ii) Receiving the valuables, ornaments, jewels and documents of their customers.

(iii) Issuing of bank drafts and traveller’s cheques in order to facilitate the transfer of funds from one part of the country to the other.

(iv) The commercial banks also do the underwriting business.

(v) The banks also collect statistical information pertaining to trade, commerce and industry.

(vi) Furnishing guarantees on behalf of customers.

Advantages or Importance of a Bank:

Banks are the nerve centre of trade, commerce and business in a country. Banking is the life-blood of modern commerce. Banking plays a very important role in the economic development of all the nations of the world. There are a large number of banks which are working in all types of economic systems in the world. Banks are beneficial for all.

The main advantages of banks are as follows:

1. To Cultivate Habit of Saving:

Banks cultivate the habit of savings in the public. Savings in the bank on the one hand are safe and on the other hand earn interest for its depositors are prompted to save and deposit in their bank accounts. This is the main advantage of a bank.

2. Safety:

There is always a risk in keeping cash with one’s own self. The money with the bank remains in safe custody. Every businessman likes to keep money with the bank to avoid the risk.

3. Facility in Making Payments:

It is also an important function of a bank. Payments are greatly facilitated through cheques which is always convenient and safe and avoids disputes. There is no need of counting money, when payment is made by means of cheques.

4. Collection of Cheques, etc.:

Banks also collect the amount of cheques, drafts, bills of exchange, etc. on behalf of their customers.

5. Securing Loans and Overdrafts:

Banks grant loans and credit facilities to the people. In this way, banks help merchants and traders. Banks also allow overdraft facilities to their customers. Under overdraft facilities the bank allows its customers to over-draw his current account upto an agreed limit.

6. To Provide Credit Information and Letter of Credit:

Banks provide information relating to the creditworthiness of their customers. Whenever anybody wants to know the financial position of a business, he is referred to its banker, who supplies him the detailed information. Banks also issue letters of credit to their customers to help and enable them to go abroad.

7. Safety of Valuable Articles:

Valuables, jewels, ornaments, documents, deeds, etc. can be put in the bank for safe custody. Banks provide lockers to their customers to store these valuable articles.

8. Representation and Correspondence:

Many a time banks procure passports, tickets for their customers and act as their representatives. Banks also make correspondence on behalf of their customers.

9. Sale and Purchase of Securities:

Banks also sell and purchase shares, stocks, debentures and bonds etc. on behalf of their customers.

10. Other Services:

In addition to the above mentioned services banks also provide various other services to their customers, such as-collection and payment of dividends, bills etc., remittance of funds, payment of insurance premium, travellers’ cheques, etc.