This article on fundamentals of banking domain is the first article of the three-part Banking domain knowledge series. In this article, we explain the following topics:
- The Banking System
- Functions of Banking
- Evolution of Indian banking system
The next two in this series will explain the concepts of Retail and Corporate banking. You can view the article on retail banking.
What is a Bank and Banking System?
A Bank is a lawful and regulated financial institution that provides deposit services, keeps the safety of deposits, and allows withdrawals when needed. These services are offered to general public individuals or small businesses to big organizations.
Investor with a surplus can deposit their money with the Bank to earn interest and keep money safe which can be withdrawn when there is a need. Other side, individual or firms looking for funds to fulfill their immediate need and get loans from banks by paying reasonable interest rates. This provides liquidity to money which is a key factor for the economic development of a country.
Banking System
When a group of banks and financial institutions collectively provide financial services to the general public, firms, or a country is termed as a banking system. The banking system provides a common channel for proving and maintaining a payment system, offering lending, accepting deposits, and providing other investment services.
Functions of Banking
Banks play an important role in a Country, its People, and for its Industries to grow. Bank plays a variety of functions and it can be categorized as:
1. Primary Functions – Primary function of the bank is to accept deposits from lenders with surplus and give them to borrowers who need the funds. This maintains the liquidity of money in the market and economy. Banks’ origin was with these 2 primary functions of Deposits and Lending.
- Savings & Deposits – Bank accepts deposits from lenders, safeguards them, pays interest, and allows withdrawing when needed. A variety of products or services are offered in deposits, like savings accounts, current accounts, fixed deposits, and recurring deposit
- Lending – Deposits accepted from borrowers are used to offer loans or other lending services at higher rates of interest which helps borrowers to fulfill their immediate need for managing working capital or expansions. Some of the common examples are loans, cash credit, bill discounting, and overdrafts.
2. Secondary Functions – Commercial banks offer a variety of other services to generate more margins or profits which are also termed as non-banking functions.
- Agency Functions – Bank acts as an agency for its customers and performs functions like fund transfer, managing payables and receivables, portfolio management, and checks collection and clearing
- Utility Functions – Banks also provide a number of utility functions to their customers such as locker facility, demand drafts, reporting, and underwriting
Indian Banking Evolution
The evolution of Banking can be visualizing as for clear understanding:
- First bank in India was established in the 18th century with the name ‘Bank of Hindustan” in Calcutta (currently named Kolkata) in 1770 and was the beginning of the Banking system in India
- In 1786, another bank was established as ‘General Bank of India’ but couldn’t sustain longer and failed in 1791
- The oldest and largest bank which is still in existence is the State Bank of India (SBI). It was established as ‘Bank of Calcutta’ in 1806 and then renamed as Bank of Bengal in 1809
- Later on two more banks Bank of Bombay in 1840 and Bank of Madras in 1843 were established
- All these 3 banks were presidential government banks and later on these were merged as ‘Imperial Bank of India’ in 1921
- In the year 1935, the Reserve Bank of India was established on the recommendation of the Hilton Young Commission
- In 1955, after independence ‘Imperial Bank of India’ was changed to State Bank of India
- In 1969, 14 banks were nationalized in order to focus and the development of lagging sectors such as agriculture, small-scale industries, and exports
- In 1980, 6 more banks were nationalized
- Specialized development banks were set up to support agriculture. NABARD was established in 1982 and EXIM bank in 1982 for export and import.
- In 1991, foreign and private investors were allowed to invest and ICICI, HDFC, Axis Bank, IndusInd Bank, and a few more banks were given banking licenses by RBI
In this post, we explained the fundamentals of banking domain. In the next article, we will discuss the overview of Retail banking. Will be happy to hear your feedback.
Conclusion
In conclusion, the banking industry is more than just a world of numbers and transactions; it is a dynamic ecosystem that is essential to the development of economies and the financial security of individuals. As we examine the foundations of this field, we find an intriguing interaction between technology, law, and human ingenuity. Banking is about more than just money; it’s also about innovation, trust, and pursuing one’s financial goals.
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