Meaning and Features of Banks, Indian Banking System Notes, B.Com CBCS Pattern

Meaning and Features of Bank
Indian Banking System Notes
B.Com CBCS Pattern

Meaning of Banks and Banking System

Meaning of Banks

A bank is a financial institution which deals in money and credit. It provides fundamental banking services such as accepting deposits and lending loans. As financial intermediaries, a bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increases and it becomes a creditor.

Meaning of Banking System

Banking systems refer to a structural network of institutions that provide financial in a country. It deals with the ownership of banks, the structure of banking system, functions performed and the nature of business. The element of the banking system includes commercial banks, Investment banks and Central bank.

The commercial banks accept deposits and lend loans and advances; the investment banks deal with capital market issues and trading; and the central bank regulates the banking system by setting monetary policies besides many other functions like currency issue.

Definitions of banks and banking System, given by various writers are given below:

Crowther defines a bank as, "one that collects money from those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it".

In the words of Professor Sayers, “Commercial banks are institutions, whose debts- usually referred to as bank deposits are commonly accepted in final settlement of other people’s debt”.

According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when it required by them for use”.

The above definitions of bank reveal that bank is an Business institution which deals in money and use of money. We can say that any person, institution, company or enterprise can be a bank. The business of a bank consists of acceptance of deposits, withdrawals of deposits, Making loans and advances, investments on account of which credit is exacted by banks.

Features of Banking

From the views of above authorities, we can derive the following basic characteristics of Banking:

1)      Dealing in money and credit: A bank is an institution which deals in money. The banks accept deposits from the public and advancing them as loans to the needy people. The deposits may be of different types – current, fixed, saving etc. accounts.

2)      Credit Creation: The banks are the institutions that can create credit i.e., creation of additional money for lending. Thus, "creation of credit' is the unique feature of banking.

3)      Acceptance of Deposit: A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.

4)      Deposits must be withdrawn able: The deposits (other than fixed deposits) made by the public can be withdraw able by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually withdrawn able on demand.

5)      Individual / Firm / Company: A bank may be a person, firm or a company. A banking company means a company which is in the business of banking.

6)      Commercial in nature: Since all the banking functions are carried on with the aim of making profit, it is regarded as a commercial institution. A bank is a profit seeking institution having service oriented approach.

7)      Agency and Utility Services: A bank provides various banking facilities to its customers. They include general utility services and agency services.

8)      Connecting Link: A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

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.

Business in which a banking company may engage

Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage. These are:

1)      Borrowing, raising or taking up of money, lending or advancing of money; handling in all manners Bills of exchange/hundies/promissory notes.

2)      Acting as agents for any government or local authority or any other person,

3)      Managing issues of shares, stock, debentures etc. including underwriting guaranteeing,

4)      Carrying on and transacting every kind of guarantee and indemnity business.

5)      Managing, selling and realizing property which may come into the possession of the banking company in satisfaction of its claims.

6)      Acquiring and holding and generally dealing with any property or any right, title or interest in such property which may form the security for any loans and advances.

7)      Underwriting and executing trusts.

8)      Establishing and supporting or aiding in the establishment and support of institutions, funds, trusts etc.

9)      Acquisition, construction, maintenance and alteration of any building and works necessary for the purpose of the banking company.

10)   Selling, improving, managing, developing, or otherwise dealing with property and rights of the company.

11)   Acquiring and undertaking whole or any part of the business of any person or company.

12)   Doing all such other things as are incidental or conductive to the promotion or advancement of the business of the banking company.

13)   Any other business which the Central Government may specify.