Origin of Banking :
It is seen that banking transactions have been taking place since last number of years. Even it is evidenced that the banking system was prevailing at the time of Babilon culture. The banks were in existence in Rome also. It was said that in the year 1171, the authorities of Venice had taken loan from the people for meeting the expenses of war and the arrangements for repayment were also made by them. Such loan was called as ‘Mot’ in Italian language. The meaning of mot in German language is ‘bank’. In those days, there was German rule in many parts of Italy. Afterwards, in Italian language it was called as banco. The German word bank means a joint stock fund. This word bank was Italianised into banco when the Germans were masters of a great part of Italy. Afterwards in France and England this word was used. It is seen that since 1646 the word ‘bank’ has been used in the articles. Later on there were many banks who started using the word bank in their names. e.g. Bank of Milan. However, there are some philosophers according to whom the Italian word ‘banco’ means table. In the old days, the money lenders used to do banking transactions by keeping tables in the market and so the word ‘bank’ has been evolved.
Bank :
Meaning :
The word ‘Bank’ has been derived from the Latin word ‘bancus’ or ‘banque’. The meaning of it in English is a bench. The early bankers transacted their business at benches in a market place. According to some authorities, the word bank was originally derived from German word bank. It means a joint stock fund. This word later on was called as ‘banco’ in Italy when a great part of Italy was ruled by the Germans.
A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.
Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.
Definitions :
1) F.E. Perry :
“The bank is an establishment which deals in money, receiving it on deposit from customers, hounouring customer’s drawings against such deposits on demand, collecting cheques for customes and lending or investing surplus deposits until they are required for repayment.”
2) Walter Leaf :
“A banker is an institution or individual who is always ready to receive money on deposits to be returned against the cheques of their depositors.”
3) Dr. Herbert L. Hart :
“A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts.”
4) The Indian Banking Companies Act, 1949 :
“Banking means the acceptance for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”
Evolution of Banking in India :
Modern banking as evolved in England was introduced by the British during their rule in India. Naturally, today’s Indian banking is similar to British banking. However, it does not mean that banking was unknown to India. The essence of banking is lending for productive purposes. In fact, India was a major partner in international trading and was a big producer of steel, cloth, spices and luxurious articles. There are references to rate of interest, security of the loans in the Manusmrity. Kautilya in the ‘Artha Shastra’ mentions regulation of interest rates, deposits and even discounting of bills. They were called ‘Hundies’. The big merchants, traders and moneylenders called ‘Sresthis’ or “Nagarseths” occupied important positions in the Mughal and Maratha courts. They had efficient courier system, extensive branches all over India and they gave loans to the kings also.
However, modern banking with its double-entry accounting system and insistence on deposit mobilisation was introduced by the British. As the British rule extended all over the country, the stages in evolution in Banking in India. Modern banking also spread driving out the indigenous banking.
Stages in the Evolution of Banking in India :
Some important stages in the evolution of modern banking in India are as follows :
1) Agency Houses :
When the English traders came to India, they had problem of raising working capital due to the language barrier. Therefore, they established Agency Houses which combined trading with banking. One agency house established the first bank in India called the Bank of Hindustan in 1770. Later on, many banks were established. But they disappeared as fast as they were born. Anybody could then start a bank. The field was free for all.
2) Presidency Banks :
The East India Co., the ruler of lndia, took initiative in establishing Presidency Banks by contributing 20% of their share capital to meet its own demand for funds. Accordingly, Bank of Bengal, Bank of Bombay and Bank of Madras were established in 1806, 1840 and 1943 respectively.
3) Joint Stock Banks :
In 1884, banks were allowed to be established on the principle of limited liability. In due course, this encouraged establishment of banks. By the turn of the century, many banks with the initiative of Indians were established. Punjab National Bank, Allahabad Bank, Bank of Baroda are some of the banks then established. Many foreigners also came in the field of Indian banking.
4) Imperial Bank of India :
To meet the competition of foreign banks, the three Presidency Banks were amalgamated and a powerful Imperial Bank of India was established in 1921 with its network of branches all over the country. This bank was later nationalised in 1955 and it is today’s State Bank of India. This is a prestigious bank as the Government is its customer.
5) Establishment of the Reserve Bank of India :
Though there was boom in banking, due to absence of any regulation and facility of timely assistance there were recurrent bank failures. This resulted in suspicion about banks in the minds of the people. They stayed away from banks. The need for a separate Central Bank was emphasised by the Hilton Young Commission. Accordingly, the RBI was established in 1935 to perform all the functions of a Central Bank. It was modeled on the pattern of the Bank of England. But it did not have much power of regulation. The period was also critical one due to the great depression and the subsequent Second World War. The RBI could not do much about banking.
6) Nationalisation of the RBI and the Banking Regulation Act :
These two important steps were taken in 1949. Immediately after independence wide powers of regulation and control were given to the RBI and by making use of those powers the RBI was successful in making Indian banking trustworthy. Soon, bank failures became a thing of the past and India’s banks progressed under the guidance of the RBI. Many malpractices, deficiencies and drawbacks were sought to be removed by the RBI.
7) Nationalisation of Banks in 1969 and 1980 :
Another significant step was taken in 1969 by nationalising 14 big Indian banks. Then six more banks were nationalised in 1980. The nationalisation of banks brought about a sea-change in the policies, attitudes, procedures, functions and coverage of banks. Indian banks are now being prepared to become international players. These are the stages through which Indian banking developed.
Types of Banks:
Banks can be classified into various types. Given below are the bank types in India:-
- Central Bank
- Cooperative Banks
- Commercial Banks
- Regional Rural Banks (RRB)
- Local Area Banks (LAB)
- Specialized Banks
- Small Finance Banks
- Payments Banks
Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central bank that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and regulate the other banking institutions in the country. Given below are the functions of the central bank of a country:
- Guiding other banks
- Issuing currency
- Implementing the monetary policies
- Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank as it provides assistance to the other banks of the country and manages the financial system of the country, under the supervision of the Government.
Cooperative Banks
These banks are organised under the state government’s act. They give short-term loans to the agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional loans
They are organised in the 3-tier structure
- Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
- Funded by RBI, the government and NABARD. Money is then distributed to the public
- Concessional CRR and SLR apply to these banks. (CRR- 3%, SLR- 25%)
- Owned by the state government and top management is elected by members
- Tier 2 (District Level) – Central/District Cooperative Banks
- Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
Commercial Banks
- Organised under the Banking Companies Act, 1956
- They operate on a commercial basis and its main objective is profit.
- They have a unified structure and are owned by the government, state, or any private entity.
- They tend to all sectors ranging from rural to urban
- These banks do not charge concessional interest rates unless instructed by the RBI
- Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:
- Public sector Banks – A bank where the majority stakes are owned by the Government or the central bank of the country.
- Private sector Banks – A bank where the majority stakes are owned by a private organization or an individual or a group of people
- Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall under this type of bank
Given below is the list of commercial banks in our country:
Regional Rural Banks (RRB)
- These are special types of commercial Banks that provide concessional credit to agriculture and rural sectors.
- RRBs were established in 1975 and are registered under the Regional Rural Bank Act, 1976.
- RRBs are joint ventures between the Central government (50%), State government (15%), and a Commercial Bank (35%).
- 196 RRBs have been established from 1987 to 2005.
- From 2005 onwards government started the merger of RRBs thus reducing the number of RRBs to 82
- One RRB cannot open its branches in more than 3 geographically connected districts.
Local Area Banks (LAB)
- Introduced in India in the year 1996
- These are organized by the private sector
- Earning profit is the main objective of Local Area Banks
- Local Area Banks are registered under Companies Act, 1956
- At present, there are only 4 Local Area Banks all of which are located in South India
Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized banks. These include:
- Small Industries Development Bank of India (SIDBI) – Loans for a small-scale industry or business can be taken from SIDBI. Financing small industries with modern technology and equipment is done with the help of this bank
- EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other financial assistance with exporting or importing goods by foreign countries can be done through this type of bank
- National Bank for Agricultural & Rural Development (NABARD) – To get any kind of financial assistance for rural, handicraft, village, and agricultural development, people can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping develop the country financially.
Small Finance Banks
As the name suggests, this type of bank looks after the micro industries, small farmers, and the unorganized sector of society by providing them with loans and financial assistance. These banks are governed by the central bank of the country.
Given below is the list of the Small Finance Banks in our country:
Payments Banks
A newly introduced form of banking, the payments bank has been conceptualized by the Reserve Bank of India. People with an account in the payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATMs, and debit cards can be done through payments banks. Given below is a list of the few payments banks in our country:
- Airtel Payments Bank
- India Post Payments Bank
- Fino Payments Bank
- Jio Payments Bank
- Paytm Payments Bank
- NSDL Payments Bank
Functions of Commercial Banks:
Banks today, perform a variety of functions. Some of the important functions are given below:
1. Acceptance of Deposits:
Commercial banks' primary function is to receive deposits from its customers, who might be individuals or corporations. The bank accepts savings, current, and fixed deposits as deposits. Surplus balances obtained from firms and individuals are loaned to meet the short-term requirements of commercial transactions
2. Availability of Loans and Advances:
Another important function of this bank is to provide loans and advances to entrepreneurs and company owners while collecting interest. It is the primary source of earning profit for banks . In this method, a bank holds a limited number of deposits as a reserve and gives (lends) the balance to borrowers in the form of demand loans, overdrafts, cash credit, short-term loans, etc.
3. Facility of Cash Credit:
When a consumer receives credit or a loan, they do not receive liquid cash. Firstly, the bank will open the customer account and then, transfer the funds to the accounts .
This procedure enables the bank to generate money. Credit creation is a distinct activity of commercial banks. Banks create a line of credit and transfer the loan to a firm or commercial entity all at once, rather than delivering liquid cash.
4. Bill of Exchange discount:
In today's world, the primary purpose of a commercial bank is to discount business invoices. Banks perceive bill discounting to be a beneficial investment. Bills generate a consistent flow of funds while not becoming a dangerous endeavour during payment because they are a negotiable instrument. These bills do not involve the financial institution in any legal proceedings.
It is a formal agreement that acknowledges the amount of money to be paid against the products acquired at a future date. The amount can potentially be cleared before the given period by using a commercial bank's discounting process.
5. Transferring Funds:
These commercial banks also handle fund transfers or money transfers in general. For certain commissions, funds can be transmitted using different channels such as IMPS, NEFT, RTGS, draught pay orders, and so on. That is a very helpful function for the customers who are in urgent need of money.
6. Purchasing and selling securities:
The bank provides customers with the option of selling and buying securities. With this function, they can opt to invest easily by investing online.
7. Other Services:
In addition to above services, a bank provides a number of services such as locker services, underwriting services, bill payments, etc. For such services, banks charge a minimum of an annual fee.
The Role of Banking in Economic Development
Banks are not just places to store money—they are fundamental pillars of economic growth. The role of banking in economic development can be understood through several key mechanisms that contribute directly to financial inclusion, job creation, and the stability of the broader economy.
1. Financial Intermediation: The Heart of Banking and Economic Growth
At its core, banking serves as a mechanism for financial intermediation. This refers to the process by which banks pool deposits from savers and then lend these funds to businesses, governments, and individuals. The availability of credit is essential for economic expansion because it enables the creation of infrastructure, the development of businesses, and the funding of innovative projects.
For example, a government may require financing to build new roads, schools, or hospitals, and it can obtain this funding through loans provided by banks. This investment in infrastructure leads to job creation and enhances economic productivity.
2. Access to Credit and Support for SMEs
Small and medium-sized enterprises (SMEs) are the backbone of most economies, yet they often struggle to obtain financing due to a lack of credit history or collateral. This is where the role of banking in economic development becomes even more crucial. By offering tailored financial services like microfinance, small business loans, and other credit products, banks provide these businesses with the capital needed to thrive.
A prime example is Grameen Bank in Bangladesh, which has been a leader in providing microfinance to entrepreneurs in rural areas, helping lift entire communities out of poverty and contributing significantly to the local economy.
3. Financial Inclusion: Reducing Poverty and Boosting Growth
One of the most profound ways banks influence economic development is through financial inclusion. This means providing financial services to underserved and marginalized communities. When more people have access to savings accounts, loans, and insurance products, it leads to improved economic mobility and poverty reduction.
In many developing nations, the expansion of mobile banking platforms has significantly increased financial inclusion, allowing people in rural areas to save money, send and receive remittances, and access credit via their mobile phones. This technology-driven approach has helped millions of people participate in the broader economy, creating new opportunities for economic growth.
4. Banking and Infrastructure Development: The Power of Investments
Banks also play a critical role in facilitating infrastructure development, which is a key driver of economic expansion. Large-scale projects such as the construction of bridges, airports, and power plants require significant capital investment. Banks help fund these endeavours by offering long-term loans and structuring complex financial deals.
In countries like China and India, public-private partnerships (PPPs) have been instrumental in financing infrastructure projects that have spurred massive economic growth. Banks help in structuring these deals by providing financing options that attract both private investors and public entities.
5. Investment Banking: Supporting Economic Expansion and Capital Formation
Investment banks are specialized financial institutions that facilitate the flow of capital to the economy. By underwriting new stocks and bonds, investment banks provide companies with the necessary funds to expand operations, conduct research and development, and innovate. This, in turn, contributes to overall economic development.
The role of investment banking in the development of capital markets is vital because it helps businesses access global investment pools. The increased access to capital enables businesses to hire more people, create new products, and expand into new markets—driving national growth.
How Banks Contribute to Economic Stability and Policy Implementation
Beyond supporting businesses and individuals, banks also contribute to economic stability by ensuring that there is adequate liquidity in the market. When banks have sufficient capital reserves and maintain solid relationships with central banks, they help ensure the smooth functioning of the economy.
Central banks, like the Federal Reserve in the United States or the Central Bank of Kenya, use monetary policy to regulate interest rates and control inflation. By managing inflation and stabilising the currency, central banks work closely with commercial banks to create a stable economic environment. This allows businesses to plan for the future with confidence and ensures that consumers maintain purchasing power.
Leadership Principles and Innovative Approaches in Modern Banking
The banking sector is continuously evolving, and leadership principles within the industry are adapting to the needs of an increasingly globalised and digital economy. Innovation is key to success, especially in areas like fintech, blockchain, and artificial intelligence. Banks are harnessing these technologies to improve operational efficiency, enhance customer experiences, and create new opportunities for growth.
Leaders in banking must embrace a forward-thinking mindset, ensuring that they are not only meeting the needs of today but also preparing for the demands of tomorrow’s economy. By adopting sustainable finance practices and focusing on green banking, financial institutions are also helping to foster long-term environmental and social economic development.
How You Can Contribute to Economic Development Through Banking
As you can see, the role of banking in economic development is multifaceted and critical to fostering sustainable growth. Whether it’s through providing credit access, promoting financial inclusion, or supporting infrastructure projects, banks are essential to creating an environment where businesses and individuals can thrive.
But the role of banking in economic development isn't just for policymakers or business leaders; it’s something that each of us can influence. By making informed financial decisions, supporting initiatives that promote economic stability, and investing in sustainable finance options, we can all contribute to the global effort for stronger economies.
Now is the time to reflect on how you can use banking services to drive your personal or professional growth, support businesses in your community, or invest in projects that lead to broader economic development. Remember, the financial choices you make today can have lasting impacts on tomorrow’s economy.
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