Information about bank . Its origin , history ,types and functions .

(Sample information about bank for project assignment .)

Introduction :-

Chamber’s Twentieth Century Dictionary defines a bank as an ” institution of keeping , lending and exchanging etc. of money .”

Banks play an important role in financial stability and the economy of a country.
It is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans.

The word has it’s origin from Old High Germanic origin banc, banke meaning “bench, counter”. Though some people trace its origin from the French word “Banque “.and the Italian word ‘Banca.

History of banking :-

The First stage of banking system :-

It was a merchant banker who first established the system of banking by trading commodities rather than money . Their trading activities required the remittances of money from one place to another ,for this they issued “ hundis “( letter of transfer ) to remit the funds . In India such merchant bankers were known as “Seths
Although , before 1640 the practice of self saving and self keeping were found in the temple of Babylon .

The Second stage :-

The next to merchant bankers in the establishment of the banking system were goldsmiths . The goldsmith started charging something for taking care of money and bullion . He started issuing receipts as evidence for receiving valuables . He started lending gold and silver as there were no marks of the owner .
Goldsmith receipts became like cheques as a medium of exchange and a means of payment.

The Third stage :-

Next to the goldsmith were moneylenders to strengthen the growth of the banking system.The moneylenders became the bankers who started performing the two functions of modern banking ,that is accepting deposits and advancing loans .

The first bank called the ‘Bank of Venice ‘ was established in Venice , Italy I’m 1157 to finance the monarch in his wars .
But modern banking began with the English goldsmith’s after 1640 . The first bank in India was the ‘Bank of Hindustan ‘ started in 1770 by Alexander & Company; an English agency house in Calcutta .
But the first bank in the modern sense was established in the Bengal Presidency as the Bank of Bengal in 1806.

Definition :-

Many Economists have defined banks highlighting its various functions .

According to Crowther , ” The banker’s business is to take the debts of other people to offer his own in exchange ,and thereby create money “.

Kent defines a bank as ” an organ whose principal operations are concerned with the accommodation of the temporarily idle money of the general public for the purpose of advancing to others for expenditures “

Sayers define bank as ,” Ordinary banking business consists of changing cash for bank deposits and bank deposits for cash ; transferring bank deposits from one person or cooperation ( one ‘depositor ‘) to another ; giving bank deposits in exchange for bills of exchange , government bonds , the secured or unsecured promises of businessmen to repay etc. ” .

Cairn Cross stated bank as ,
“ Bank is a financial intermediary institution which deals in loans and advances”.

In words of P.A. Samuelson ,
“ Bank provides service to its clients and in turn receives perquisites in different forms. ”

Indian Company Law 1936 defines Bank as
“ a banking company which receives deposits through current account or
any other forms and allows withdrawal through cheques or promissory notes “.

Thus , a bank is an institution which accepts deposits from the public and in turn advances loans by creating credit . It is different from other financial institutions as other institutions do not create credit .

Types of Bank :-

Banks can be classified on the basis of :-
functions , consumer , structure , ownership and organisation .

The above flow chart shows various classification of banks .

Functions of bank :-

Bank as an institution of keeping , changing , lending and creating money , performs various functions all together .

Functions of bank are divided into two categories :-

1:Primary functions.

2:Secondary Functions

Primary Functions of Bank :-

Primary function of bank include major two functions :-

A:-. Accepting of deposits
B:- Advancing loans .

A:- Accepting deposits :-

This is the oldest function of a bank. While banking was developing into an institution bankers used to charge a commission for keeping the money in its custody .
Accepting of Deposit is considered to be the fundamental function of a bank . The bank accepts the deposit by the public , guaranteeing safety and interest .

Banks accept different types of deposits from the public . These deposits can be divided as the following :-

1: Saving Deposits :-

Saving deposit is a deposit on which the bank pays small interest to the depositors who are usually small savers . The process of opening the account for saving deposits can be said as a plain sailing process . It can be opened in a single name or in joint names. The depositors just need to maintain minimum balance . This type of deposit is suitable for small savers and wage earners .Such deposit encourages saving habits among the public. The rate of interest is low and there is no restriction on the number and amount of withdrawals.

2:Fixed Deposits:

Fixed deposits are mainly for savers who do not need money for stipulated periods from 6 months to longer periods ranging up to 10 years or more. Money is deposited for a fixed tenure . Bankers pay higher rates of interest on such deposits and the rate increases with the length of the time period of the fixed deposit But there is always a limit of the interest rate which can be paid .
There is no withdrawal money allowed during the maturity period . In case depositors withdraw before maturity, banks levy a penalty for premature withdrawal.

3:Current Deposits:

Businesses keep deposits in their current account . They can withdraw any amount standing to their credit in current deposit by cheques without notice . These deposits act as a short term loan to meet urgent needs. The bank does not pay interest on such accounts but charges a high-interest rate along with the charges for overdraft facility on a nominal sum for services rendered to its customers.

4:Recurring Deposits:

This type of deposit is mainly made by salaried paid persons or traders . Certain amount of money is deposited in the bank at a regular interval. Money can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on the deposit .

B:- Advancing Loans.

Another of the primary functions of a bank is to advance loans to its customers .A bank earns profit and carries on its business by lending a certain percentage of cash lying in deposits at a higher interest rate than it pays on such deposits.
Bank offers the following types of Loans and Advances:-

1: Cash Credits:

The bank advances loans to businessmen or individuals against certain specified securities .i.e against mortgage of certain property tangible assets or guarantees. It is a short term loan facility up to a specific limit . Cash credit can be given to any type of account holder as well as to those who do not have an account with a bank.
The amount of the loan is credited to the current account of the borrower . Interest is charged on the amount withdrawn . The borrower can withdraw cash through cheques according to his requirements.

2:.Call Loans :-

These are very short term loans advanced to bill brokers for not more than fifteen days . They are advanced against first class bills or securities . Such loans can be reduced at very short notice .

3: Bank Overdraft:

A bank often permits to draw cheques for a sum greater than the balance lying in his current account . This is done by providing the overdraft facility up to a specific amount . This facility is for current account holders. The interest for overdraft is paid only on the borrowed amount for the period .An overdraft facility is granted against collateral security.

4: Discounting the Bill of Exchange:

It is a type of short term loan, where the bank provides money to the creditor holding a bill of exchange by discounting the bill of exchange . The bank gets the payment on maturity of the bill from the drawee or acceptor of the bill .

Secondary Functions of Bank:-

Secondary functions of the bank have the same level of importance as the primary function. The secondary functions are also classified into two parts:

A:- Agency functions
B :- Utility Functions

A:- Agency Functions of Bank

The bank provides various Agency services to its customers . Banks are considered as agents for their customers .
Various Agency services of bank include :-

• Transfer of Funds that include mobilising of funds from one branch/place to another .

• Collection and Payment :-
of dividend, salary , pension , rents , electricity bills , bills of exchange , the money of the cheques through the clearing section of the customer’s.

• Bank also buys and sells the shares and debentures of the clients and debits or credits the account. This is known as portfolio management.

• Bank acts as an income tax consultant to its clients as well as acts as a trustee and executor of property and will of its customers.

(For some services the bank charges a normal fee while it renders others free of charge .)

B:- Utility Functions of Bank

• Besides other services banks also perform a number of other services .
It acts like the custodian of the valuables of its customers by providing them lockers where they can keep their jewellery and valuable documents .

• It issues various forms of credit instruments such as cheques , drafts , travellers cheques etc which facilitate transactions.

• Bank also acts as a referee to clients and issues letters of credit.

• It also deals in foreign exchanges ,social welfare programmes, project reports etc.

• Banks also publish journals which provide statistical information about the money market and business trends of the economy .

Function that differs a bank to other financial institutions.

Other than the primary and secondary functions the most important function of a bank which distinguishes it with other financial institutions is the Credit Creation .

Credit creation :-

Credit creation is one of the most important functions performed by commercial banks. It separates a bank from other financial institutions . In simple terms credit creation is the expansion of deposits. A bank expands the demand deposit into multiple cash reserves as demand deposits are the principal medium of exchange.

In words of Newly ” Credit Creation refers to the power of commercial bank to expand secondary deposits either through the process of making loans or through investment in securities ”

Note :- the function of banks can be used in the sense of a commercial bank functions .

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