Banking and Bank Transactions

MEANING OF BANKING
A bank may be defined as a company which collects
money from the public in the form of deposits and
lends the same to borrowers. It is an institution that
provides facilities for safekeeping, lending and
transfer of money. Some experts believe that the
term 'Bank' is derived from the word 'Banque' which
means a bench. In the early days, European
moneylenders used to exhibit on a bench coin of
different countries for the purpose of lending and
changing money. Other experts are of the opinion
that the term 'Bank' is derived from the Italian word
Banco which means a joint stock fund.
"The banker's business is to take the debts of other people to offer his own in exchange and thereby create
money."

TYPES OF BANKS
1. Central Bank: A central bank is the apex bank which supervises and
controls the entire banking system of a country. It regulates money and
credit in a country with close cooperation of the Government. A central bank.
is so called because it occupies a central position in the banking sector of
the country. The Reserve Bank of India is the central bank of our country.

2. Commercial Banks: A commercial bank is an institution which

accepts deposits of money from the public and provides loans and
advances to businessmen and others. State Bank of India is the largest
commercial bank of India.
In India, commercial banks are of three types-
(a) public sector banks which are owned and controlled by the
Government, e.g., Union Bank of India:
(b) private sector banks which are owned and controlled by private
businessmen, e.g., ICICI Bank, Global Trust Bank, etc.; and
(c) foreign banks such as Citi Bank, American Express Bank, etc.

3. Industrial Banks: Industrial banks are the banks which provide long-term
finance to industries. These banks also offer technical and managerial
assistance. Industrial banks are also known as development banks. Industrial
Finance Corporation of India (IFCI) and Industrial Development Bank of India
(IDBI) are examples of industrial banks.
4. Exchange Banks: Exchange banks are a type of commercial banks. Their main function is financing of
foreign trade. They provide the following services:
(a) discounting of foreign bills of exchange;
(b) financing foreign trade;
(c) facilitating foreign remittances
(d) buying and selling of gold and silver.
Export Import Bank (EXIM Bank)

5. Agricultural Banks: These banks provide long term finance to agricultural

sector. They are also known as Land Mortgage Banks because loans are
granted generally against mortgage of agricultural land. Short-term redit to
agriculturists is provided by regional rural banks, cooperative banks and
commercial banks. The National Bank for Agriculture and Rural Development
(NABARD) offers resonance facilities to all those banks which provide loans to
agriculturists.

6. Cooperative Banks: Cooperative banks are the banks which are organised
on the principles of cooperation. They are set up as cooperative societies.
They encourage thrift and savings among members.

7. Post Office Savings Banks: These banks only accept deposits and
do not grant loans. Their purpose is to mobilise small savings of public and
encourage the habit of thrift among people.

8. Indigenous Banks: In rural and semi-urban areas, moneylenders

carry on banking business even today. They advance loans and discount
hundies. But they charge a high rate of interest.

FUNCTIONS OF CENTRAL BANK

1. Issue of Currency Notes: The central bank has monopoly

over issuing currency notes in the country. In order to inspire
public confidence in paper currency, the central bank keeps
reserves of gold, silver, etc., for issuing currency notes.

2. Banker to the Government: The central bank acts as a

banker, agent and advisor to the Government. As a banker, it
receives and makes payments on behalf of the Government. The
central bank serves as the Government's agent in financial matters.

3. Banker's Bank: The central bank acts as the bank for all commercial banks in the country. When a
commercial bank needs funds it can obtain loans and rediscount its bills with the central bank. Therefore,
central bank is called 'lender of last resort'.

4. Credit Control: The central bank exercises both qualitative and quantitative control over credit
granting capacity of commercial banks in order to maintain stability in prices and foreign exchange.
5. Custodian of Foreign Currency Reserves: The central bank is the sole custodian of gold,
foreign exchange and all other reserves of the country.

6. Maintenance of Exchange Rate: The central bank monitors the exchange rate of the home
currency in relation to foreign currencies. It tries to maintain stability in the exchange rate in order to
promote the country's foreign trade and to encourage the flow of foreign investment.

FUNCTIONS OF COMMERCIAL BANKS

1. Accepting Deposits: Commercial banks receive deposits

from public for the purpose of making investments and granting
loans. People deposit their savings for the sake of safety and for earning interest.

2. Lending Money: Commercial banks lend money to businessmen, farmers, artisans and others in the
following ways.
(a) Overdraft: Overdraft means an arrangement under which a current account holder is allowed to withdraw
more than the balance to his credit upto the specified limit.
(b) Cash Credit: In this arrangement, the bank advances cash loans to the borrower against some tangible
security or personal guarantee.
(c) Discounting of Bills: Businessmen receive bills of exchange from their customers who buy goods on
credit.
(d) Loans and Advances: The bank advances a fixed amount in lump sum to the borrower for an agreed
period.

3. Agency Functions: As an agent of its customers, a commercial bank performs the following
functions.
(a) Collecting Receipts: Banks collect amounts of cheques, bills, promissory notes and hundies on behalf of
their customers.
(b) Making Payments: On the instructions of customers, banks make payments of loan instalments, interest,
rent, insurance premium, taxes, etc., on behalf of account holders.
(c) Buy and Sell Securities: Banks buy and sell shares, debentures and other securities on behalf of their
customers.
(d) Trustees and Executors: Commercial banks act as trustees and executors for their customers.

4. General Utility Functions: Commercial banks also perform several general utility functions which
are given below.
(a) Issuing Credit Instruments: Banks issue letters of credit, drafts and travellers' cheques to their
customers.
(b) Underwriting Capital Issues: Banks underwrite the shares and debentures issued by companies.
(c) Safe Custody of Valuables: Banks accept jewellery, documents and other valuables for safe keeping.
(d) Advice and Information: Banks offer advice on financial matters.
TYPES OF BANK DEPOSIT ACCOUNTS
(1) Fixed Deposit Account: Fixed deposits are made for a fixed time period and cannot be withdrawn before
the expiry of the period, e.g., one year, three years, five years, and so on. A fixed deposit is also known as a
time deposit or long-term deposit.
2. Savings Deposit Account: Any person can open savings deposit account with the minimum specified
amount. In this account, small savings are deposited by middle- and low-income people.
3. Recurring Deposit Account: In this account, the account holder is required to deposit a specific amount
every month. After the expiry of the specified period, the depositor gets back his money together with
interest. thereon.
4. Current Account: Current account is generally opened by business firms. Money can be deposited into
and withdrawn from this account any number of times.

OPERATING A BANK ACCOUNT

1. Pay-in-Slip Book: A pay-in-slip book contains a number of
printed slips with perforated counter-foils. This slip is to be
filled in at the time of depositing cash and cheques.

2. Cheque Book: This book contains a number of printed blank forms of cheques with their counter foils
consecutively numbered.
3. Pass Book: The pass book is an extract or copy of the customer's account in the bank's ledger as on a
particular date.

ADVANTAGES OF BANK ACCOUNT

1. Safety of Money
2. Payment Facility
3. Collection Facility
4. Habit of Savings
5. Loans and Advances
6. Safe Custody of Valuables
7. Credit Information

WHEN CAN A BANK REFUSE PAYMENT OF A CHEQUE

(a) When the funds to the credit of the drawer are not sufficient to make payment of the cheque.
(b) When the cheque is post-dated and is presented for payment before the date it bears.
(c) When the cheque is stale, i.e., more than three months old.
(d) When the drawer has stopped payment of the cheque.
(e) When the cheque is altered and alterations are not signed.
(f) When the cheque is mutilated.
BANK DRAFT
A bank draft is a type of
cheque drawn by a bank
either on its own branch or
on another bank in favour of
a third party. It is always
payable on demand and is,
therefore, also known as
'demand draft'. It is safe
because its amount is
credited to the account of
the person named in it. The
form duly filled in along with
the amount of the draft plus commission is paid to the bank, who issues the draft. He then sends the draft to
the receiver by post or courier.

TRAVELLERS' CHEQUE
Tourists and travellers have to carry adequate money with them. It is always risky to carry large sums of
money while travelling from one place to another.