Concept of Bank

• “A bank Collects money from those who have it to spare or who are saving it out of their incomes, and it lends this money to those who require it.” — Crowther
• According to the Indian Companies (Amendment) Act, 2000, banking means:
  “Accepting for the purpose of lending or depositing money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise.”

Modern money consists of two components:​

• Currency — Notes and coins issued by the Central Bank (in India, the Reserve Bank of India)
• Deposit Money — Created by commercial banks through their lending activities

Currency forms only a small fraction of a country's total money supply. The greater proportion consists of money created by commercial banks.​

All three functions are equally essential. No institution qualifies as a bank unless it performs all three.

The following comparison — drawn directly from the source — clarifies why only commercial banks qualify as banks:

Why Post Office Savings Bank is NOT a bank:
Although it accepts deposits from the public, it does not lend and therefore does not create money. Hence, it is not regarded as a bank.​

Why LIC and UTI are NOT banks:
They accept deposits from the public and lend to others, but they do not have the power to create money, which is the unique and exclusive characteristic of commercial banks.​

"Creation of money is the unique characteristic of commercial banks. Their debts circulate as money in the economy. Banks have the power to 'create' and 'destroy' money through their lending activities. Money created by commercial banks is known as deposit money or bank money."

How Banks Create Money — The Process
Banks operate on the principle of Fractional Reserve Banking — they are legally required to keep only a fraction of total deposits as cash reserves (called the Legal Reserve Ratio / CRR) and are free to lend out the rest.

The origin of banking can be traced back to three key figures who operated early forms of banking:​
Merchants → Money-lenders → Goldsmiths →Modern Commercial Banks

Among the three, goldsmiths took the leading role. They accepted gold/valuables for safekeeping and issued paper receipts. Over time, these receipts began circulating as money, and goldsmiths discovered they could lend out the deposited gold because no depositor ever came to withdraw simultaneously. This formed the foundation of modern fractional reserve banking.​
Modern banking gradually evolved through a series of modifications to meet society's growing needs.

• Modern money = Currency (by RBI) + Deposit Money (by Commercial Banks)
• A bank must perform all three functions: accept deposits + lend + create money
• Credit/money creation is the unique characteristic that separates commercial banks from all other financial institutions
• Banks use fractional reserve banking — keeping a small % as reserves (CRR) and lending the rest
• Money Multiplier = 1/CRR — an initial deposit multiplies through the banking system
• Post Office Savings Bank, LIC, and UTI are non-banking financial institutions — they cannot create money
• Modern banking evolved from goldsmiths, who first issued paper receipts for gold deposits.