Definitions [2]
Definition: 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.”
Definition: Banking
“Ordinary banking business consists of changing cash for bank deposit and bank deposit for cash, transferring bank deposit from one person to another, giving bank deposit in exchange for government bonds, the recurring promises of businessmen to repay and so forth.” — Prof. Sayer’s
Key Points
Key Points: Concept of Bank
- 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.
Key Points: Banking > Functions of Commercial Bank
- Accept Deposits – Main source of funds: Demand Deposits (Current/Savings Accounts) & Time Deposits (Fixed/Recurring Deposits)
- Grant Loans & Advances – Cash Credit, Overdraft, Term Loans, Bill Discounting (banks profit from interest spread)
- Cheque System – Safe payment method using cheques (principal business payment tool)
- Transfer of Funds – Fast/safe money transfer via drafts, pay orders, mail/telegraphic transfers (essential for commerce)
- Credit Creation – Banks multiply money: loans create new deposits (Initial Deposit × 1/CRR formula)
- Financing Trade – Bill discounting + short-term trade loans (facilitates internal/external trade)
- Foreign Exchange & Utility Services – Currency exchange + lockers, travel cheques, mobile banking, agency functions
