Table of Contents

What is Banking?

A bank is any financial institution that helps people and businesses store, invest and borrow money. It plays an important role in the movement of money through the economy.

Banks provide services like deposits, loans, and investment options. There are many types of specialized banks that provide specific services to certain members of the economy, like businesses, startups, individuals, and more.

Banks in India are regulated by the Reserve Bank of India (RBI), which is the central banking authority of the country. Every country has a central bank, like the Federal Reserve in the U.S. and the European Central Bank.

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What Are The Functions of Banking?

1. Money Storage

Both individuals and businesses store their money in banks. Apart from being a safe place to keep money, banks also provide savings accounts that give the account owner interest on their deposit so that the money is not sitting idle.

Businesses store money in checking accounts or current accounts. To learn more about the difference between savings, current, and checking accounts, check out our blog here!

2. Loan Facility

Banks also give out loans to both individuals and businesses. These loans are to be paid back over a period of time with a certain amount of interest added.

People take loans for a number of reasons: to buy a new asset like a car, or house or for education. Businesses take loans to expand operations, meet liquidity needs, or fund daily operations.

3. Corporate Finance Management

Special kinds of banks called investment banks help businesses with complex financial transactions like mergers and acquisitions or IPOs.

Read more: Initial Public Offering

Generally, these banks do not offer retail or consumer banking services and only specialize in corporate finances. They are intermediaries in the transaction and work with large corporations, hedge funds, and other financial institutions.

4. Regulating the Economy

Banks play an important role in maintaining the balance of the economy. By controlling the amount of money that circulates in the country, banks control the spending power of the people.

When banks reduce the number of loans they give out, people have less money to spend – if the bank rejects your vehicle loan, you can’t buy a vehicle! This causes a decrease in the spending power of the people.

When spending power goes down, demand for goods and products goes down and prices also go down!

How do Banks Work?

The working of banks supports the entire economy. The cycle starts with people storing money with banks in the form of savings accounts or deposits.

The bank gives out these deposits to people in the form of loans. The interest charged on these loans is the bank’s main source of revenue.

The bank also invests a part of these deposits into stocks and bonds and earns interest.

From the interest earned from loans and investments, the bank pays a small amount of interest back to the savings accounts and deposit holders, and retains the remaining as profit.

This is how banks make money – by loaning out the money that people have deposited. This process keeps money moving through the economy and is also how central banks control inflation!

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Types of Banks

There are three kinds of banks in our country:

Commercial Banking	These are banks that service individual customers. They offer loans, investment options, and even Demat accounts for stock trading.
Corporate Banking	These banks specialize in the complex financial needs of large institutions. Corporate banking services include current accounts, checking accounts, escrow accounts, and credit facilities.
Central Banking	These banks are the central regulatory authority of all banks in a country. In India, banks are regulated by the Reserve Bank of India.

Forms of Banking

Banking today exists in a myriad of forms, thanks to the advancement of technology.

Mobile Banking	Banks today have a mobile app where account holders can make transactions, check balances, open deposits and more. Most people today prefer a mobile app over a physical bank branch for basic functions.
Internet Banking	Banks today also have a website where account holders can log in and carry out all the functions that previously required a visit to a bank branch.
Digital Banking	Digital banking is a service offered by brick-and-mortar banks, to make transactions easier for their customers. Digital banking has become so popular that most people now prefer making payments through NEFT or IMPS, or the newly launched UPI.
Neobanking	Neobanks operate entirely online with no physical presence at all. Neobanks offer flexibility and ease of use that legacy traditional banks typically do not, or cannot offer. Legal regulations have not yet caught up to these new-age banks, the RBI “is cognizant of the benefits that neobanks bring to the table”.

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FAQs

What is banking?

Banking is the industry that allows people and businesses to deposit, borrow and transfer money. The banking industry has been an important part of the economy ever since humans started using money.

Why is banking so important?

Banks play a very important role in the economy. They allow money to flow through the economy by providing credit, investment facilities and financial infrastructure.

What is the origin of banking?

Banking originated in the ancient world out of a need to keep extra money or gold safe. People also needed loans to grow crops or grain when times where hard. The basic functions of banking have more or less remained the same in modern times.

What are the different types of banks?

Commercial or retail banks and Corporate banks are the two main divisions of banking. There are also digital banks and neobanks.