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What Is Bank? Functions, Types And Advantages Of Bank

Lets Learn: What is a bank? What are the functions of the bank? Types of Bank, Advantages of Banking

Whenever we ask ourselves the question of money in our mind, the picture of the bank comes in front of us. What kind of place is this, where you will get to see lakhs or crores of rupees in one place? Now the question arises: what exactly is a bank?

In simple language, we can say that a bank is a place where people come to deposit money and withdraw money when needed.

There was a time when any work related to money had to be done, be it deposit or withdrawal, and then we had to go to the bank for all the work and stand in long queues waiting for our number. But now time has changed. Now we do not need to go to the bank for many things; we can do that through Internet banking, mobile banking, etc., and we can easily do many things through electronic banking while sitting at home.

So today we will know what the types of banks are and how they work.  You will get the complete information about them in this article, so without further delay, let us learn about the banks.

What is a bank?

A bank is a person that, in the normal course of its business, accepts deposits of people's money and returns them from time to time by paying cheques written by them.


A bank is an institution that lends money to people, keeping in mind the security of their money. When people no longer need money, they deposit their money with that.

Any institution or person can be entitled to be called a bank when it

  • Fixed deposit accounts
  • Deposits money in current accounts.
  • By issuing a cheque, it pays the amount written on you.
  • Collects crossed or uncrossed cheques on behalf of your customers.

In addition to performing all these functions, it will also be mandatory for a person/institution to fulfill the following conditions:

Banking business should be their own personal business.

He/They should declare in front of the public that he/they are a banker and does banking business, and the public should understand them in the same form.

In doing business in this way, he/they should have the desire to earn money, and banking should be their main business, not a subsidiary.

In normal words, a bank can be defined in such a way that a "Bank is an institution that exchanges money."

What are the functions of the bank?

Although the bank does many things, it is mainly divided into two parts, which are as follows:

Primary functions of a bank

  • to collect public savings in the form of wealth.
  • giving loans to businessmen and the general public.

Secondary functions of a bank

  • performing various services for customers.
  • other tasks.

Primary functions of a bank

Collecting the public's savings in the form of wealth

This work of banks is very important. Every sensible person saves some money to meet future needs. People deposit their savings in banks. This gives them two benefits. The first advantage is that their money remains safe in the banks, and the second advantage is that the money that remains as it is at their home is deposited in the banks, and they also get some interest on it. Businessmen and industrialists have started depositing money in the bank because they have great convenience in making payments and transactions and sending it from one place to another. Banks receive deposits from the public, usually on the basis of accounts.

Fixed Deposit Account: money is deposited in this account with the bank for a fixed period of time. Money cannot be withdrawn from it before the time is over. But if the person depositing money in this account needs to withdraw the money before the completion of time, then the bank also gives a loan on the security of the deposit. The rate of interest on this type of deposit is very high.

Current Account: The specialty of such deposits is that the depositing institution or individual can deposit and withdraw money at any time per their wishes. There is no restriction on this. Those who deposit money in this account get a passbook and a chequebook. When there is a need to withdraw money, the depositor neither has to send the passbook nor has to go to the bank himself. He can write a check and give it to whomever he wants. He also has the right to withdraw as much money as he wants, whenever he wants using a cheque. But one restriction on opening a current account is that it is necessary for the depositor to always have a certain minimum balance in the bank account. But nowadays, many banks have started paying interest on these accounts as well.

Savings Bank Account: This account has an important place in some countries, especially India. The purpose of this type of heritage is to generate an image of accumulation among the common people. Small amounts are deposited in this account. Some restrictions are imposed on withdrawing money from these accounts, such as that money can be withdrawn only once or twice a week, or it can be withdrawn several times a week up to a limited amount. Thus, there is a restriction on time or amount. The bank also pays some interest on the amount deposited in this account.

Home-safe account: Its purpose is to create a sense of savings among children. On the opening of this type of account, the bank gives a locker to the customer by locking it. The customer takes it home and keeps putting in some savings money from time to time. After a certain time, it is opened by taking it to the bank, and that amount is deposited in the customer's account. In this case, too, the customer receives interest, like in a savings account.

Giving loans to the general public and businessmen

According to records, "A person can become a banker only when he starts giving money to others." In this way, the main function of the bank is to lend the deposited amount again to other people. There are many ways to lend. Among them, the following are the main ones:

Overdraft: "The merchants who have a current account, sometimes the bank gives them the right to withdraw more than their deposited amount." This excess amount is called an overdraft.

"The amount of the overdraft, the period, and what will be the interest rate on it—it is first decided by the bank and the businessman. As the merchant takes an overdraft, the amount increases, and finally it stops after reaching a certain amount. Some people consider both loans and overdrafts to be the same. But there is a difference between the two. In the case of a loan interest has to be paid on the total amount of the loan disbursed, but in the case of an overdraft interest has to be paid only on the amount of the overdraft that has been withdrawn. No interest has to be paid on the amount that has not been withdrawn. Suppose that the amount of the overdraft is settled at $2,000 but the merchant has withdrawn only $1,000; then he will have to pay interest on the $1,000 only. Overdraft is more attractive than a loan for customers.

Loans and Advances: Any person can take a loan from the bank by giving good security. Banks generally give loans for the short term only. Ordinary people also give loans, but there is a difference between lending by banks and lending by ordinary people. Ordinary people give loans in cash, but banks do not give loans in cash. They open an account in the name of the borrower and deposit the loan amount in that account. The bank gives a passbook and a chequebook to the borrower and gives them the right to withdraw money by cheque, ATM, or any other means to the extent of that loan amount.

Cash credit: This is a service in which the bank gives its customer the right to take a loan up to a certain amount on the basis of good security. The customer has to pay interest on the amount he withdraws. Maybe now you will get confused between cash credit and overdraft, but there are a lot of differences between cash credit and an overdraft. The main difference between the two is that the right of overdraft is given only to those who deposit money in current accounts, and cash credit can be availed by anyone by providing good security.

Money at Call, and Short Notice Money: Banks or any lender not only give loans for a long time they also give loans for short time periods (1 to 14 days), these types of loans are known as Money at Call, and Short Notice Money. As both loans are for a short time period and are almost similar but there are some differences between them. In case of money at call, a lender can ask the borrower to pay the money at any time. Sometimes it is given at night and taken back in the morning. Banks charge 1 percent or 1.5 percent interest on this. The specialty of such loans is that the lender can call the borrower to pay them anytime, and the customer can pay them anytime (within a certain time frame). If a borrower is not able to pay them within the specified time, then the lender can get the money by selling the guarantee submitted by the borrower. Such loans are often offered by brokers on the spot market.

In case of short notice money, the borrower does not require immediate payment when called. Rather, it gives the right to the borrower for the payment of the loan within a time period of up to 14 days.

Discounting of Bills or Hundis: For the convenience of their customers, banks pay the bills or hundis generated by them ahead of time and take some interest from the date of payment to the maturity date; this is the bank's advantage. In many ways, the discounting of bills and hundis is more convenient for the bank, as these can be quickly converted into rupees when required. These can be redeemed by the Central Bank or sold on the Stock Exchange. The amount invested in these is for a fixed time. After that, the bank gets the money back.

Secondary Functions of a Bank 

Customer Services

The bank serves its customers in the following manner:

  • Bank collect the cheque of any bank from their customers which is written for certain amount to pay in their customer's account and deposit that particular amount written in cheque to their customer's account.
  • They receive the payment of the bills written by the customers on their behalf, and with their permission, they also pay the bills accepted by them.
  • If ever the customers need to send money to another place, they can deposit that much money in the bank and send it to that place by taking a bank draft from the bank. On showing the draft, the branch of the bank in that place gives that much money.
  • With the permission of the bank customer, from time to time they keep paying the amount on their insurance premium, donation, or shares of the company.
  • Banks also act as representatives, protectors, and advisors for their customers.
  • They keep the valuables of their customers like jewellery, important documents etc. safe.

Other Functions 

Among the other functions of the bank, there are two major ones: printing notes and exchanging the currency of the country for the currencies of other countries.

The government has taken over the job of printing notes from ordinary banks. Now only the government bank or central bank can do this work. Exchange banks perform the task of changing currencies.

Types of Bank

Initially, when the banking field was underdeveloped, banks used to do almost all kinds of work. But as the banking field developed, the banks also adopted a special function. In this way, different categories of banks were formed due to their different functions.

Banks can be classified on the basis of their specialized functions as follows:

Commercial Bank

Commercial banks are those that provide short-term loans for the trade and industry of a country. They provide loans mostly for three months. Sometimes they also give loans for a year. These banks deposit money in all types of accounts, but they receive the most deposits in current accounts. These banks mostly give loans on the security of movable property. In India Punjab National Bank, Central Bank, Allahabad Bank, etc. are the banks that belong to this category.

Industrial Banks

These are the banks that give long-term loans for the development of industries. These banks provide loans for tenures ranging from 5 years to 20 years. The objective of these banks is to provide long-term loans to industries and businesses for their buildings, machinery, furniture, etc. In India, "Industrial Finance Corporation, Industrial Development Bank, and Industrial Credit and Exchange Corporation" come under this category.

Exchange Banks

These are the banks that buy and sell foreign exchange bills to meet the economic needs of foreign trade. The definition of big industrial and commercial banks in our country, etc., are examples of industrial banks. Foreign exchange banks have branches at the centers. Exchange banks in India are Citi Bank, ANZ Grindlays Bank, Standard Chartered Bank, Hong Kong Bank, American Express Bank, Bank of America, British Bank of Mideast, Bank of Tokyo, and Deutsche Bank.

Co-operative Banks

These are the credit institutions that are organized on the basis of cooperatives and give loans to their members at low-interest rates. The members of these banks are often poor farmers, labourers, or artisans. These people establish a cooperative bank by collecting a little bit of money. These banks provide loans to their members for production purposes at low-interest rates. Such banks have been working in India since 1950 A.D. Here, they have three forms. Basically, there are cooperative credit societies that provide financial assistance to farmers and artisans. There are central banks in the districts for financial assistance to these committees, and there are cooperative banks in the states for financial assistance and supervision of these banks.

Land Mortgage Banks

These are the banks that provide long-term loans to farmers by mortgaging their land. Farmers need to take out loans for a long time to make permanent improvements to the land, make wells, buy land, buy heavy agricultural machinery, etc. Land Development Banks provide loans for these projects only. There is a shortage of these banks in India.

Central Banks

In every country, there is a central bank to operate and control the country's money system smoothly. It is the apex bank of the country, and all other banks in the country work under its control. It saves the banks from an economic crisis by fulfilling the money and credit-related requirements of the banks and keeping control over their credit creation power. Government funds are under this authority. It also has the right to issue paper money to the country.

In this way, the bank keeps the internal and external purchasing power of money stable by controlling the money and credit systems of the country. The central bank of our country is the Reserve Bank of India.

Indigenous Banker

In almost all countries, some people are found doing banking business alone or in partnership. They have a very important place in the economy of our country. Here they are known by the names of Mahajan, Sahukar, Sarraf, Chetti, Seth, etc. They do business with their capital. Big bankers also take money from the public in the form of deposits. They do some other work along with the banking business. Their interest rate is very high. They give loans to farmers, labourers, artisans, and traders. Such bankers are called indigenous bankers.

Savings Bank

This bank works mainly to inculcate the habit of thrift among the poor and middle-class members of society. This type of bank allows the poor and middle class to save a small amount of money. Even small amounts can be deposited in it. The Postal Savings Bank has become more popular in India. Independent savings banks are also established in other countries.

Some Other Types of Banks

In the modern era, such institutions are found in many places but are not banks in the true sense, because the entire work of the bank is not carried out by them. These are of the following types:

Investment Banks

There are many investment banks in England and America. Their job is to invest capital in various types of investments.

Labour bank

In America, labour unions have opened their own banks in which their members deposit some part of their income as savings.

Business tycoon

Some big businessmen in London also do work-money transactions, which are known as business tycoons.

Student bank

An institution is opened for depositing the money of students belonging to schools or colleges, which is called a student bank.

Discounting institutions

These types of institutions are mainly found in London. Their main function is to encash bills of exchange. 

Apart from this, these days, organisations named Blood Bank, Eye Bank, etc. are also being opened, but in reality, they are not banks but only stores.

Advantages of Banking

There are various advantages of banking, which are as follows: 

Industrial and economic development of the country

The economic development of any country depends on the industrial development of that country. Large-scale production requires capital. No production can be done without capital. The main function of the bank is to deposit the money of those people in society for whom it is not required at that time. By collecting this type of money, the bank gives that money to other people (in the form of a loan) in the form of capital for production purposes. Due to this, industries start flourishing in the country, and economic progress in the country starts.

Increase in internal and foreign trade

By helping in sending money from one place to another, by encashing bills of exchange, bills, etc. of traders, and by giving short-term loans when needed, banks in the modern era innovate internal and foreign trade, providing consciousness.

The elasticity in the monetary system

The bank is the creator of credit. According to the needs of the country, the bank creates flexibility in the monetary system by creating or contracting credit. Due to this, there is no fear of currency contraction or inflation in the country, and there is no hindrance to the economic progress of the country.

To inculcate the habit of saving

By providing the facility of keeping the money safe and earning interest on it, the bank inspires people to save. People can deposit their extra money not required at a particular time in different types of accounts. The bank also provides the customer with the facility to keep jewellery, essential papers, etc. This leads to the accumulation of capital in the country.

Increase in the Productivity of Capital

Generally, only those people who deposit money in the bank don't have any productive use of money. The bank gives this money as a loan to those who have the ability to use it for productive work.

Convenience to Pay

Increases the use of bank Cheques. It is convenient to pay with cheques. The time spent on counting, checking, and sending money is saved, and there is no risk. There is no need to keep cash nearby.

Benefits of Credit Money

The circulation of credit money is possible only because of banks. Credit has many benefits.

The facility of government finance

Banks provide loans to the government when required. Banks also do the work of selling government securities. In India, where the Reserve Bank of India was not there earlier, Imperial Bank used to work as a government bank.

Various services to customers

Banks provide various services to their customers, such as handling their payments, buying and selling debentures, acting as their trustees and representatives, and providing information about their financial status. Collects and publishes economic information and data, etc. Through these services, banks make their customers worry-free.


People can keep their valuables safe with the bank. Due to this, there is no fear of theft.

Therefore, it is clear that the bank is the Artery center of trade for the country's business and commerce world.

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