Definition of Banking
Banking is a fundamental and integral part of any economy. It plays a crucial role in facilitating the flow of funds between savers or depositors and borrowers. Banks act as intermediaries by collecting funds from individuals, businesses, and institutions in the form of deposits and then channeling those funds to borrowers in the form of loans.
Definition of Banking:
Banking can be defined as the process or activity carried out by financial institutions called banks, whereby they accept deposits from customers who have extra money (surplus funds) and make these funds available to customers who need additional money (deficit funds) through various lending activities.
Banks are licensed and regulated entities that provide a range of financial services, apart from their core function of accepting deposits and making loans. These services include currency exchange, investment management, wealth management, payment processing, safety deposit boxes for safekeeping valuables, issuing debit/credit cards, providing electronic banking facilities such as internet banking/mobile banking applications, etc.
Core Functions Of Banks:
Accepting Deposits: One primary function of banks is to collect deposits from individuals, businesses, government entities or any other customer segments with surplus cash. These deposits can take different forms such as demand deposits (checking/saving accounts), time deposits (fixed/recurring deposits), current accounts for businesses etc.
Lending Money: Another critical function performed by banks is lending money to customers who require funding for various purposes like personal consumption expenditure or business investments. The bank analyzes loan applications according to established criteria before granting credit facilities.
Payment Facilitation: A significant role played by banks is acting as an intermediary for payment transactions between buyers and sellers in domestic or international trade. This includes processing checks/cash withdrawals at branches/ATMs and enabling electronic fund transfers through channels like NEFT/RTGS/UPI/SWIFT.
Investment and Wealth Management: Banks also manage customer investments on their behalf, providing services related to mutual funds, portfolio management, insurance products such as life insurance or general insurance policies.
Types of Banks:
There are different types of banks catering to specific segments or functions within the financial ecosystem. These include:
Retail Banks: These banks provide banking services directly to individual customers for personal needs such as savings accounts, basic checking accounts, mortgages, personal loans etc.
Commercial Banks: A commercial bank offers a wider range of services in addition to retail banking like loans and credit facilities for businesses along with treasury services (foreign exchange dealings), investment banking activities (underwriting IPOs/Bonds etc.) and cash management solutions.
Investment Banks: Investment banks primarily assist companies in raising capital by issuing securities like stocks/bonds/derivatives through underwriting activities or helping in mergers/acquisitions/IPOs etc. They also offer advisory and risk management services.
Central Bank: Central banks are the apex regulatory authority managing monetary policy and currency issuance within a given country. They supervise other commercial banks while ensuring economic stability through various measures like controlling inflation rates and lending interest rates.
Development Banks: Development banks focus on supporting industries requiring long-term financing for infrastructure projects or sectors vital for economic development like agriculture/education/housing/the environment by providing concessional funding/grants/subsidies.
In conclusion, the definition of banking encompasses an array of financial activities performed by licensed institutions called banks that collect deposits from individuals/institutions and lend these funds to borrowers who need financial assistance along with offering a variety of other value-added services impacting different facets of the economy's functioning.
