What is Bank? Meaning, Functions of Banks and Types of Banks in India

What is Bank?

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans.


What is Bank?

Functions of Bank

1. Primary Functions 

A. Accepting Deposits

  • Fixed Deposit Account
  • Current Deposit Account
  • Saving Deposit Account
  • Recurring Deposit Account

B. Advancing Loans

  • Money At Call – very short period generally from 1 to 14 days. Such advances are usually made to other Banks and financial institutions only. Money at Call ensures liquidity.
  • Overdraft – Overdraft means allowing the borrower to over drew his current Balance. The drawee has to pay interest on extra amount withdrawn. This facility of overdraft is available for Short-term to reliable customers only.
  • Cash Credit  – The bank advances loans to the Customer on the basis of his Current Assets. These loans are given in the form of a Fixed amount. Bank enters the amount of loans in the Account books of the debtor. The interest is chargable on the whole amount from the day the loan is started.
  • Discounting of Bills – The Banks Facilitate trade and Commerce by Discounting Bills of Exchange. Discounting a bill of Exchange means advancing a loan against a promise of repayment in future.
  • Credit to Government – The Commercial Banks Provides indirect Credit to the Central Government and State Government By Investing in their Securities.

C. Credit Creation 

Commercial Banks create demand deposit and help in circulating it as medium of Exchange. This is also called the Credit Creation. When a bank advances a loan or Credit, it does not lend Cash but opens an Account in favour of the Customer and Credits the amount to the Account.

D. Cheque System Provide

A cheque as a negotiable instruments is the most popular Credit instrument used by the cuto make Payments.

2. Secondary Functions 

Agency Functions 

  • Collection and Payment of Credit
  • Purchase and Sale of Securities
  • Trustee and Executor
  • Remittance of Money
  • Trading

General Utility Services 

  • Locker Facilities – Bank Provides Locker Facilities to their Customers. People can keep their Gold or Silver or Their Important documents in these Lockers at very nominal annual rent.
  • Acting as a Reference – Banks also act as a Referee. Banks give information about the economic position of their Customer to domestic and foreign traders.
  • Issuing Letter Of Credit – Letter Of Credit is a very popular documents in foreign trade. Banks certify that Credit worthiness of his Customers in a way by Issuing Letter Of Credit. Issuing Letter Of Credit to their Customer to enable them to go abroad.
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3. Development Functions 

  • Mobilization Of Savings
  • Expansion of Banking Services in Rural Areas
  • Providing loans to weaker section

4. Modern Functions 

  • Automatic Teller Machine (ATM)
  • Credit Cards or Debit Cards
  • Tele-Banking
  • Internet Banking

Indian Banking System 

A Banking system is a group or network of institutions that provide financial services for Customers.

The financial institutions are responsible for operating a payment system, Providing loans, taking deposits and helping with investments.

The Banking System in India consists of RBI, Commercial Banks, Co-operative Banks and Development Financial Institutions.

Characteristics Of Good Banking System 

  1. Suitable to Economic Conditions
  2. Sound Financial Basis
  3. Mobilization Of Savings
  4. Controlled Credit (RBI Uses Quantitative & Qualitative)
  5. Uniformity of Policies
  6. Co-ordinated System
  7. Trained and Progressive Administration
  8. Modernization
  9. Flexible & Dynamic

Structure Of Indian Banking System 

A. Reserve Bank Of India

RBI is the Central Bank Of Our Country. RBI Holds the Apex Position in the Banking Structure of India. It is also known as Banker’s Banks.

It is Owned and Controlled By The Government Of India and Has the Monopoly Power Of Issuing Notes.

B. Commercial Banks 

The main aim of Commercial Banks is to earn Profits.

  1. Public Sector Banks – The Majority Stake is held by the government in public sector Banks. There are 12 Public sector banks in India after the recent amalgamation of smaller Banks with larger Banks. Bank of Baroda, Bank Of India, Bank of Maharashtra, Canara Bank, Central Bank Of India, Indian Bank, Indian Overseas Banks, Punjab National Bank, Punjab and Sind Bank, Union Bank of India, UCO Bank, State Bank Of India.
  2. Private Sector Banks – Private sector Banks are those Whose equity is held by Private Shareholders e.g. ICICI Bank, HDFC Bank, Axis Bank etc. A Significant role is Played by Private sector Banks in the growth of indian Banking Sectors.
  3. Foreign Banks – Foreign Banks are those Banks which have their Origin and head office abroad but a working branch in India. eg. CITI Bank, HSBC, Standard Chartered, etc.
  4. Regional Rural Banks – A Regional Rural Bank is Sponsored by Commercial Bank. The main objective of this Bank is to provide Credit and Other Facilities Particularly to Small and Marginal Farmers, Agricultural Labourers and Small Scale Industries so As to develop Agriculture, Trade, Industries in the Rural Areas and To develop the Rural Economy.
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C. Co-operative Banks

Cooperative Banks are jointly run by a group of Individuals. Each Individuals has an equal share in these Banks. They are organised and Manged on the Principles Of Cooperation and Mutual Help. The main aim of Cooperative Banks to provide Rural Credit.

D. Scheduled and Non-Scheduled Banks 

A bank is said to be a Scheduled Bank when it has a paid up share Capital and Reserve as per the prescription of RBI and included I Second Schedule of RBI Act 1934.

On the other hand non-scheduled Bank is a bank which is not included in the second Scheduled of RBI Act 1934.

E. Development Banks and Other Financial Institutions 

A development Bank is a financial institution which provides a long term funds to industries for development purpose. Development Banks includes Bank Like – SIDBI, IFCI, NIDC, IBI. NSIC, SIDC, and SFC.

F. Wholesale Banking 

Wholesale Banking is also known as investment banking. Wholesale Banking meets the requirements of trade and industry by performing the Functions of Intermediary, Consultant, Financial Agency.

G. Retail Banking 

Retail Banking is typical mass-market Banking where Individual Customers use local branches of larger Commercial Banks to access the services of Savings and Checking Accounts, Mortgage, Personal Loans, Debit Cards and Credit Cards.

Types Of Bank

1. On the basis of law

Banks can be classified into the following Categories on the basis of the Second Schedule of Banking Regulation Act 1965

Scheduled Bank – A Scheduled Bank is one which is registered in the Second Scheduled of the Reserve Bank Of India Act. A bank must satisfy the following Conditions to be included the second Scheduled.

  • The bank concerned must be in business of Banking in India
  • Presently, RBI has Prescribed a minimum Capital of Rs. 200 crore For Starting A New Commercial Bank.

Non-Scheduled Bank – Non-Scheduled Banks are those Banks Whose names do not appears in second Schedule of Reserve Bank Of India Act.

2. On the basis of Domicile

  • Foreign Banks – Foreign Banks are those banks which are registered or incorporated outside India and having branch in India.
  • Domestic Banks – Domestic Banks are those Banks which are registered or incorporated in India. These Banks are the dominant part of total Commercial Banks.

3. On the basis of Ownership 

Public Sector Banks – Public Sector Banks are those Banks which are owned by the government. The Government runs these Banks in India. Public Sector Banks Dominate Commercial Banking in India. 12 Public Sector Banks.

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Private Sector Banks – These Banks are Owned and run by the private sector. Banks which are Owned by Individuals or corporations are included in this category.

Co-operative Banks – Cooperative Banks are those Banks which are jointly run by a group of Individuals. Each Individuals has an equal share in these Banks.

Three tier system is operating in Co-operative Banking which are Follows- 

  • The Primary Credit Societies
  • Central Co-operative Banks
  • State Co-operative Banks

4. On the basis of Functions

A. Commercial Banks

B. Industrial Banks

C. Agricultural Banks

D. Exchange Banks

  • Discounting Bills of Exchange
  • Foreign Remittance
  • Purchase & Selling of Gold and Silver
  • Issuing of letter of Credits
  • Facilities of finance international trade

E. Saving Banks

The main aim of Saving Banks is to collect Small Saving Across the country and put them to the productive use.

F. Indigenous Banks

5. Special types of Banks 

  • Retail Banks
  • Small finance Banks
  • Payments bank – paytm mobile banking


Reserve Bank Of India 

It is Apex body. The reserve bank of india (RBI) Is the central bank of the country. It has been established as a body corporate under the reserve bank of india Act 1934, Which came into effect from 1 April 1935. It took over the functions of management of currency from the government of india and the power of credit control from the imperial bank of india.

Reserve Bank of India

Functions of Reserve Bank Of India

A. Central Banking Functions 

  • Issue Paper Currency
  • Regulation of Credit ( through bank rate, open market operations, change in CRR )
  • Banker’s Bank ( Lenders of the Last Resort )
  • Bank of Government
  • Regulation of Foreign Exchange
  • Clearing House facility
  • Control over Nationalised Banks / Supervision
  • Training in Banking

B. General Banking Function

  • Accepting Deposits – RBI accept deposits from Central Government, State Government, and Private Individuals without paying of any interest on these deposits.
  • Bills Discounting – Reserve Banks buys, sells and rediscount the 90 days duration Bills, promissory Notes, etc.
  • Advancing Loans – Reserve Bank Of India Gives loan to the Central and State Government For The Period of 90 days
  • Deal in Foreign Securities
  • Deal in Costly Metal
  • Deal with other Countries Banks

C. Development Functions of RBI

  • Promotion of Agricultural Finance (NABARD)
  • Promotion of Industrial Finance ( IDBI, IFCI, SFC)
  • Promotion of Finance of Exports
  • Strengthening of Banking Structure
  • Extension of Banking Facilities


Conclusion: In this article we learn that ‘What is Bank? Meaning, Functions of Banks and Types of Banks in India’. This Article Is Very Important For All students who adopt ‘international Business’ Subject.

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