Banking

A bank is a financial intermediary which collects money from the individuals and lends this money to those who need them. In other words a bank acts as the mediator between the depositors on one hand borrowers on the other. By conducting the business, banks help in the development of trade and industry in the country.

Meaning and Definition

According to Crowther, “A bank is an institution which collects money from those who have it to spare or who are saving out of their income, and lends out those who require it.” In his definition, Crowther has outlined two main function of bank, i.e. acceptance of deposit and advancement of loans. But now-a-days, other financial institution also perform this function. Banks have an important function for which they figure so prominently in press, platform and parliament. That is, banks play an important role in money supply of the country. Bank deposits are now widely used as a means of payment. Taking this factor into consideration, Prof Sayers defines a bank as “an institution whose debts (bank deposits) are widely accepted in the settlement with other people’s debts (bank deposits) are widely accepted in the settlement with other people’s debts to each other.” In this definition, the important business of commercial bank, i.e. creation of bank money is duly emphasised. The deposits of the public are the debts of the bank. The bank allows its creditor or depositor to transfer claims by cheques and cheques act as good as money in effecting transactions. Therefore accepting deposits and using the deposits as a means of payment through cheques is the special feature of a commercial bank which Sayers emphasises. The Banking Companies Regulations Act, 1949 defines, “Banking means accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.”

From the above discussion, it is clear that a bank is an institution which accepts deposits, lends on the basis of the deposits and in the process creates money. Today the importance of banking has gone up because the debts of the bank (bank deposits) are widely accepted as money. By creating more or less of bank money, they can throw the economy out of gear. In developed countries of the West, the banking system is well organized, but in under-developed countries like India, the banking system is ill organised and underdeveloped.