Banking is an important part of our daily to daily life transactions as it provides various services such as payment of bills, UPI transactions, withdrawals, purchases, loans, and many other services. There are many banks in India.
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What is Banking?
Banking refers to the industries and practices associated with the handling of financial transactions, primarily through banks and financial institutions. It encompasses a wide range of activities related to managing money, providing loans, accepting deposits, facilitating transactions, and offering various financial services.
Banking is significant for the economy because it helps money move around and allows economic activities to happen.
KEY TAKEAWAYS:
- Importance of Banking: Banking is crucial for daily financial transactions, offering services like bill payments, UPI transactions, withdrawals, purchases, loans, and more, making it an integral part of everyday life.
- Functions of Banks: Banks perform essential functions such as accepting deposits, providing loans, issuing credit, facilitating payments, offering financial services, managing risks, creating money through fractional reserve banking, and acting as intermediaries between savers and borrowers.
- Types of Banks: Banks are classified into various types including retail banks, public sector banks (PSBs), private sector banks, regional rural banks (RRBs), commercial banks, community banks, credit unions, savings banks, online banks, investment banks, and development banks, each serving distinct purposes and target markets within the financial system.
Functions of the Banks
Banks play a fundamental role in the functioning of the financial system and the economy, providing essential services that help facilitate economic activity, manage financial risks, and promote prosperity. Some of the core functions of the Banks are mentioned below:
- One of the primary functions of banks is to accept deposits from individuals, businesses, and other entities. These deposits can take several forms, such as savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts.
- Banks lend money to individuals, businesses, and governments for various purposes. Loans provided by banks can include mortgages for purchasing homes, auto loans for buying vehicles, business loans for financing operations or expansion, and personal loans for various needs.
- Banks issue credit in the form of credit cards and lines of credit, allowing individuals and businesses to borrow money up to a certain limit. This credit can be used for purchases, payments, or other financial needs.
- Banks facilitate payments between individuals, businesses, and other entities through various means, including checks, electronic funds transfers (EFTs), wire transfers, and online payment systems. They also issue debit cards and provide services for processing credit card transactions.
- Banks offer a wide range of financial services to their customers, including investment services, wealth management, retirement planning, insurance products, foreign exchange services, and safe deposit boxes for storing valuables.
- Banks engage in risk management activities to assess and mitigate risks associated with their lending, investment, and operational activities. This includes credit risk assessment, market risk management, liquidity risk management, and operational risk management.
- Through the process of fractional reserve banking, banks effectively create money by accepting deposits and making loans. When banks make loans, they create money in the form of credit, which expands the money supply in the economy.
- Banks act as intermediaries between savers and borrowers, channelling funds from individuals and businesses with excess capital to those in need of funds for investment or consumption purposes. This intermediation function helps allocate resources effectively in the economy.
- Banks play a crucial role in supporting economic growth by providing financing to individuals and businesses, facilitating investment and consumption, and promoting entrepreneurship and innovation.
Types of Banks
Some of the main types of banks, each serving distinct purposes and target markets within the financial system, are:
- Retail Banks: Retail banks cater to individual customers and provide a wide range of services such as savings accounts, checking accounts, personal loans, mortgages, credit cards, and other financial products and services. Retail banks are also referred to as Consumer Banks.
- Public Sector Banks (PSBs): These are the banks whose majority stake is held by the government. These banks play a significant role in providing banking services across the country, especially in rural and semi-urban areas. Some of the well-known public sector banks in India include the State Bank of India (SBI), Punjab National bank (PNB), and many more.
- Private Sector Banks: These are the banks whose majority stock is held by private individuals or corporations. These banks are known for their efficiency, innovation, and customer service. The prominent private sector banks in India include ICICI Bank, HDFC Bank, and many more.
- Regional Rural Banks (RRBs): These are the banks that are financial institutions established to provide banking and financial services to rural areas. These banks are sponsored by a commercial bank, a regional rural bank, and the government of India. RRBs play a vital role in promoting financial inclusion and rural development.
- Commercial banks: These are the banks that primarily serve businesses and corporations, offering services such as business loans, lines of credit, treasury management, merchant services, and other financial solutions tailored to the needs of the businesses.
- Community Banks: These are the banks that are locally owned and operated financial institutions that focus on serving the banking needs of specific communities or regions. They typically offer personalised service, community involvement, and a range of banking services similar to those of larger banks.
- Credit Unions: These banks are member-owned financial cooperatives that provide banking services to their members, who are typically part of a specific community, profession, or organisation. Credit unions offer savings accounts, checking accounts, loans, and other financial products with a focus on member satisfaction rather than maximising profits.
- Savings Banks: These are the banks that focus on promoting savings and homeownership. They offer savings accounts, mortgages, home equity loans, and other financial products aimed at helping individuals and families save and invest for the future. Savings banks are also referred to as thrift institutions.
- Online Banks: These are the banks that operate exclusively through digital channels, such as websites and mobile apps, without physical branch locations. They offer a wide range of banking services, often with lower fees and higher return rates on savings accounts and other deposit products due to lower overhead costs.
- Investment Banks: These are the banks that provide a range of financial services to corporations, governments, and institutional clients, including underwriting securities, mergers and acquisitions advisory, corporate restructuring, trading of securities, and asset management services.
- Development Banks: These are the banks that provide financing and technical assistance to developing countries for projects aimed at economic development, poverty reduction, infrastructure improvement, and sustainable growth. These banks are also referred to as multilateral development banks.
Banking: Examples of Public, Private and Foreign Banks
Some of the best Public, private, and Foreign banks in India are mentioned in the table below.
| Top Banking in India | ||
| Public Sector Banks | Private Sector Banks | Foreign Banks |
| State Bank of India (SBI) | ICICI Bank | Citibank |
| Punjab National Bank (PNB) | HDFC Bank | Standard Chartered Bank |
| Bank of Baroda (BOB) | Axis Bank | HSBC India |
| Canara Bank | Kotak Mahindra Bank | DBS Bank |
| Union Bank of India | IndusInd Bank | Barclays Bank |
| Bank of India | Yes Bank | Deutsche Bank |
| Indian Bank | IDFC First Bank | BNP Paribas |
| Central Bank of India | Federal Bank | Bank of America Merrill Lynch |
| Indian Overseas Bank | Bandhan Bank | |
| Bank of Maharashtra | RBL Bank | |
| UCO Bank | South Indian Bank | |
| Punjab & Sind Bank | ||
| Corporation Bank | ||
| Oriental Bank of Commerce | ||
| Andhra Bank | ||
| Allahabad Bank | ||
Types of Bank Accounts in India
There are several types of bank accounts in India designed to cater to specific financial needs and preferences of the customers, these are:
- Savings Account: A savings account is a basic type of bank account primarily meant for individuals to deposit their savings and earn interest on the deposited amounts.
- Current Account: A current account is typically used by businesses, firms, and companies for conducting their day-to-day financial transactions.
- Fixed Deposit Account: A fixed deposit account allows individuals to deposit a lump sum amount for a fixed tenure at a predetermined interest rate.
- Joint Account: Joint accounts are opened by two or more individuals, allowing them to share ownership and access to the account.
- Salary Account: These are the accounts that are offered by banks to facilitate salary payments by employers to their employees. These usually come with features such as zero balance requirements, special privileges like overdraft facilities, and discounted rates on various banking services.
Banking FAQs
What does banking mean?
Banking refers to the industry and practice of dealing with financial transactions, primarily involving accepting deposits from customers, providing loans, and many other financial services. Detailed information about banking and its functions is mentioned in the above article.
How does a bank work?
Banks work as intermediaries, facilitating the flow of funds between the savers and the borrowers. A detailed analysis of the function of banks is mentioned in the article above.
Name some of the public sector banks in India.
Some of the public sector banks in India include State Bank of India (SBI), Punjab National Bank (PNB), Union Bank of India (UIB), Bank of Baroda (BOB), and many more.
