An over view of banks

1.1 INTRODUCTION

Evolution of Banking (Origin and development of Banking)

The evolution of banking can be traced back to the early times of human history. The

history of banking begins with the first prototype banks of merchants of the ancient

world, which made grain loans to farmers and traders who carried goods between

cities. This began around 2000 BC in Assyria and Babylonia. In olden times people

deposited their money and valuables at temples, as they are the safest place available

at that time. The practice of storing precious metals at safe places and loaning money

was prevalent in ancient Rome.

However modern Banking is of recent origin. The development of banking from

the traditional lines to the modern structure passes through Merchant bankers,

Goldsmiths, Money lenders and Private banks. Merchant Bankers were originally

traders in goods. Gradually they started to finance trade and then become bankers.

Goldsmiths are considered as the men of honesty, integrity and reliability. They

provided strong iron safe for keeping valuables and money. They issued deposit

receipts (Promissory notes) to people when they deposit money and valuables with

them. The goldsmith paid interest on these deposits. Apart from accepting deposits,

Goldsmiths began to lend a part of money deposited with them. Then they became

bankers who perform both the basic banking functions such as accepting deposit and

lending money. Money lenders were gradually replaced by private banks. Private

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 banks were established in a more organised manner. The growth of Joint stock

commercial banking was started only after the enactment of Banking Act 1833 in

England.

1.2. MEANING OF BANKING

Origin of the word bank

The term Bank is derived from the Italian word banca, Latin word bancus and

French word banque which means bench. In fact, Medieval European bankers

transacted banking activities displaying coins on a bench. Another view is that bank

might be originated from German word banc which means joint stock fund.

Definitions

Definition of bank varies from countries to countries.

Under English common law, a banker is defined as a person who carries on the

business of banking, which is specified as conducting current accounts for his customers,

paying cheques drawn on him/her, and collecting cheques for his/her customers.

Experts Views:

Prof Kinley views: A bank is an institution which receives deposits and advances
loans

According to H.L.Hart A banker is one who, in, the ordinary course of his

business, honours cheques drawn upon him by persons from or for whom he receives

money or current accounts.

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 According to Prof. CrowtherA bank collects money from those who have it spare

or who are saving it out of their incomes. It lends money to those who require it.

Comprehensive Definition According to Banking companies Banker means a

person transacting the business of accepting for purpose of lending or investing of

money from the public, repayable on demand or otherwise withdrawable by cheque,

draft, and order or otherwise.

CHARACTERISTICS OF BANKER/BANKING

1. Banker deals with others money

2. Banks repay deposits either on demand or after the expiry of specified period

3. They utilise deposits for lending/investment

4. They perform subsidiary services and innovative functions

5. Banking should be dominant part of business of bank

6. A bank should hold itself out as a bank

IMPORTANCE OF BANKS

Bankers play very important role in the economic development of the nation.

The health of the economy is closely related to the growth and soundness of its banking

system. Although banks create no new wealth but their fund collection, lending and

related activities facilitate the process of production, distribution, exchange and

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consumption of wealth. In this way, they become very effective partners in the process

of economic development.

1. Banks mobilise small, scattered and idle savings of the people, and make

them available for productive purposes

2. By offering attractive interests, Banks promote the habit of thrift and savings

3. By accepting savings, Banks provide safety and security to the surplus money

4. Banks provide convenient and economical means of payments

5. Banks provide convenient and economical means of transfer of funds

6. Banks facilitate the movement of funds from unused regions to useful regions

7. Banking help trade, commerce, industry and agriculture by meeting their

financial requirements

8. Banking connect saving people and investing people.

9. Through their control over the supply of money, Banks influence the economic

activities, employment, income level and price level in the economy.

1.3 TYPES OF BANKS:-Banks can be classified as follows

(a) On the basis of Functions

(b) On the basis of Ownership

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 (c) On the basis of Registration

(d) On the basis of Domicile

On the basis of Function:-

(i) Commercial Banks:- The most popular kind of banks is the commercial

bank receives surplus money from the public and lends to others who needs

funds. The bank collects cheques, Bill of exchange etc for customers .It transfers

money from one place to another. The purpose of a commercial bank is to earn

profit. These banks play a vital role in economic development.

(ii) Central Bank:- Central bank is the most important bank of any country.

Almost all countries of the world now have central bank. The central bank is the

leader of all other banks in a country. It has a right to issue currency notes. It

controls the operations of other banks for monetary and economic stability in

country. The central bank represents the Govt in International conferences.

Since it is occupying a central position, its known as Central Bank. It is operating

under states control and is not a profit motive organization. Bank of Canada

(Canada), Federal Reserve System(USA) ,

Reserve Bank of India (India), etc are the examples of Central Banks.

(iii) Industrial Banks:-The industrial bank is very important for the

development of any country. These banks provide medium and long-term

finance to industry. Industrial banks generally provide finance for fixed capital

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requirement of industries. They provide finance for expansion and

modernization of industries.

(iv) Agricultural Banks:-In an agricultural country most of its exports consist

of Agro-based products. So well organized agriculture sector is necessary for the

development of a country. Agricultural banks provide loan for production and

exporting of agriculture products.

(v) Saving Bank:- The banks are established for encouraging and collecting

savings of people. Saving banks are not banks in the real sense of term. They

only provide saving facility. These banks usually invest their funds in Govt

securities. The well-Known Post Office savings Banks is an institution of this type.

Commercial banks are also providing the service of saving banks .

(vi) Investment Banks:- The bank is opened to buy and sell shares and other

securities. It also provides loans for purchase of shares and debenture etc. It

keeps new companies by under writing the share, bonds & other securities.

(vii) Merchant Bank:- The bank provides services like acceptance of bills of

exchange, corporate finance, Leasing, hire-purchase and insurance broking. It is a

whole sale bank and accepts large sums for fixed term from individual,

companies and financial institutions.

(viii) Exchange banks: Exchange banks finances foreign exchange business

(export, import business) of a country. Special exchange banks are found only in

some countries. The main functions of exchange banks are remitting money

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 from one country to another country, discounting of foreign bills, buying and

selling gold and silver, helping import and export trade etc.

(ix) Mortage Bank :- These banks provide loans to people against moveable

and immovable property. Loans will be provided with mortgaging assets with

the bank.

(x) Cooperative Bank:- These banks are set up to provide credit facilities to

farmers and small producers. The bank is opened by persons of similar

occupations living in same areas for providing banking facilities

On the Basis Of Ownership:-

Public sector Bank:- Such banks are owned by government and works under the

direct control of the government. The chief executive of such banks is appointed

by federal government.

Private Sector Bank:- These banks are under the direct ownership of the private

organization. The banks are controlled by the individuals or Pvt Organization.

On The Basis Of Registration:-

Scheduled Bank:-

These are the banks which are registered in the list of central bank. They are

bound to follow the instruction and policies of central bank.

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 Non Scheduled Banks:- These are the banks which are not registered in list and

policies, Instruction of central Bank.

On The Basis Of Domicile:-

Domestic Bank:- The banks which are registered and incorporated with in the

country are called domestic bank. These banks provide financial assistance

domestically.

Foreign Bank:- The bank which have their origin and head offices in foreign

country are called foreign bank. Foreign banks are the branches of the banks

incorporated abroad.

1.4. Banking issues in 21st century

The top 4 challenges facing banks are

1. Not making enough money. Despite all of the headlines about banking

profitability, banks and financial institutions still are not making enough return

on investment, or the return on equity, that shareholders require.

2. Consumer expectations. These days its all about the customer experience, and

many banks are feeling pressure because they are not delivering the level of

service that consumers are demanding, especially in regards to technology.

3. Increasing competition from financial technology companies. Financial

technology (FinTech) companies are usually start-up companies based on using

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 software to provide financial services. The increasing popularity of FinTech

companies is disrupting the way traditional banking has been done. This creates

a big challenge for traditional banks because they are not able to adjust quickly

to the changes not just in technology, but also in operations, culture, and other

facets of the industry.

4. Regulatory pressure. Regulatory requirements continue to increase, and banks

need to spend a large part of their discretionary budget on being compliant, and

on building systems and processes to keep up with the escalating requirements.

Innovative Functions

The adoption of Information and Communication technology enable banks to provide

many innovative services to the customers such as;

1. ATM services Automated Teller Machine (ATM) is an electronic

telecommunications device that enables the clients of banks to perform

financial transactions by using a plastic card. Automated Teller Machines

are established by banks to enable its customers to have anytime money. It

is used to withdraw money, check balance, transfer funds, get mini

statement, make payments etc. It is available at 24 hours a day and 7 days

a week.

2. Debit card and credit card facility Debit card is an electronic card

issued by a bank which allows bank clients access to their account to

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 withdraw cash or pay for goods and services. It can be used in ATMs,

Point of Sale terminals, e-commerce sites etc. Debit card removes the

need for cheques as it immediately transfers money from the client's

account to the business account. Credit card is a card issued by a

financial institution giving the holder an option to borrow funds, usually

at point of sale. Credit cards charge interest and are primarily used for

short term financing

3. Tele-banking : Telephone banking is a service provided by a bank or

other financial institution, that enables customers to perform financial

transactions over the telephone, without the need to visit a bank

branch or automated teller machine

4. Internet Banking: Online banking (or Internet banking or E-banking) is a

facility that allows customers of a financial institution to conduct

financial transactions on a secured website operated by the institution.

To access a financial institution's online banking facility, a customer

must register with the institution for the service, and set up some

password for customer verification. Online banking can be used to

check balances, transfer money, shop onlline, pay bills etc.

5. Mobile Banking: Mobile banking is a system that allows customers of a

financial institution to conduct a number of financial transactions

through a mobile device such as a mobile phone or personal digital

assistant. It allows the customers to bank anytime anywhere through

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 their mobile phone. Customers can access their banking information

and make transactions on Savings Accounts, Demat Accounts, Loan

Accounts and Credit Cards at absolutely no cost.

6. Electronic Clearing Services : It is a mode of electronic funds transfer

from one bank account to another bank account using the services of a

Clearing House. This is normally for bulk transfers from one account to

many accounts or vice- versa. This can be used both for making

payments like distribution of dividend, interest, salary, pension, etc. by

institutions or for collection of amounts for purposes such as payments

to utility companies like telephone, electricity, or charges such as house

tax, water tax etc

7. Electronic Fund Transfer is a nation-wide payment system facilitating

one-to-one funds transfer. Under this Scheme, individuals, firms and

corporate can electronically transfer funds from any bank branch to any

individual, firm or corporate having an account with any other bank

branch in the country participating in the Scheme. The funds can be

transferred within a day by using this system.

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