What is Banking?

Banking is directly or indirectly connected with the trade of a country and the life of each individual. It
is an industry that manages credit, cash, and other financial transactions. In banking, the commercial
bank is the most influential institution for any country’s economy or for providing any credit to its
customers.
In India, a banking company is responsible for transacting all the business transactions including
withdrawal of cheques, payments, investments, etc. In other words, the bank is involved in the
deposit and withdrawal of money, repayable on demand, savings, and earning a decent amount of
profits by lending money.
Banks also help to mobilise the savings of an individual, making funds accessible to businesses and
help them to start a new venture.
However, unlike commercial banks, private sector banks are owned, operated, and regulated by
private investors and have the right to operate according to the market forces.

Types of Banking
Banks are further segregated into four types.
Commercial banks: These banks are regulated by Banking Regulation Act, 1949. They accept the
public deposit from the public for lending or investment.
Cooperative banks: Cooperative banks are undertaken by the State Cooperative Societies Act and
give cheap credit to their members. The rural population is dependent on the cooperative banks for
its financial backup.
Specialised banks: These banks provide financial help to special industries, foreign trade, etc. Few
examples of specialised banks are foreign exchange banks, export and import banks, development
banks, etc.
Central banks: These banks manage, check, and monitor all the activities of the commercial banks
of a country.

Functions of Commercial Banks

(1) Acceptance of deposits

     Banks provide the loans only based on the amount deposited by the public.
     They lend money and get interested in them.
     They get funds for lending through deposits in current and savings accounts.
     They pay interest on deposits according to the rates decided by RBI.
(2) Lending of funds

     Providing loans to the public is an important function of banks.

     Advances can be made in the form of overdrafts, cash credits, term loans, etc.
(3) Cheque facilities
      Banks provide cheque facilities to the owners of savings and current accounts to withdraw
their money.
     It is the most developed form of credit instrument.
     Banks also encash the cheques drawn on another bank.
     There are two types of cheques.
(a)  Bearer cheques that are cashable immediately
(b)  Crossed cheques that are to be credited to the payee’s account
(4) Remittance of funds

     Banks also provide the function of money transfer.

     It provides money transfer facilities through drafts, pays orders, net banking, NEFT/RTGS,
etc., on nominal commission charges.
     A payee can present the cheques in the drawer bank to collect the funds.

Types of Commercial Banks

(1) Public sector banks

     Public sector banks are those banks in which the major holding is of the government.
     Examples: SBI, PNB, OBC, etc.
(2) Private sector banks

     Private sector banks are those banks that are owned, controlled, and managed by private
promoters.
     They operate according to the market forces.
     Examples: HDFC, ICICI, Kotak Mahindra, etc.