WHAT IS A BANK?
A Bank is a financial institution which acts as an intermediary between those who have surplus funds and those who need it. Persons with surplus funds keep their deposits with the banks, out of which the banks give loans to those who require them. Thus, the Banks help in mobilising the savings and put these idle savings to productive use.
Thus, banks act as levellers of wealth not only between persons but also among different areas by mobilising funds from surplus areas and investing them in deficit areas, thereby leading to distribution of wealth. Therefore, banks are also known as ‘financial intermediaries.’
DEFINITION OF BANKING
Banking is a legally defined activity, which means that it is governed by strict rules and regulations. The Banking Regulation Act, 1949 defines and governs the banking activities in India.
As per Section 5(b) of this act, banking has been defined as “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”. In simple words, banking is related to –
- Accepting deposits of money from the public.
- For the purpose of lending, i.e. making loans, and making investments (in approved govt. securities).
- Withdrawal of money on demand or through cheque.
The above three are the basic functions of the banks. Other than this, banks are allowed to undertake several other functions like bill business, foreign exchange business, bonds/debentures, bank guarantees, letter of credit, etc. as mentioned in Sec. 6 of the Banking Regulation Act, 1949.
However, modern banking covers a large number of other activities also like issuance of debit/credit cards, providing safe custody of valuable items, locker facility, ATM services, transfer of funds, etc.
UNIQUE FEATURES OF BANKING
Banking has three unique features which are not available to any other organisation.
- The deposits are repayable on demand. It means that whenever a depositor wants to withdraw the money, bank will pay the money, subject to applicable rules. For example, A makes an FD for a period of 6 years but on the second day if he needs the payment, bank will make the payment.
No company other than a bank can accept deposits payable on demand.
- The Banks are allowed to issue cheques and no company other than a bank can issue its own cheques.
- For the Banks, it is necessary to incorporate words like bank, banking, banker, in their name. No other organisation is allowed to use such words as part of its name.
Some other features of banking include:
- Banks are authorized to create credit i.e. creating additional money by making loans.
- Most of the banks are commercial in nature, i.e. they function for making profits.
A company registered under the Companies Act, which transacts the business of banking as defined in Banking Regulation Act is known as banking company. Most of the banks are in the form of registered company.
In all countries the entire banking system is controlled by a Central Bank. The name Central Bank is given to that bank which is entrusted with task of controlling the issue of money and regulating all other banks. It also regulates the supply of money in the country. In India this function is performed by RBI.
To undertake the banking activities in India, it is compulsory, by law, to obtain a licence from the Reserve Bank of India (Sec.22 of Banking Regulation Act, 1949). Even the foreign banks have to obtain such a licence from the RBI before opening a branch in India. The RBI also has the powers to cancel the licence, if it is not satisfied with the bank’s functioning.
Minimum capital required to start a banking company is Rs. 500 crore.
REGULATION OF BANKS
The Banking Regulation Act, 1949 authorises the Reserve Bank of India to regulate and control the banks in India. As per Section 35(a) of this law, the RBI is fully authorized to issue instructions/directions to the banks as it deems fit, as and when considered necessary. It is mandatory for all the banks (including foreign banks) to comply with directions of the RBI. Further, Sec. 35 authorises RBI to inspect any bank branch any time.