What is Bank

What is Bank

  7:32 AM    Unknown

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Definition can vary from person to person but we can all have a summary of bank as an institution that accepts deposits of money from the public withdraw-able by cheque and used for lending.

Thus, there are two essential functions which make a financial institution a bank:

(1) Acceptance of chequable deposits (of money) from the public and

(2) Lending.

The former is its unique or most distinctive function.

Three things about deposits are noteworthy:

(i) They are deposits of money and not of goods or non-money financial assets;

(ii) Deposits are accepted from the public at large and not merely from its shareholders or members;

(iii) The deposits are repayable on demand and withdraw-able by cheque, i.e., the deposits are demand deposits. 

The second essential function relates to the use of deposits. They are used for lending to others, and not for financing its own business of any kind (say manufacturing or trade).

In fact, as bank (under the Banking Regulation Act, 1949) is not allowed to carry on any such business (other than that of banking). The word lending is used here broadly to include both direct lending to borrowers and indirect lending through investment in open-market securities.

The above discussion implies that neither of the functions alone is sufficient to earn an institution the status of a bank (in the modem sense of the term). Thus, acceptance, of chequable deposits from the public is only a necessary, but not a -sufficient, function of a bank. It must also lend to others. For this reason, Post Office savings banks are not banks in the accepted sense of a bank, even though some of them accept chequable deposits.

The reason they are not banks in the ordinary sense of the term (and are called savings banks) is that they do not perform the other essential function of a bank—that of lending to others. The Post Office savings banks are run as departmental agencies of the Central Government, and all the funds deposited with them are in fact lent to the Government, their owner.

Similarly, lending alone does not make a financial institution a bank. In fact, leaving out Post Office savings banks, all other financial institutions do the work of lending to others. But only those of them are banks that also accept chequable deposits them. All others are non-bank financial institutions. The examples are the LIC, UTI, the IDBI etc.

Banks are said to be department stores of financial services as they render a wide variety of such services to their customers. The range of these services differs from bank to bank, depending mainly on the size and type of banks.

So far we have highlighted only two of them, because, in combination, they are the necessary services which a bank as a bank must perform. They are also the two most important functions of a bank. We sum up briefly below the main services which banks in India generally perform. This should help appreciate the role which banks play in the economic life of the country.