Meaning and Definition of a Bank

A bank is a financial institution that accepts deposits from the public, repayable on demand or otherwise, and uses those funds to lend money to those who need it, earning the difference between the interest it pays on deposits and the interest it charges on loans. Section 5(b) of the Banking Regulation Act, 1949 defines "banking" as "the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."

Two elements are essential to this definition: accepting deposits from the public and lending or investing those deposits — an institution that only accepts deposits without lending (like a chit fund, in the strict sense), or only lends without accepting public deposits, does not qualify as a "bank" in this legal sense.

Modern economies rarely rely on a single kind of bank — different needs (day-to-day payments, agricultural credit, long-term industrial finance, foreign trade) are served by different, specialised categories of banks, all operating within the framework the RBI, as the central bank, regulates and supervises. This chapter classifies the different types of banks operating in India today.

The classification of banks studied here — central bank, commercial banks, cooperative banks, and specialised development banks — mirrors the same banking structure covered in CBSE/NCERT Business Studies and Economics at the senior secondary level, since India's banking system is a single national structure regulated by one RBI, regardless of the board a student studies under.