Meaning of a Bank and the Banking System

Almost every commercial transaction a business or a household carries out today — receiving a salary, paying a supplier, saving for the future, borrowing to expand a shop — passes through a bank at some point. A bank is a financial institution licensed by the monetary authority of the country to accept deposits of money from the public and to lend that money to individuals, businesses and governments, while also offering a range of related financial services such as transferring funds, collecting cheques and issuing demand drafts. For a student working through the Andhra Pradesh Intermediate Second Year Commerce course, this chapter on Banking Services builds directly on the earlier idea, introduced in the study of business finance, that an economy needs institutions to channel savings towards productive borrowing.

A bank is best understood as a financial intermediary — an institution that stands between people who have surplus money they are not spending right now and people who need to borrow money for consumption, working capital or investment. What separates a bank from an ordinary private money-lender is scale and trust: a money-lender lends only personal capital, whereas a bank lends money that ultimately belongs to thousands of depositors, so it carries a much larger duty of safety, liquidity and public confidence. This is exactly why banking, everywhere in the world, is a licensed and closely regulated activity rather than something any private party may simply start doing.

The banking system of a country is the complete network of such institutions operating together under the supervision of a central monetary authority. In India this system has a clear hierarchy: a central bank — the Reserve Bank of India — sits at the apex, regulating and supervising every other bank, while a wide spread of commercial, cooperative, regional rural and specialised banks operates below it, each built to serve a different segment of the economy. This chapter works through that structure, the core functions a commercial bank performs, the regulatory role of the Reserve Bank of India, and finally the electronic channels through which banking is delivered today.