Banking: Meaning of Banking, Important Terms of Banking

Banking is an important segment in Indian Financial System that helps in the nation’s economic development. Banks are financial intermediaries between the depositors and the borrowers. In today’s changed global business environment, apart from accepting deposits and lending money, banks offer many more value added services and various categories of stakeholders use the banks for their different requirements. Further, the Reserve Bank of India is the Central Bank of the country and act as the regulator, supervisor and facilitator of the Indian Banking System.

Meaning of Banking

Bank: A commercial bank is a financial intermediary. It accepts the deposits from the surplus units and lends these financial resources to the deficit units. The main aim of the commercial banking sector is profit making.

Functions of commercial banks: A bank is a financial institution. It is a profit-making business firm dealing with money. Modern banks in India are joint stock companies registered under the Indian Companies Act.

Definition of Bank: Sayers define bank as, “an institution whose debts (bank deposits) are widely accepted in settlement of other people’s debts”.

According to Crowther, a bank “collects money from those who have it to spare or who are saving it out of their incomes and lends this money to those who require it”.

Some Important Terms of Banking

(a) Current deposits: These are the deposits made into the current account of a bank. They are most convenient to the businessmen, public authorities and joint stock companies because there are no restrictions on the number and the amount of withdrawals.

(b) Savings deposits: These deposits are made into a savings bank account of the bank. They are most convenient to the small businessman, salaried employees, artisans and people belonging to the low and middle income groups. The interest paid on these deposits is comparatively low and is around 4% per

(c) Term deposits: They are also called fixed deposits because the money is deposited with the bank for a fixed period of time. The deposit can be withdrawn after the expiry of maturity period. The minimum period of deposit is 15 days. The rate of interest varies from 6% per annum to 12% per annum.

(d) Recurring or cumulative deposits: These are the variants of fixed deposits. These deposits are very convenient to those who cannot save huge amounts at a time. These deposits carry interest at a rate more than that of savings bank and less than that of a term deposit.

(e) Demand loans/call loans: A demand loan is a loan that should be repaid on demand by the bank. It does not have a specified maturity period. This loan is a kind of advance made with or without security. These are also called call loans. Normally call loans are given to other banks or financial institutions for a day or a few days.

(f) Short term loans: These loans are given for a specified short period. They are sanctioned to businessmen and farmers etc. to finance working capital. Individuals may also receive such loans as personal loans. They are given against security.

(g) Cash credits: A cash credit refers to an arrangement by which the bank allows its customer to borrow money upto a specified limit from an account opened for the purpose. The customer need not withdraw the entire amount in one installment.

(h) Overdraft: This is a facility allowed by the bank to the current account holders. They are allowed to withdraw money with or without security in excess of the balance available in their account up to a limit. Interest is charged on the amount of actual withdrawal.

(i) Discounting of bills of exchange: Bills of exchange are undertakings written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date. The traders who posses such bills of exchange with them may approach the banks for discounting of the bills of exchange when they need money.

(j) Credit cards: Now-a-days, the banks have devised new methods of giving loans to the customers. One such popular method is issuance of the credit card. A credit cardholder can use his card to purchase goods on credit from specified firms and shops and also withdraw cash subjects to certain regulations.

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