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banking#intro-to-banking

Learn Banking and Banking Fundamentals

[Full Guide]
Banking is a cornerstone of modern economies, serving as a conduit for financial transactions
and a source of credit for individuals and businesses.

iEduNote offers a comprehensive exploration of the multifaceted world of banking. It delves

into the intricacies of bank funds, organization management, regulation, risk management,
and services.

Each section delves into specific topics related to banking, such as the qualitative and
quantitative indicators of bank failure, methods of bank performance evaluation, the
CAMELS rating system, and sources and functions of bank funds.

Learn banking and its fundamentals through in-depth coverage and clear presentation with
our articles.

1. Intro to Banking
Bank: Meaning, Characteristics, Features, Functions

A bank is a financial institution that deals with deposits, advances, and other related services.
It receives money from those who want to save in deposits and lends money to those who
need it. Different Authors and Economists have given some structural and functional
definitions of banks from different angles.

Where the word “Bank” came from

The history of the banking industry is long and vast, and Finance is the lifeblood of trade,
commerce, and industry. The development of any country mainly depends upon the banking
system. The term bank is either derived from the old Italian word “Banca” or the French
word “Banque,” both mean a Bench or money exchange table.

In the olden days, European money lenders or money changers displayed (show) coins of
different countries in big heaps (quantity) on benches or tables for lending or exchanging.
Nowadays, the banking sector acts as the backbone of modem business.
Definitions of Bank

Oxford Dictionary defines a bank as “an establishment for custody of money, which it pays
out on customer’s order.”
According to R.S. Sayers, “Banks are institutions whose debts are commonly accepted in
final settlement of other people’s debts.”
According to Peter Rose, a “Bank is a financial intermediary accepting deposits and
granting loans.
According to F.E. Perry, “Bank is an establishment which deals in money, receiving it on
deposit.”
According to Cairn Cross, “Bank is an intermediary financial institution which deals in
loans and advances.”
 According to R.P. Kent, “Bank is an institution which collects idle money temporarily
from the public and lends to other people as per need.”
According to P.A. Samuelson, “Bank provides service to its clients and in turn receives
perquisites in different forms.”
According to W. Hock, “Bank is such an institution which creates money by money only.”

Meaning of Bank

From the above definitions, a bank means a financial institution that;

Feals with money; it accepts deposits and advances loans.

It also deals with credit; it has the ability to create credit, i.e., the ability to expand its
liabilities as a multiple of its reserves.
It is a commercial institution; it aims at earning profit.
It is a unique financial institution that creates demand deposits that serve as a medium of
exchange, and as a result, the banks manage the country’s payment system.

Finally, we can say that bank is an organization where people and businesses can invest or
borrow money, change it to foreign money, etc. or a building where these services are
offered.
Who is a Banker? Definition of Banker

A banker is an officer of a bank. In a broad sense, a banker conducts the business of banking.
A banker is a person who is doing banking activities or business.

Different Authors and Economists have given some structural and functional definitions of
Banker from different angles:-

Dr. H.L. Hart states, “A banker or a bank is a person or a company/carrying on the business
of receiving money, and collecting drafts, for customers.”

According to John Bouvier, “A banker is one engaged in the business of receiving other
person money in deposit, to be returned on demand discounting other persons’ notes, and
issuing his own for circulation.”

According to Richmond V. Blake, “A banker is a private person who keeps a bank; one who
is engaged in the banking business.”

From the above definition, we can find the following characteristics of a banker:-

A banker performs multifarious functions.

A banker is essentially a man of wisdom.
He deals with others’ money but with his faculties.
A banker acts as a depository, agent, and repository of financial advice.
To be a banker, the company’s main function must be the ‘business of banking.’

Finally, we can say that a banker is an individual employed by a banking institution and
participates in various financial transactions, which may or may not include investments.
Characteristics / Features of a Bank
Characteristics Or Features Of A Bank Are;
A bank is a financial institution licensed to receive deposits and make loans. Banks may also
provide financial services like wealth management, currency exchange, and safe deposit
boxes.

11 characteristics/features of a bank are;

Dealing in Money
Individual/Firm/Company
Acceptance of Deposit
Giving Advances
Payment and Withdrawal
Agency and Utility Services
Profit and Service Orientation
Ever-increasing
Connecting Link
Banking Business
Name Identity

The main characteristics/ features of a bank are discussed below:-

1. Dealing with Money

The bank is a financial institution that deals with other people’s money, i.e., the money given
by depositors.
2. Individual/Firm/Company

A bank may be a person, firm, or company. A banking company is a company that is in the
business of banking.
3. Acceptance of Deposit

A bank accepts money from people in deposits that are usually repayable on demand or after
a fixed period expires. It gives safety to the deposits of its customers. It also acts as a
custodian of funds of its customers.
4. Giving Advances

A bank lends out money in loans to those who require it for different purposes.
5. Payment and Withdrawal

A bank provides its customers with an easy payment and withdrawal facility in checks and
drafts. It also brings bank money into circulation. This money is in the form of checks, drafts,
etc.
6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general utility
services and agency services.
7. Profit and Service Orientation

A bank is a profit-seeking institution with having service-oriented approach.

8. Ever-increasing
Functions Banking is an evolutionary concept. There is continuous expansion and
diversification regarding a bank’s functions, services, and activities.
9. Connecting Link

A bank acts as a connecting link between borrowers and lenders of money. Banks collect
money from those who have surplus money and give the same to those who require money.
10. Banking Business

A bank’s main activity should be to do banking business that should not be a subsidiary of
any other business.
11. Name Identity

A bank should always add the word “bank” to its name to let people know that it is a bank
that deals in money.
Functions of Banks

The functions of banks are briefly highlighted in the following diagram or chart.
Functions Of Banks

Primary Functions of Banks.

Accepting Deposits.
Saving Deposits.
Fixed Deposits.
Current Deposits.
Recurring Deposits.
Granting of Loans and Advances.
Overdraft
Cash Credits
Loans
Discounting of Bill of Exchange
Secondary Functions of Banks.
Agency Functions.
Transfer of Funds.
Collection of checks.
Periodic Payments.
Portfolio Management.
Periodic Collections.
Other Agency Functions.
General Utility Functions.
Issue of Drafts, Letters of Credit, etc.
Locker Facility.
Underwriting of Shares.
Dealing in Foreign Exchange.
Project Reports.
Social Welfare Programs.
Other Utility Functions.

A. Primary Functions of Banks

The primary functions of a bank are also known as banking functions. They are the main
functions of a bank. These primary functions of banks are explained below.
1. Accepting Deposits

The bank collects deposits from the public. These deposits can be of different types, such as

Saving Deposits: This type of deposit encourages saving habits among the public. The rate
of interest is low. At present, it is about 4% p.a.
Fixed Deposits: The lump sum amount is deposited at one time for a specific period. A
higher rate of interest is paid.
Current Deposits: This type of account is operated by businessmen. Withdrawals are freely
allowed. No interest is paid.
Recurring Deposits: This type of account is operated by salaried persons and petty traders.
Withdrawals are permitted only after the expiry of a certain period. A higher rate of interest is
paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The
rate charged is higher than what it pays on deposits. The types of bank loans and advances
are:

Overdraft: This type of advance is given to current account holders. It is sanctioned to

business people and firms. An overdraft facility is granted against collateral security.
Cash Credits: The client is allowed cash credit up to a specific limit fixed in advance. The
cash credit is given against the security of tangible assets and or guarantees. The advance is
given for a longer period, and a larger loan amount is sanctioned than that of an overdraft.
Loans: It is normal for the short term, say a period of one year, or medium-term, says a
period of five years. Nowadays, banks do lend money for the long term. Loans are normally
secured against the tangible assets of the company.
Discounting of the bill of exchange: The bank can advance money by discounting or
purchasing bills of exchange, both domestic and foreign. The bill is presented to the drawee
or acceptor of the bill on maturity, and the amount is collected.

B. Secondary Functions of Banks

The bank performs some secondary functions, also called non-banking functions. These
important secondary’ functions of banks are explained below.
1. Agency Functions

The bank acts as an agent of its customers. The bank performs several agency functions,
which include:-

Transfer of Funds: The bank transfers funds from one branch or place to another.
Collection of checks: The bank collects the checks’ money through its customers’ clearing
section. The bank also collects money from the bills of exchange.
Periodic Payments: On standing instructions of the client, the bank makes periodic
payments regarding electricity bills, rent, etc.
 Portfolio Management: The banks also undertake to purchase and sell the shares and
debentures on behalf of the clients and accordingly debit or credit the account. This facility is
called portfolio management.
Periodic Collections: The bank collects salary, pension, dividend, and other periodic
collections on behalf of the client.
Other Agency Functions: They act as trustees, executors, advisers, and administrators on
behalf of their clients. They act as representatives of clients to deal with other banks and
institutions.

2. General Utility Functions

The bank also performs general utility functions, such as,

Issue of Drafts and Letter of Credits: Banks issue drafts for transferring money from one
place to another. It also issues letters of credit, especially in the case of import trade. It also
issues travelers’ checks.
Locker Facility: The bank provides a locker facility to safely store valuable documents,
gold ornaments, and other valuables.
Underwriting of Shares: The bank underwrites shares and debentures through its merchant
banking division.
Dealing in Foreign Exchange: Commercial banks are allowed by.RBI to deal in foreign
exchange.
Project Reports: The bank may also undertake to prepare project reports on behalf of its
clients.
Social Welfare Programs: It undertakes social welfare programs, such as adult literacy
programs, public welfare campaigns, etc.
Other Utility Functions: It acts as a referee to customers’ financial standing. It collects
creditworthiness information about clients of its customers. It provides market information to
its customers, etc. It provides travelers’ check facilities.

Importance of Banks

Banking plays an important role in financial life, and the importance of banks can be seen
from the fact that they are considered the lifeblood of the modem economy.

Although bank creates no wealth, their essential activities facilitate wealth production,
exchange, and distribution. In this way, banks become effective partners in the process of
economic development and growth.
Bank Importance

11 important of banks are;

For Business.
Savings and Advancing Loans.
Money Transfer.
Encourages Savings.
Transfer Savings into Investment.
Overdraft Facilities.
Discounting Bill of Exchange.
Financing Internal & External Trade.
 Act as an Agent.
Issue of Traveler’s Check.
General Utility Services.

Let’s try to understand these;

1. For business

Based on these important functions of Banks, we may easily describe the importance of
banks in today’s global life.
2. Savings and Advancing Loans

Acceptance of deposits and advancement the loans is the basic function of commercial banks.
3. Money Transfer

Banks have facilitated payments from one place or person to another utilizing checks, bills of
exchange, and drafts, instead of cash.
4. Encourages Savings

Banks perform an invaluable service by encouraging savings among the people. These
savings help in capital formation.
5. Transfer Savings into Investment

Banks transfer the savings collected from the people into investment and thus increase the
amount of effective capital, which helps the process of economic growth.
6. Overdraft Facilities

The banks allow overdraft facilities to their trusted customers and thus help them in
overcoming temporary financial difficulties.
7. Discounting bill of exchange

The importance of banks can be seen through the discounting bill of exchange. Banks
discount their bill of exchange of consumers and help them with financial difficulties.
8. Financing Internal & External Trade

Banks help merchants and traders finance internal and external trade by discounting a foreign
bill of exchange, issuing letters of credit, and other guarantees for their customers.
9. Act as an Agent

The bank acts as an agent and helps its customers purchase and sell shares, provision lockers,
payment of monthly, and dividends on stock.
10. Issue of Traveler’s check

The bank provides travelers’ checks for the convenience and security of money for travelers
and tourists.
11. General Utility Services

The existence of commercial banks is essential for contributing to general prosperity. Banks
are the main factors in raising the world’s economic development level.
A bank is a Financial Intermediary.
A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment bank, mutual fund, and pension
fund.

Financial intermediaries offer some benefits to the average consumer, including safety,
liquidity, and economies of scale involved in commercial banking, investment banking, and
asset management.

A bank is one of the major financial intermediaries because banks move funds from parties
with excess capital to parties needing funds. The process creates efficient markets and lowers
the cost of conducting business.

For example, a financial advisor connects with clients by purchasing insurance, stocks,
bonds, real estate, and other assets.

Banks connect borrowers and lenders by providing capital from other financial institutions
and the Federal Reserve. Insurance companies collect premiums for policies and provide
policy benefits. A pension fund collects funds on behalf of members and distributes payments
to pensioners.
Management of Commercial Bank

Management is a universal concept that is necessary for the success of profit-oriented

business organizations and non-trading and non-profit organizations such as families, clubs,
religious institutions, self-serving organizations, and nationalized institutions.

Banks can be of different types. But from the very outset, “bank” popularly means only
commercial banks. Although different types of hanks are found, only commercial banks are
the major participants in the hanking world.

For the past thirty years, commercial banks more or less have been performing all types of
activities of specialized banks, more or less. The usual activities of commercial hank and
specialized banks are almost the same.

For example, commercial and specialized banks may also take money as a deposit, but
sometimes specialized banks are engaged in collecting government long-term debt funds.

On the other hand, commercial banks make a profit by selling services. In the same way,
specialized banks are also engaged in debt offerings.

So. we can see that, though specialized banks are established for the development of the
specific sector, there is no basic difference between these in the context of banking activities.
Deposit is the Blood of the Bank, and the bank is the blood of the country’s economy.

Money can be compared with the blood of the bank.

As long as blood remains in circulation, all the organs in the body will remain sound and
healthy. If blood is not adequately supplied to any organ or part of the body, that part will be
starved of nutrients and oxygen and become useless.
In the same way, as long as money remains in circulation, all the banks in society will remain
economically sound and healthy. If money is not adequately supplied to the bank, it loses its
existence in society.

Similarly, a bank can be compared with the blood of society.

As long as all the banks remain economically sound and healthy, society will gradually
develop toward prosperity and solvency.

So, in reality, the deposit is the blood of a Bank, and the bank is the blood of a country’s
economy.
Conclusion

Stephenson & Britain defined banks as “Banks are the custodians and distribution of liquid
capital, which is the lifeblood of our commercial and industrial activities and upon the
prudence of their administration depends on the economic well-being of the nation.”

A bank is a financial institution that collects society’s surplus cash and gives a part of that as
a loan to investors to earn profit. So, a bank is an intermediary institution that makes a
relationship between the owner of surplus savings and the investor of deficit capital.

The bank is an institution that is registered by the central bank and mainly performs the
following activities;

receives the current deposit and gives the withdrawal facilities to clients through a check
receives a term deposit and pays interest on it
discounting notes, approving loans, and investing in government and other credit
instruments
collect the check, draft, notes, etc.
issue draft and cashier’s check
notification of depositors’ check
act as a trustee following government permission.

We knew before that a bank is a blank doc. These activities of banks are changing with the
change of time. Logically, banking activities will change with the change in culture, time, and
perception of people in a country. So, it isn’t easy to give a valid & precise definition that fits
all situations.

In this process, banks earn profit by receiving interest from borrowers who want to take
short-term or long-term loans and make relatively lower interest payments to the depositors
to provide their funds for use by the bank.

Banks are using various types of credit products to honor the demand of time. In this way, the
risk associated with using paper currency or metallic coins is properly managed.

With a clear understanding of bank; for more learning use our complete guideline on banking
and banking fundamentals.

Avatar of Muntasir Muntasir Minhaz Muntasir runs his own businesses and has a business
degree. Founded iEduNote.com and writes on various business subjects.
Learn Banking and Banking Fundamentals [Full Guide]

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18 Types of Bank Services
General Lien & Particular Lien [Comprehensive Guide]
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When Banks Required to Disclose Customer Information
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Why Banks Fail To Recover Loans? [17 Reasons]
Understanding Contestability & Consolidation in the Banking Industry
Bank Failure: Qualitative & Quantitative Indicators of Bank Failure
Loan Supervision Activities Of A Bank!
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Bank Credits: Types, Purpose, Duration [Full Guide]

Discover the various types of bank credits, including real estate, agricultural, commercial,
and more. Explore their purposes, duration, and nature.

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Credit Evaluation: 7Cs of Creditworthiness

Lenders consider the 7Cs of Creditworthiness for Credit Evaluation, including character,
capacity, cash flow, capital, collateral, conditions, and control.

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Loan Pricing: Components, Formula, Methods [Followed
by Commercial Banks]

Loan pricing is not an exact science gets adjusted by various qualitative and qualitative
variables affecting the demand for and supply of funds.

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Altman’s Z-Score Model: What is It, Formula,

Interpretation

Learn about Altman's Z-Score Model, its formula, and understand how powerful it is in
predicting financial distress and bankruptcy in businesses.
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Bank Loan Review: Enhance Loan Compliance

Ensure loan compliance and mitigate risks with effective bank loan reviews. Protect your
institution's financial health and optimize lending practices.

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What is Bank Assignment?

Discover the Concept of Bank Assignment: Explore the transfer of rights, property, and debts
from one person to another in the banking business.
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Difference between Bank Overdraft and Cash Credit

Understand the subtle differences between bank overdraft and cash credit. Learn how they
operate and which one suits your financial needs.

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6 Steps in the Lending Process

Navigate 6 steps of lending process: prospecting, evaluation, credit assessment, analysis,

collateral review, and monitoring.
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Loan Administration: Meaning, Structure of Loan

Administration

Learn about the importance of a proper loan administrative framework, its structure, and
steps for effective loan management. Optimize your loan activities now!

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What is Bank Charge? Types of Bank Charges

Explore the types of bank charges: fixed charges for specific assets and floating charges on
changing property. Ensure your financial security.

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Pay Order and Demand Draft

Explore the differences between pay orders and demand drafts for secure money transfers.
Discover their usage, benefits, and limitations.

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Differences Between Loan and Investment

Discover the disparities between loans and investments. Understand transaction types,
negotiation scope, income sources, risk levels, and more.

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7 Factors for Banks Loans: Liquidity, Profitability,

Security

Discover the crucial factors banks consider before sanctioning loans. Explore liquidity,
profitability, security, and more.

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14. Investment Management

Managing of Bank Investment Portfolio [18 Factors]

Get Expert Insights on Bank Investment Portfolio Management: Boost profits, minimize
risks, and maximize wealth. Explore key factors and risk considerations.

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Investment Strategies of Commercial Banks

Maximize wealth with effective investment strategies for commercial banks. Learn about
transaction-related, active, maturity, and other profitable approaches.

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Security Investment: The Emergence of Security
Investment

Unlock Your Financial Potential with Security Investment - Discover approved securities,
advantages, and expert strategies for profitable investments.

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Changes of Interest Rate Over Business Cycle

Get insights into the relationship between interest rate changes and the business cycle.

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Bank Investment: Characteristics, Objectives, Functions,

Policy

Learn how bank investment process maximize shareholder wealth, diversify risk, and ensure
stable income for banks and it's shareholders.

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15. Bank Regulation

Bank Regulation: Meaning, Objectives, Tools, Strategies

Explore bank regulation's meaning, objectives, tools, strategies, and the role of regulatory
authorities in safeguarding customers, banks, and economy.

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16. Bank Risk Management

Market Risk Management: How Banks Manage Market

Risks
Discover the crucial components of an effective market risk management system, including
RAROC and VaR. Learn how banks mitigate risks and optimize performance.

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Liquidity Risk Management: How Banks Manage

Liquidity Crisis

Master liquidity risk management and uncover essential strategies for banks to navigate
funding crises and ensure financial stability.

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Interest Rate Management: How Banks Manage Interest
Rates

Learn about interest rate management, gap analysis, duration analysis, and balance sheet
simulation models for precise risk assessment and earnings management.

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Credit Risk Management: How Banks Manage Credit

Risks

Discover how banks proactively manage credit risks through qualitative and quantitative
approaches, credit scoring, and default models.
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Bank Risk Management: Overview, Steps, Risk Types in

Banking

Discover the essential aspects of bank risk management, including credit, interest rate, and
foreign exchange risks.

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Foreign Exchange Risk Management in Banking

Learn how banking institutions tackle foreign exchange risk with proactive strategies,
enhance profitability and limit potential losses.

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17. Issues for Survival of Banks

Understanding Contestability & Consolidation in the

Banking Industry

Unveiling the Banking Industry and discover the dynamics of contestability and
consolidation, influencing competition and shaping the sector's future.

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Bank Output: Definition, Measuring Bank Output

Unravel the intricacies of measuring bank output using production and intermediation
approaches. Explore challenges in assessing accurate productivity measures.

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SCP Model & RE Hypothesis: Understanding Banking

Competition

Uncover banking competition insights with the SCP model and RE hypothesis. Explore key
features, implications, and real-life examples for informed decisions.
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Understanding X-Efficiency in the Banking Industry

X-efficiency in banking helps cost optimization and performance enhancement. Explore

causes, measurement methods, and technological impact.

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18. Policy of Bank

Bank Profit Planning: How Commercial Banks Plan For

Profit
Learn and explore the ten-step program how Bank Profit Planning set financial goals,
optimize resources, and implement strategies for long-term growth.

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Pattern of Dividend Policy in Banks

Uncover the dynamics of bank dividend policies, from stable to irregular, and their
implications for investors and financial performance.

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19. Basel Accord

Basel Accord [A Comprehensive Guide]

Explore the Basel Accord: a comprehensive guide to risk-based capital ratios, committee
members, objectives, and limitations in banking regulations.

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20. Islamic Banking

Sources & Use of Funds of Islamic Banks

Discover sources and uses of funds by Islamic Banks for project financing, asset acquisition,
leasing, syndication services, and trade financing.

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Loan Pricing in Islamic Banks [How Interest-Free Loans

Priced]

Unveiling Islamic banks' distinctive loan pricing: Explore interest-free options, profit-sharing
models, and ethical finance alternatives.

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Difference Between Islamic Banking & Conventional
Banking

Explore the key differences between Islamic and conventional banking systems, from
principles to social responsibility.