3.1 Understanding Banking

As we understood in the previous chapter, saving is essential. You got 1000 Rs pocket money from your mom, and you wish to save it. Where will you save? There are many options to save. One option is banks.

Just like your piggy bank, where you put all your excess pocket money for future use, Banks do the same! It’s a place where people open up their accounts and save their money. 

A bank is a financial institution that accepts deposits from the public and creates credits. Apart from saving, banks also perform various functions. 

Just as you save in a piggy bank, the bank also helps you to save money and even more!

Let’s look at the main functions of banks.

  • Accepting Deposits

Just like when you put your excess money in a piggy bank, you can put it in your bank account. The money is called a deposit and the piggy bank, in this case, is your bank account. You can take money out of the account when you need it. That is called a withdrawal. However, unlike your piggy bank, banks pay extra money to you for holding cash in your account. That is called interest income. 

  • Lending

When you have no savings, what do you do? You ask for more money from your mom. 

Similarly, nationalised banks lend money to individuals and companies as loans to fulfil their financial needs. People who avail of loan facilities from banks have to repay the loans, usually with an interest charge.  

  • Money Transfer

When you need to send money to a friend in India or abroad, you can transfer the required amount from your bank account to your bank account. It is called remittance. Banks have various modes of remittances within the country and abroad

  • Transactional Systems

Whether you need to pay for your education fees or buy a car, banks provide different systems and modes to facilitate these transactions. Cheques, Demand Drafts (DDs), National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), and wallet accounts like Paytm, route their transactions through banks.

  • Other Functions

Banks also cater to other needs such as holding valuable documents on behalf of customers in its safe custody, providing secure deposit vault (locker) facility, investment advisory, distribution of new currency, replacement of damaged money, investment advisory services, etc. Banks play a pivotal role in the Indian government’s initiatives, like collecting the applications for new Aadhaar cards and financial inclusion initiatives undertaken by the RBI from time to time.

 

 

                             Various functions performed by a bank. 

THINK ABOUT IT! 

How many of these functions does your piggy bank carry out?