Rajasthan Board RBSE Class 12 Economics Notes Chapter 18 Commercial Bank: Meaning and Function
There are proofs of commercial banking in different countries in the ancient times.
There is also a description of banking in Kautilya’s Arthashastra.
In ancient times, this business was not like the modern Banking format.
In ancient times, this banking business was done by businessmen, goldsmiths and money lenders.
In the year 1157, Bank of Venice was established in Italy.
In the year 1401, Bank of Barcelona, and in year 1407, Bank of Geneva, were established.
In the year 1609, Bank of Amsterdam was established in Holland, and Bank of Hamburg in Germany was established in the year 1619.
In the year 1694, Bank of England was established.
In India, Bank of Calcutta in the year 1806, Bank of Bombay in the year 1840 and Bank of Madras in the year 1842 were established.
According to a belief, origin of the word ‘bank’ is from the Italian word ‘Banco’.
According to a second belief, origin of the word ‘bank’ is from the German word ‘Banck’.
Modern banking started from Europe.
Bank is that financial institution, which accepts deposits and offers loans to public.
There are many functions of commercial banks.
These functions can be divided into three categories :
- Primary functions
- Agency-related functions
- General utility functions.
Primary functions of these Banks include accepting deposits and advancing loans.
Agency-related function includes clearance of bank cheques, bills of exchange, overdraft facility, money transfer and sale and purchase of bonds. Banks work as a trustee and even as a financial advisor.
Other services include providing locker facility, internet banking, ATM facility, mobile banking, card facility, credit creation by banks, etc.
Today Banks are also providing the facility of Internet banking.
They also provide the facility of mobile banking.
One of the most important functions of bank is creation of credit.
Bank creates credit through two methods –
Firstly by issuing paper currency, and secondly, through primary deposits and derived deposits.
Credit control is determined by the development of banking system, banking habits, monetary policy of the government and also by industrialization and its commercial growth.
Important Definitions of commercial Banks
- According to the Oxford Dictionary, “A commercial bank is that financial institution which accepts deposits from the people and offers loans for the purpose of consumption or investment”.
- According to the Indian Banking Companies Act, 1949, “Banking is ‘accepting’, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, orders or otherwise”.
- According to Findlay Sbirras, “Banker is that individual, firm or company who has a place for doing the business where the money or currency can be deposited, and through this deposited money or currency, the function of credit is performed and the deposited money is paid either by draft, cheque or order”.
- According to Crowther, “A commercial bank is an institution which collects money from those who have it in spare or who are saving it out of their income and lend this money out to those who require it”.
- According to Kinley, “Bank is an establishment which make to individuals such advance of money as may be required and safely made, and to which individuals entrust money when not required by them for use”.
Important Terminology
Bank : It is an institution which performs the business of currency and credit.
Clearing house : It is a place in a bank where different representatives of banks come together for the settlement of mutual cheques which are entered in accounts.
Saving Account: This type of account is operated by the small savers or by service class people. Banks pay interest on such deposits at a fixed rate. The interest paid on saving deposits is comparatively lesser.
Current Account : This type of account is operated by business class and industrialist class. The daily number of transactions of these classes is very high. Banks do not pay interest on these accounts.
Fixed term deposits : The deposits that can be withdrawn after a specific period and which carry a high rate of interest are known as fixed deposits. This account is popular among depositors both for the safety and for their interest amount.
Demand deposits : Demand deposits are those deposits which are repayable on the demand of the depositors. The rate of interest on these is relatively low.
Prime Minister Jan-Dhan-Yojana : It is a recent policy introduced by the government of India. Under this policy, banks have been directed to open the accounts at zero balance. It was started on 28 August, 2014.
Loan : An amount given by the bank to its customer that has to be paid back, usually together with an extra amount of money that you have to pay as a charge for borrowings.
Overdraft: Clients who have a current account with the bank get the facility to withdraw more money than the present amount in the particular account. It is called overdraft, facility. This facility is available for short term to reliable parties, especially to the business class.
Credit creation : Banks provide loans to the customers from the deposits of other customers. It is called credit creation.
Agency services : Banks also act as an agent for and on behalf of their customers. For example : bank cheques, bills of exchange are accepted and issued by the bank and they ! provide finance facility in the form of an agency to attract the customers.
Cheque : A cheque is a document that orders the bank to pay a specific amount of money on presentation.
Crossed cheque : Payment of this type of cheque is made to the person whose name is written on the cheque and the money is deposited in his account only.
Internet hanking: A method of banking in which transactions are conducted electronically via the internet.
ATM : In order to provide the facility of cash withdrawal, 24 hours a day, banks provide ATM machines to their customers at public places. ATM refers to the Automatic Teller Machine. Any customer can withdraw money using ATM card upto the daily withdrawal limit.
Mobile banking : Due to the increase in use of commercial smart phones, banks, through mobile applications, provide banking facility. Customers of bank may download the app and use this facility. Customers can make payments by mobile banking at any time and anywhere.
Locker facility : Commercial banks provide locker facility for the safe-keeping of valuables such as precious ornaments, land deal papers, legal documents, etc. against a fixed annual fees.
Credit card facility : Commercial banks, through credit cards, provide banking facility upto a limited amount on their account. Payment at any place can be made through the use of credit card in a very short time.
Primary deposits : When customers deposit legal tender, money in the banks, certain deposits accumulate in the bank. Such bank deposits are known as primary deposits.
Derived deposits : These are also called as secondary deposits. These deposits emerge due to the loans given by banks which are assumed to be deposited in the bank.