Banking Fundamentals-Overview, How Banks Work, Types

A bank is a type of financial institution that is permitted to accept deposits and provide loans. Financial services such as wealth management, currency exchange, and safe deposit boxes may be offered by banks. Retail banks, commercial or corporate banks, and investment banks are among the several types of banks. Banks are governed by the national government or central bank in most nations.

Banks play a vital role in the economy by providing essential services to both consumers and companies. They provide you with a secure place to deposit your money as a financial services provider. You can execute typical banking operations such as deposits, withdrawals, check writing, and bill payments using a range of account types such as checking and savings accounts, as well as certificates of deposit (CDs). You can also put your money aside and earn interest on it.

Banks, whether physical or virtual, control the flow of money between individuals and businesses. Banks, in particular, provide deposit accounts, which are safe places for consumers to keep their money. Deposit money is used by banks to provide loans to other persons and businesses.

In exchange, the bank receives interest payments from borrowers on those loans. Part of that interest is then returned to the original deposit account holder in the form of interest, which is usually on a savings, money market, or CD account. Banks make their money mostly from interest on loans and fees charged to its customers.

These charges may be associated with specific items, such as bank accounts, or with financial services. An investment bank that provides portfolio management to investors, for example, can charge a fee for this service. When a bank grants a mortgage loan to a homebuyer, it may charge an origination fee.

Banking is a heavily regulated field. The Federal Reserve System is in charge of overseeing banks and other financial institutions, as well as coordinating with state regulatory bodies to guarantee that banks adhere to the rules. Other government agencies, such as the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation, regulate banks (FDIC).

Types of Banks in India 

Central banks, commercial banks, specialised banks, and cooperative banks are the four types of banks in India.

• Central Bank-The Reserve Bank of India (RBI) is the country’s central bank. It oversees and regulates other banks and financial organisations as the supreme body. It also serves as the government’s banker. The statutory liquidity ratio, cash reserve ratio, reverse repo rate, and repo rate are all determined by the RBI.

• Commercial Bank-It provides services to the general public, such as receiving deposits and/or issuing loans. Such banks see loans as investments with the goal of making money. HDFC Bank, State Bank of India, United Bank of India, and others are some of the country’s commercial banks.

• Specialised Bank-These banks were created with the express intention of serving a specific industry or sector. They might specialise in import and export, or they might offer financial services to specific areas of the economy. The best example of a specialised bank is the EXIM Bank.

• Cooperative Bank-The State Cooperative Societies Act authorises the establishment of these banks. They make it easy for cooperative bank members to get credit. The provision of financial resources to the impoverished is one of the cooperative banks’ primary functions. Cooperative banks in India include New India Cooperative Bank Limited, Ahmedabad Mercantile Cooperative Bank, and others.

e-Banking 

The use of an electronic medium to enable consumers to access their bank accounts and funds is known as electronic banking, digital banking, or e-banking. The fundamental benefit of e-banking is that it eliminates the need for clients to visit the bank for transactions on a regular basis. Customers can now access digital banking services quickly and easily because to the widespread availability of the internet.

Due to the ease of use, e-banking is becoming the preferred method for both bankers and customers. Banks will not have to bear any additional transaction expenses, and there will be far less possibility for human error. The fixed costs are also greatly reduced. Customers benefit from round-the-clock convenience because they are not required to visit the bank for every transaction. Furthermore, it aids the consumer in saving time, money, and effort. In the case of specific transactions, digital banking also eliminates geographical boundaries.

Types of Bank Accounts 

When it comes to banking fundamentals, it’s critical to understand the many sorts of bank accounts and their benefits. As a result, the following are the many types of bank accounts:

Savings Account

• They’re designed to be put away for the future.
• The primary goal of savings accounts is to encourage the general people to save money.
• A savings bank account has no limits on the number or amount of deposits that can be made.
• According to the bank’s current terms and conditions, the credit balance in this account can earn interest.

Current Account

• These are active accounts that have been opened by business people, corporations, traders, and others.
• Due to the numerous money receipts and payments associated with the firm, current accounts can be operated on a regular basis.
• There are no limits on how many deposits and withdrawals you can make.

Fixed Deposit

• It includes both fixed-term deposits and deposits subject to notice of withdrawal.
• Fixed deposits are short-term investments that pay off after a set length of time chosen at the time of deposit.
• Call deposits can be thought of as demand or term obligations, with repayment terms and notice of withdrawal agreed upon at the time of deposit acceptance.
• They cannot be transferred.

Recurring Deposit Account

• In a conventional pattern, customers pay a set sum in monthly instalments for a term ranging from 6 to 120 months.
• After the last instalment is paid, the entire amount, including interest, is due.
• Middle- and low-income people benefit greatly from recurring deposit accounts.
• The deposit period ranges from six months to ten years.
• The minimum monthly deposit into the RD account is INR 500, with subsequent deposits in multiples of INR 100.

Other Services Provided by the Banks

Apart from the aforementioned, both commercial and public sector banks in India provide the following services:

Locker Facility 

• It is an optional service provided by commercial banks to their customers for the safekeeping of their jewellery, stocks, debentures, and other valuables.
• It reduces the likelihood of goods being taken at home or elsewhere.

Mutual Funds 

• It is a method of investing in securities such as money market instruments, bonds, stocks, and other assets using a pool of money collected from various participants.

Internet Banking 

• It allows bank or other financial institution customers to undertake a number of financial operations (transactions) through the bank’s website or app.

Debit & Credit Cards 

• A bank issues a debit card or an ATM card to its customers. Customers who prefer credit cards, on the other hand, can apply for them at their local bank.
• A debit card is a plastic payment card that can be used to make transactions instead of cash. It works similarly to a credit card, except that when a transaction is made, the money on the debit card is taken immediately from the customer’s bank account.
• A credit card is a plastic card that allows a customer to borrow money against a credit line, commonly known as the credit limit on the card.

Cheques & Demand Draft (DD) 

• Cheques are paper documents that instruct a bank to withdraw a specified amount of money from a person’s account and pay it to the person whose name appears on the cheque.
• A demand draught, like a bill of exchange, is a negotiable document. 
• A demand draft is a document issued by a bank to a customer (drawer) requesting that another bank (drawee) or one of the bank’s own branches pay a certain sum to the specified party (payee).

Conclusion

A bank’s purpose, like any other business, is to make a profit for its owners. The owners of most banks are their shareholders. Banks accomplish this by charging borrowers more interest rates on loans and other forms of debt than they do on savings accounts. For example, a bank that pays 1% interest on savings accounts and 6% interest on loans earns a gross profit of 5% for its shareholders.