Fundamentals of Banking and Insurance

The concepts and principles linked to the practise of banking are referred to as banking fundamentals. Banking is a business that deals with credit, cash holding, investments, and other types of financial activities. Because it allocates cash to borrowers with productive investments, the banking industry is one of the most important drivers of most economies. 

Deposits and withdrawals, currency exchange, forex trading, and wealth management are all services provided by banks. They also serve as a conduit between depositors and borrowers, using the monies placed by their customers to provide credit to those who need it.

Banks make money by charging interest on loans, which they benefit from by charging a greater interest rate than they pay on customer deposits. They must, however, follow the rules set down by the central bank or the national government.

Types of Banking

Banks can be categorised into numerous types based on their structure or function. Banking is separated into two types: branch banking and unit banking. Deposit banking, investment banking, and mixed banking are the three types of banking.

1. Branch Banking: This is a system in which two or more banks are established under the same ownership. State Bank of India, Punjab National Bank, Indian Bank, and other banks with multiple branches across India are examples.

2. Unit Banking: This refers to a banking system in which all banking operations are handled by a single organisation with no branches. This approach was once prevalent in the United States. One of the major advantages of branch banking is that it allows a single bank to serve multiple sections of a big country (by its branches in various areas), which would be impossible for a unit bank to do. A unit bank, on the other hand, has the advantage of concentrating its efforts in one area, allowing it to provide excellent service to that area.

3. Group Banking: This is a structure in which two or more banks, each of which is independently incorporated, are linked by a single holding company that acts as a trust.

4. Chain Banking: This is linked to the concept of group banking. Two or more banks are controlled by a single organisation, either through share ownership or other means.

5. Deposit Banking: Banks serve as depositors’ custodians or trustees in this category.

6. Correspondent banking system: Another important form of banking system is the commercial banking system. A correspondent bank is a financial institution that connects two banks in a unit banking system. RBI, or the Reserve Bank of India, is the best example of a correspondent bank in India.

7. Investment Banking: This term refers to banks whose primary role is to offer financing for industrial investments. They do it by purchasing newly floated company shares and debentures.

8. Mixed Banking: In India, the majority of banks serve dual functions. Deposit banking and investment banking are two different types of banking. Mixed banking is a term used to describe this form of banking.

Insurance

A contract between two parties is called insurance. The insured is one party, and the insurer is the other. The person whose life or property is insured with the insurer is referred to as the insured. In other words, the person whose risks are covered is referred to as the insured. The insurer is the entity to which the insured transfers his or her risk. In other words, the individual who ensures the risk of the insured is referred to as the insurer.

 As a result, insurance is a legal agreement between the insurer and the insured. It is a contract in which the insurance company agrees to compensate the insured if a specific event occurs in exchange for a fee. It is a contract between an insurer and an insured in which the insurer agrees to compensate the insured for any losses incurred as a result of the risk covered against.

Characteristics of Insurance

 Insurance follows important characteristics – These are follows 

1. Sharing of risk- Insurance is a cooperative tool for sharing the risk of unanticipated events such as the death of a family head, the occurrence of sea dangers, or the loss of property due to fire.

2. Co-operative device- Insurance is a cooperative method of spreading a risk across a group of people who are at risk. A huge number of people share the losses caused by a certain risk.

3. Large number of insured persons- The success of the insurance industry is dependent on a huge number of people who are insured against the same danger. This will allow the insurer to spread the risk of loss across a wide number of people, lowering the premium rate.

4. Evaluation of risk- The amount of risk, which is the basis of the insurance contract, is analysed for the purpose of determining the insurance premium.

5. Payment of the event of specified event- The insurance company is obligated to pay the insured if a specific event occurs. In life insurance, the occurrence of a particular event is guaranteed, but it is not required in the case of fire, marine, or accidental insurance. In such instances, the insurer is not responsible for indemnification payments.

6. Transfer of risk- A scheme in which the insured passes his risk to the insurer is known as insurance. This could be the reason why some people think of insurance as a way to transfer certain economic losses that would otherwise be incurred by the insured.

7. Spreading of risk- Insurance is a strategy for spreading the risk and losses of a few individuals across a big group of people. “Insurance is a scheme by which a big number of people connect themselves and transfers risk attached to individuals to the shoulders of all,” says John Magee.

8. Protection against risks- Insurance protects against the danger of loss of life, property, and materials. It’s a tool for avoiding or reducing hazards.

9. Insurance is not charity- Charity gives without expecting anything in return, however in the case of insurance, the insured pays a premium to the insurer in exchange for a future payment.

10. Insurance is not a gambling- Insurance isn’t a game of chance. Gambling is prohibited because it benefits one side while harming the other. Insurance is a legally binding agreement to compensate for losses. Furthermore, insurable interest is present in insurance contracts and has an investment component.

11. A contract- Insurance is a legal contract between the insurer and the insured in which the insurer agrees to financially recompense the insured within the extent of the insurance policy and the insured promises to pay the insurer a certain amount of premium.

12. Social device- Insurance is a social welfare programme that protects people’s interests. “Insurance is of a social nature,” Rieged and Miller observe.

13. Insurance is for pure risk only- Pure risks result in losses for the insured and no profits for the insurer. Accidents, misfortune, death, fire, injury, and other pure risks are examples of pure risks, which are all sided hazards that ultimately result in loss. Insurance firms only write policies for pure risk, not for speculative risks.

14. Based on mutual goodwill- Insurance is a contract between two people that is founded on trust. As a result, both parties are obligated to disclose material facts impacting the contract before the other. One of the most fundamental insurance concepts is absolute good faith.

Conclusion

A bank is a type of financial institution that handles deposits, advances, and other financial services. It collects money in the form of deposits from individuals who wish to save and loans money to those who need it. A bank is a financial institution and a financial intermediary that receives deposits and invests them in lending activities, either directly or indirectly through capital markets. A bank serves as a link between consumers with capital deficiencies and those who have capital surpluses.