Banking and Insurance notes for BA students
Definition of a Bank
Chamber’s Twentieth century Dictionary defines a bank as, “an institution for the keeping, lending and exchanging etc. of money”.
According to Banking Regulation Act, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and an order or otherwise”.
Evolution of Banking
The term bank is either derived from Old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. According to some authorities, the work “Bank” itself is derived from the words “bancus” or “banqee,” that is, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the marketplace.
For centuries, banks have borrowed and lent money
to business, trade, and people, charging interest on loans and paying interest on deposits. These
two functions are the core activities of banking. Besides these two functions, a commercial bank
performs a variety of other functions which can be categorized in two broad categories namely
(a) Agency or Representative functions (b) General Utility functions.
(a) Agency or Representative functions:
• Collection and Payment of Various Items: Banks carry out the standing
instructions of customers for making payments; including subscriptions, insurance
premium, rent, electricity and telephone bills, etc.
• Undertake government business like payment of pension, collection of direct tax
(e.g. income tax) and indirect tax like excise duty.
• Letter of Reference: Banks buy and sell foreign exchange and thus promote
international trade. This function is normally discharged by Foreign Exchange
Banks.
• Purchase and Sale of Securities: Underwrite and deal in stock, funds, shares,
debentures, etc.
• Government’s Agent: Act as agents for any government or local authority or any
other person or persons; also carry on agency business of any description
including the clearing and forwarding of goods, giving of receipts and discharges,
and otherwise acting as an attorney on behalf of customers, but excluding the
business of a managing Agent or Secretary and treasurer of a company.
• Purchase and Sale of Foreign Exchange: Banks buy and sell foreign exchange and
thus promote international trade. This function is normally discharged by Foreign
Exchange Banks.
• Trustee and Executor: Banks also act as trustees and executors of the property of
their customers on their advice.
• Remittance of Money: Banks also remit money from one place to the other
through bank drafts or mail or telegraphic transfers.
(a) General Utility functions:
• Locker facility: Banks provide locker facilities to their customers. People can keep
their gold or silver jewellery or other important documents in these lockers. Their
annual rent is very nominal.
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• Business Information and Statistics: Being familiar with the economic situation of the
country, the banks give advice to their customers on financial matters on the basis of
business information and statistical data collected by them.
• Help in Transportation of Goods: Big businessmen or industrialists after consigning
goods to their retailers send the Railway Receipt to the bank. The retailers get this
receipt from the bank on payment of the value of the consignment to it. Having
obtained the Railway Receipt from the bank they get delivery of the consignment
from the Railway Goods Office. In this way banks help in the transportation of goods
from the production centers to the consumption centers.
• Acting as a Referee: If desired by the customer, the bank can be a referee i.e. who
could be referred by the third parties for seeking information regarding the financial
position of the customer.
• Issuing Letters of Credit: Bankers in a way by issuing letters of credit certify the
credit worthiness of the customers. Letters of credit are very popular in foreign trade.
• Acting as Underwriter: Banks also underwrite the securities issued by the government
and corporate bodies for commission. The name of a bank as an underwriter
encourages investors to have faith in the security.
• Issuing of Traveller’s Cheques and Credit Cards: Banks have been rendering great
service by issuing traveller’s cheques, which enable a person to travel without fear of
theft or loss of money. Now, some banks have started credit card system, under which
a credit card holder is allowed to avail credit from the listed outlets without any
additional cost or effort. Thus a credit card holder need not carry or handle cash all
the time.
• Issuing Gift Cheques: Certain banks issue gift cheques of various denominations e.g
some Indian banks issue gift cheques of the denomination of Rs. 101, 501, 1001 etc.
These are generally issued free of charge or a very nominal fee is charged.
• Dealing in Foreign Exchange: Major branches of commercial banks also transact
business of foreign exchange. Commercial banks are the main authorized dealers of
foreign exchange in India.
• Merchant Banking Services: Commercial banks also render merchant banking
services to the customers. They help in availing loans from non-banking financial
institutions.
Chamber’s Twentieth century Dictionary defines a bank as, “an institution for the keeping, lending and exchanging etc. of money”.
According to Banking Regulation Act, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and an order or otherwise”.
Evolution of Banking
The term bank is either derived from Old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. According to some authorities, the work “Bank” itself is derived from the words “bancus” or “banqee,” that is, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the marketplace.
For centuries, banks have borrowed and lent money
to business, trade, and people, charging interest on loans and paying interest on deposits. These
two functions are the core activities of banking. Besides these two functions, a commercial bank
performs a variety of other functions which can be categorized in two broad categories namely
(a) Agency or Representative functions (b) General Utility functions.
(a) Agency or Representative functions:
• Collection and Payment of Various Items: Banks carry out the standing
instructions of customers for making payments; including subscriptions, insurance
premium, rent, electricity and telephone bills, etc.
• Undertake government business like payment of pension, collection of direct tax
(e.g. income tax) and indirect tax like excise duty.
• Letter of Reference: Banks buy and sell foreign exchange and thus promote
international trade. This function is normally discharged by Foreign Exchange
Banks.
• Purchase and Sale of Securities: Underwrite and deal in stock, funds, shares,
debentures, etc.
• Government’s Agent: Act as agents for any government or local authority or any
other person or persons; also carry on agency business of any description
including the clearing and forwarding of goods, giving of receipts and discharges,
and otherwise acting as an attorney on behalf of customers, but excluding the
business of a managing Agent or Secretary and treasurer of a company.
• Purchase and Sale of Foreign Exchange: Banks buy and sell foreign exchange and
thus promote international trade. This function is normally discharged by Foreign
Exchange Banks.
• Trustee and Executor: Banks also act as trustees and executors of the property of
their customers on their advice.
• Remittance of Money: Banks also remit money from one place to the other
through bank drafts or mail or telegraphic transfers.
(a) General Utility functions:
• Locker facility: Banks provide locker facilities to their customers. People can keep
their gold or silver jewellery or other important documents in these lockers. Their
annual rent is very nominal.
4
• Business Information and Statistics: Being familiar with the economic situation of the
country, the banks give advice to their customers on financial matters on the basis of
business information and statistical data collected by them.
• Help in Transportation of Goods: Big businessmen or industrialists after consigning
goods to their retailers send the Railway Receipt to the bank. The retailers get this
receipt from the bank on payment of the value of the consignment to it. Having
obtained the Railway Receipt from the bank they get delivery of the consignment
from the Railway Goods Office. In this way banks help in the transportation of goods
from the production centers to the consumption centers.
• Acting as a Referee: If desired by the customer, the bank can be a referee i.e. who
could be referred by the third parties for seeking information regarding the financial
position of the customer.
• Issuing Letters of Credit: Bankers in a way by issuing letters of credit certify the
credit worthiness of the customers. Letters of credit are very popular in foreign trade.
• Acting as Underwriter: Banks also underwrite the securities issued by the government
and corporate bodies for commission. The name of a bank as an underwriter
encourages investors to have faith in the security.
• Issuing of Traveller’s Cheques and Credit Cards: Banks have been rendering great
service by issuing traveller’s cheques, which enable a person to travel without fear of
theft or loss of money. Now, some banks have started credit card system, under which
a credit card holder is allowed to avail credit from the listed outlets without any
additional cost or effort. Thus a credit card holder need not carry or handle cash all
the time.
• Issuing Gift Cheques: Certain banks issue gift cheques of various denominations e.g
some Indian banks issue gift cheques of the denomination of Rs. 101, 501, 1001 etc.
These are generally issued free of charge or a very nominal fee is charged.
• Dealing in Foreign Exchange: Major branches of commercial banks also transact
business of foreign exchange. Commercial banks are the main authorized dealers of
foreign exchange in India.
• Merchant Banking Services: Commercial banks also render merchant banking
services to the customers. They help in availing loans from non-banking financial
institutions.
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