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Banking - The Nerve Centre of Trade, Commerce and Business

December 01, 2011  by: Rojer  Points: 12   Category: Others  Earning $0.60   Views: 1031

Banking is considered to be the nerve center of trade, commerce and business in a country. It plays a vital role in distributing the money for the development of trade, industry and commerce. Therefore we may say that banking is the lifeblood of modern commerce. Bankers are not only dealers in money but also leaders in economic development of a country.



Banking is considered to be the nerve center of trade, commerce and business in a country. It plays a vital role in distributing the money for the development of trade, industry and commerce. Therefore we may say that banking is the lifeblood of modern commerce. Bankers are not only dealers in money but also leaders in economic development of a country.


A sound banking system is necessary to achieve the following objectives:

1. Savings and capital formation: Bank plays a vital role in mobilizing the savings of the people and promoting the capital formation for the economic development of the country.

2. Canalization of savings: The mobilized savings are allocated by the banks for the development of various fields such as agriculture, industry, communication, transport etc,.

3. Implementation of Monetary Policy: A well-developed banking system can easily implement the monetary policy because development of the economy depends upon the control of credit given by the banks. So, banks are necessary for the effective implementation of monetary policy.

4. Encouragement of Industries: Banks provide various types of financial services such as granting cash credit loans,issuing letter of credit, and bill discounting etc., which encourages the development of various industries in the country.

5. Regional development: Banks,by transferring surplus money from the developed regions to the less developed regions reduces regional imbalances.

6. Development of Agriculture and other neglected sectors: Banks are necessary for the farmers. It also encourages the development of small-scale and cottage industries in rural areas.


In simple words bank is an institution, which deals in money and credit.

1. According to Herbert L. Hart "A banker is one who in the ordinary course of his business honours cheques drawn upon him by persons from and for whom he receives money on current accounts".

2. 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, order or otherwise".

Features of Banks:

From the above definitions the features of a bank may be listed as follows:

1. Acceptance of deposits of money from the public.
2. Obligation to refund deposits on demand.
3. Lending or investing money for promotion and development of business.
4. Profitable employment of funds received as deposits from the public.
5. Money is with-drawable by cheque or draft.


Banks can be classified on the basis of their functions, ownership and schedules of RBI.


1. Commercial bank:

Banks, which help for the development of trade and commerce, are called Commercial Banks. The commercial banks may be owned by government or owned by private sector. For eg: Canara Bank, Punjab National Bank, Lakshmi Vilas Bank, Karur Visya Bank etc., are called as commercial banks.

2. Industrial bank :

These banks assist to promote industrial development by providing medium and long-term loans, underwrites the shares and debentures, assisting in the preparation of project reports, providing technical advice and managerial service to the industries. For eg: Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), are known as industrial banks.

3. Regional rural bank:

These banks are established in rural areas. Its object is to develop the rural economy by providing credit and other facilities for agriculture, trade, commerce, industry and other productive activities in the rural areas.

4. Exchange bank:

Exchange banks deal in foreign exchange and specialize in foreign trade. It plays an important role in promoting international trade. It encourages flow of foreign investments into India and helps in capturing international capital markets.

5. Central bank:

Every country has a central bank of its own which is called as central bank. It is the apex bank and the statutory institution in the money market of a country. The central bank occupies a central position in the monetary and banking system of the country and is the superior financial authority. In India, the Reserve Bank of India is the central bank of our country. It performs the following functions:

a) It regulates and supervises the whole banking system in the country.
b) It controls the credit in the country.
c) It has the sole right of note issue.
d) It is the lender of last resort and custodian of foreign exchange of the country.
e) It acts as the banker for the government.
f) It acts as the bankers bank.
g) It acts as the bank of central clearance.


On the basis of ownership banks can be classified as:

1. Public Sector Banks: These types of banks are owned and controlled by the government. The nationalized banks and regional rural banks come under this category.

2. Private sector Banks: These Banks are owned by private individuals and corporations.

3. Co-operative Banks: These banks are operated on cooperative principles. It is a voluntary association of members for self-help and caters to their financial needs on a mutual basis. These banks are also subject to control and inspection by Reserve Bank of India.


a) Scheduled banks:

These types of banks are included in the second schedule of the Reserve bank of India Act 1934. The banks, which fulfill the following conditions, are classified into scheduled banks.
i) Its paid up capital and reserves are at least Rs.5 Lakhs.
ii) Its operations are not detrimental to the interest of the depositors.
iii) It is a corporation or co-operative society and not a partnership or a single owner firm.

b) Non-Scheduled banks:

The banks, which are not covered by the second schedule of Reserve Bank of India, are called as non-scheduled banks.



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