Bank: definition, history, types and role

A bank is a place where people keep their savings, make deposits and withdrawals, and conduct various financial transactions, including obtaining loans.

Investopedia defines a bank as a financial institution licensed to accept savings and checking deposits and lend money as loans. The other facilities offered by banks include services such as retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.

Economic Times defines a bank as a financial services provider that provides a safe place to store cash and plays an important role in the economy of a nation by providing essential services to consumers and businesses.

The history of banks dates back to 2000 BC to ancient Mesopotamia where the palaces and temples played the role of banks by providing grains in the form of loans to all the traders and farmers.

There are different types of banks, such as central, commercial, and investment banks that promote economic development in many ways.

The role of banks is important in providing financial stability, offering credit to customers, and mobilizing savings. They also focus on growth and innovation in the financial sector.

According to a report by the India Brand Equity Foundation (IBEF), India is one of the fastest-growing Fintech markets and holds the 3rd largest FinTech ecosystem globally in the world. The report also says that as of 2022, more than 80% of the Indian population has a bank account in comparison to 17% in 2009.

Read on to learn more about what is a bank, the history of banks, the types of banks, and their roles in the nation’s economy.

What is a Bank?

A bank is a financial institution regulated at the national level (nationalized banks), state level (Gramin banks), or both with the primary role of accepting deposits and making loans. However, a bank can offer various other products including credit cards, check cashing, wealth management, insurance, and business banking.

In general, banks also work like intermediaries between the borrowers, those who require money, and the depositors, those who deposit money into the bank.

According to the International Monetary Fund, “banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). The primary role of banks is to take in funds, called deposits, from those with money, pool them, and lend them to those who need funds.”

How does a bank work?

Banks offer a range of services and generate income through financial intermediation, managing risks, and maintaining liquidity to meet both depositor and borrower needs. The main working of a bank depends on the services they offer that are listed below.

• Services: Banks provide multiple services apart from accepting savings and lending money, such as foreign exchange transactions, wealth management and even payment processing.
• Loans: The funds that get deposited in the banks are delivered as loans to all the borrowers. The banks supply these funds as enterprise loans, mortgages, private loans, education loans, etc.
• Interests: Banks provide interest to the account holders when they make a deposit. They also take an interest in the loans they offer.

The banks also earn revenues via fees for services like monetary advice, overdrafts, and account maintenance. These financial institutions manage the risks of loan insolvencies and maintain sufficient liquidity.

What is the history of banks?

The history of banking spans from its origins in ancient Mesopotamia to the development of modern banking systems and institutions over the centuries, including significant growth in India during British rule and post-independence.

The history of banks is listed below.

1. Ancient age: Banking activities started in 2000 BC in ancient Mesopotamia. Here, the palaces and temples played the role of banks and provided grains in the form of loans to all the traders and farmers. This particular practice developed greatly because of the grants made by the Greeks and the Romans, who presented instruments that were much more refined. 
2. The Middle Ages: During the medieval age, banking became a lot more formal. Families, such as the Medici family, launched the first-ever banks. Furthermore, Bankers in Italian cities like Venice and Florence became the first to introduce bills and notes of exchange.
3. Modern Age: The first modern-day bank, called the Bank of England, was launched back in the 17th century and was founded in 1694. Besides that, the Industrial Revolution expanded the growth of banks because they started to offer funds for industrial growth. India received its first-ever bank back in the 18th century when the “Bank of Hindustan” was established in 1770. During British rule, India witnessed the launch of many other banks, including “The State Bank of India”, which was founded in 1806.
4. 20th Century Banking: During the 20th century, there was an increase in central banking. Many banks and financial institutions were introduced, such as global financial institutions, banking guidelines, etc. According to a report “Number of banks in India 2023, by type” published by Statista Research Department on Dec 12, 2023, India has 33 public and private sector banks that offer numerous financial services. The number of public sector banks decreased in India due to merging of several public sector banks. Besides these major banks there a nearly 100,000 urban and rural cooperative banks still operating in India.

What is the history of banking in India?

The history of banking in India dates back to 1947, before India got independence and is an important topic to learn if you are preparing for government exams. The banking sector development in India is divided into three phases that includes Phase I -The Early Phase from 1770 to 1969, Phase II – the Nationalisation Phase from 1969 to 1991 and Phase III: the Liberalisation and the Banking Sector Reforms Phase from 1991 to till date.

What is the Pre Independence Period (1786-1947) for banks in India?

The Pre Independence period (1786 -1947) for banks in India starts from the establishment of the first bank of India named as “Bank of Hindustan” which was established in Calcutta (now Kolkata) in 1770. The bank of Calcutta ceased its operations in 1832.

During this phase, 600 banks registered in India, but only a few managed to survive. Some of these banks were General Bank of India (1786-1791), Oudh Commercial Bank (1881-1958), Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843).

During the British rule, East India company established three banks – Bank of Bengal, Bank of Bombay and Bank of Madras which were known as the Presidential Banks. Later in 1921, these three banks were merged and named as “Imperial Bank of India.”

In 1955, the Imperial Bank of India was nationalised and named as State Bank of India, and is currently the largest Public sector Bank in India.

What is the Post Independence Period (1947-1991) for banks in India?

The Post Independence Period (1947-1991) for banks in India led to nationalisation on 20 banks including 7 subsidiaries of State Bank of India.

When India got independence, all the banks in India were privately held and the rural people were still dependent on the money lenders for financial assistance. This was a major concern for the government and therefore Banking Regulation Act, 1949 was introduced to solve this problem.

In 1949, Reserve Bank of India was the first bank to nationalise. Later, in 1955, State Bank of India was also nationalised.

During 1969 to 1991, 20 more banks having national deposits of more than 50 crores were nationalised. The list of 14 banks nationalised in 1969 are listed below.

1. Allahabad Bank               
2. Bank of India                          
3. Bank of Baroda
4. Bank of Maharashtra         
5. Central Bank of India
6. Canara Bank         
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank                         
11. Syndicate Bank             
12. Union Bank of India
13. United Bank 
14. UCO Bank

The list of 6 banks nationalised in 1980 are listed below.

1. Corporation Bank
2. Andhra Bank
3. Oriental Bank of Comm.
4. New Bank of India
5. Vijaya Bank 
6. Punjab & Sind Bank

The nationalisation of these banks took the number of nationalised banks number to 20. Apart from the above mentioned 20 banks, the 7 subsidiaries of SBI were also nationalised in 1959, which are listed below.

1. State Bank of Patiala
2. State Bank of Bikaner & Jaipur
3. State Bank of Patiala
4. State Bank of Mysore
5. State Bank of Hyderabad
6. State Bank of Travancore
7. State Bank of Saurashtra
8. State Bank of Indore

All these subsidiaries of banks were later merged with the State Bank of India in 2017, except the State Bank of Saurashtra, and State Bank of Indore, which merged in 2008 and 2010 respectively.

What are the types of banks?

There are 9 different types of banks with different functions and roles that are listed below.

1. Central Bank
2. Cooperative Banks
3. Commercial Banks
4. Local Area Banks (LAB)
5. Specialized Banks
6. Small Finance Banks
7. Payments Banks
8. Domestic Systemically Important Banks (D-SIBs)
9. Neo banks

These above types of banks play a crucial role in maintaining a financial and economic stability in India.

What are the roles of banks in economic development?

The roles of banks in economic development inlcudes implementation of financial policies for stability, mobilise savings for economic growth, simplify commerce with services for trade and payments, promoting economic inclusion with financial services for under served communities, and providing credit for business development and innovation.

The different roles of banks in economic development are listed below.

1. Implementation of financial policies

Banking institutions, such as the central bank, play an important part in handling financial strength by introducing multiple economic guidelines. They take the help of many instruments to govern the fund supply, which improves the monetary stability. Let’s understand this with an example.

“The RBI uses “cash reserve to ratio, reverse repo rate and repo rate to promote financial development, control the inflation and manage the liquidity. The changes in these rates have a huge impact on the lending and borrowing rates throughout the Indian economy. In return, it impacts the overall financial activity, business funding and customer spending”

2. Mobilisation of the savings

All banks and financial institutions donate to monetary expansion by cultivating savings from people and companies. They also provide an accessible and secure way to deposit funds, such as recurring deposits, fixed deposits and savings accounts. The savings account help the banks in collecting capital used for funding.

This method does not only secure the finances of every individual but also offer a good amount of funds that a bank lend for many financial activities to help promote development and growth.

3. Simplifying commerce and trade

Simplifying commerce and trade nationally and globally is the another role of banks in economic development. Banks offer several services to boost trade and commerce that are listed below.

• Payment processing solutions
• Trade finance 
• Letters of credit
• Foreign exchange services

For example, “Banks help all businesses take part in global trade by simplifying transactions and providing currency exchange services. This type of assistance permits businesses to contribute towards the Indian economy, increase the sales and expand their reach.”

4. Economic Inclusion

Economic inclusion is primarly driven by financial institutions when they offer monetary services to all marginalised and underserved communities. The products offered to match with the population’s needs are listed below.

• Monetary literacy programs
• Microfinance loans
• Savings accounts

The “Pradhan Mantri Jan Dhan Yojana” is an initiative launched by the government with the main objective of including unbanked population in the economic system. This initiative improved the monetary services and provided all the benefits of financial growth to a wider society. According to the Pradhan Mantri Jan Dhan Yojana (PMJDY) website managed by the Department of Financial Services, Ministry of Finance, Government of India, “52.74 Crore beneficiaries have banked so far leading to balance in beneficiary accounts to ₹231,908.92 Crore.

5. Delivery Credit

Banks also provide credit stretching to the general public and businesses to improve financial development. They offer several loans for different purposes which are listed below.

• Development of medium-sized and small businesses 
• Allow people to acquire their monetary objectives 
• Foster innovation
• Credit facilities

The credit facilities help stimulate monetary activity, drive the entire financial development, and create jobs for people.

What is the importance of banks?

Banks are a vital component of a nation’s economy. Banks drive financial innovation and growth, maintaining economic stability and generating employment through direct roles and support for businesses.The various reasons that highlight the importance of banks are listed below.

1. Growth and innovation

Banks play an important part in financial growth and innovation by offering capital for research and development activities to support all the latest technological advancements and ideas.

Banks also provide venture capital to allow all the startups to bring cutting-edge solutions and products to the market. This type of monetary support is highly essential for businesses as it allow them to grow their operations and create new technologies.

2. Financial strength

Banks provide financial strength to the Indian economy by managing the flow of funds and credit in the financial system, which, in return, stabilise the financial conditions. 

They also govern the interest rates and control the fund’s supply to make sure there is an appropriate balance between economic inflation and evolution. It’s important for them to manage the monetary resources correctly as it help support monetary confidence and strength. 

3. Jobs creation

The banks also contribute heavily towards job creation, both indirectly and directly. They use many individuals in different roles, right from managers and financial analysts to loan officers to tellers.

Apart from directly creating jobs. banks also fund many businesses and start-ups, which leads to the creation of many occupation possibilities. This type of support towards employment increase the monetary growth and offer people career prospects.

What is banking?

Banking refers to the business of accepting and safeguarding money owned by individuals and entities, then lending out this money in order to earn a profit.

The list of financial services provided by banks are given below.

• Deposits
• Loans and Credit
• Payment Services
• Wealth Management
• Risk Management
• Currency Exchange
• Safekeeping and Custody

What are the types of banking?

The types of banking in India includes online banking, retail banking, investment banking, corporate banking and private banking.

1. Online banking: The online banking provide access to all the banking-related services from the internet. Today, the online banking offers various transactions including payment of bills, checking the account balance and transfer the funds through NEFT, RTGS and IMPS. These services have made online banking become a popular option for many businesses and individuals looking for accessible and simple monetary management services.
2. Retail banking: Retail banking provide financial services including personal loans, mortgages and savings account. The retail banking services are known to provide regular banking needs. It also provides financial products that are created solely for personal finance management.
3. Investment banking: Investment banking give you access to services linked with the financial markets, including asset and merger administration, securities trading, and financing. Investment banks, such as ICICI Securities, assist corporations by increasing their capital, steering through complicated monetary transactions and preserving all the financial risks. 
4. Corporate banking: Corporate banking delivers financial solutions to various establishments by offering services including trade finance, treasury administration and corporate loans. This type of banking work with corporations to preserve all their finances, simplify the massive monetary transactions and growth initiatives.
5. Private banking: Private banking offer personalised assistance, such as asset advisory, funds management, and estate planning. It also provide solutions that match your monetary objectives. Banks, such as the Axis Bank, HDFC banks, etc. offer private banking services where High Net individuals (HNI) opt for investment approaches and tailored monetary planning.