IBPS Exam for Bank PO and Bank Clerical have become the most important exam for aspirants of bank jobs. Applicants for IBPS Exam should know some of the basic facts about banks which can be useful during common written examination as well as during ibps bank interviews.

Definition of Banks

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act,

 “A banking company is a company which transacts the business of banking in India.”

Further, Section 5(b) of the BR Act defines banking as,

“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.”

This definition points to the primary activities of a commercial bank which distinguish it from the other financial institutions. These are:

  • Maintaining deposit accounts including current accounts
  • Issuing and paying cheques

Importance of Banks

Banks are special for three important reasons.

  1. Banks take a primary role in developing other financial intermediaries and markets.
  2. Due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.
  3.  Banks helps vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks.

Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. However, given the increasing sophistication and diversification of the Indian economy, the range of services extended by commercial banks has increased significantly, leading to an overlap with the functions performed by other financial institutions. Further, the share of long-term financing (in total bank financing) to meet capital goods and project-financing needs of industry has also increased over the years. The main functions of a commercial bank can be segregated into three main areas:

  • Payment System
  • Financial Intermediation
  • Financial Services.

 (i) Payment System

A payment refers to the means by which financial transactions are settled. A basic method by which banks help in settling the financial transaction process is by way of issuing and paying cheques issued on behalf of customers. The payments system also includes electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role.

(ii) Financial Intermediation

  • The second main function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation.
  • In financial terms, bank deposits represent the banks’ liabilities, while loans disbursed, and investments made by banks are their assets.
  • Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest.
  • Bank loans and investments made by banks play an important function in channeling funds into profitable as well as socially productive uses.

(iii) Financial Services

Banks also provide financial services such as investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank’s profitability.