BRIEF HISTORY OF BANKING

Banking in its simplest form is as old as authenticated history. In India, reference

about banking habits and regulations exist in our scriptures and ancient texts. During

the Vedic times (2000-1400 B.C), money lending and debt are repeatedly mentioned

in the Vedic period and epic literature. During the smirit period, which followed the

Vedic period and epic age Manu, the great law giver of that time spoke of vaishs

earning money through interest.

Chanakyas Arthashastra (About 300 B.C) is full of facts to show that there were

powerful guilds of merchant bankers in existence who received deposits, advanced

loans and carried on the other banking functions. A system of banks had also been

devised as early as 2000 B.C by the Babylonians. In ancient Greece and Rome, the

practice of granting credit was widely prevalent. The Bank of Venice, which was

established in 1157, is considered to be the most ancient bank. In Florence, ‘Monte’

was established in 1336, and a public bank was set up in 1401 in Barcelona. For

fulfilling the needs of merchants, the Bank of Amsterdam was set up in 1609.

Early history apart modern banking began with the goldsmiths of London in the 17th

century. At that time money was held in the form of gold and silver coins. As the

goldsmiths had excellent strong rooms, people started keeping their money with them

for safe keeping in return for a fee. The goldsmiths used to issue receipts for the same

which began to be transferred from one trader to another for settlement of debts. In

this manner, the trader avoided the problem of withdrawing their coins from the

goldsmith to make the payment to their creditors. The creditors, in turn, were saved

from the necessity of having to deposit the same with the goldsmith for safe keeping.

To make such transactions simpler, the goldsmith started issuing receipts in

convenient denominations and made them payable to bearer. The goldsmiths soon

observed that at a time only a small proportion of coin were needed for making

payment, so they started lending the surplus money and charging certain interest for

doing so.

The goldsmiths began entrusting reserves to the ‘Exchequer’ under sanction and care

of king. Unfortunately, King Charles 2 shut up the exchequer one day and that caused

the ruin of the goldsmiths. However, this proved to be a turning point in the history of

English banking with the growth of private banking and the Bank of England in 1694.

At this point, it is pertinent to mention that apart from the goldsmiths, the money

lenders and merchants also had a strong role to play. Each of these was closely

concerned in dealing of money which in those days was in the form of coins made of

precious metals. Merchants were trustworthy people to whom people gave their

money for safe keeping. They also issued receipts acknowledging their liabilities and

honored them when the receipts were presented. Money lenders in villages too lent

money to people on interest. This money was usually their own, but it also belonged

to people with surplus money who gave it to them. Money lenders, thus, became

embryonic banks by serving as money borrowers as well as moneylenders. As these

money changers transacted their business sitting on benches, they came to be known

as ‘BANKS’.

BUSINESS OF BANKING

Banks are institutions that accept various types of deposits and use those funds for

granting loans. The business of banking is that of an intermediary between the saving

and investment units of the economy. It collects the surplus funds of millions of

individual savers who are widely scattered and channelizes them to the investors.

Money

(Savers) Intermediary (Investors) (Banks)

In simple terms, banks serve as a middle man from the money surplus units to the

money deficit units. They are intermediaries, who transfer funds from savers to

investors through grants for business, commerce, education, and other purposes.

According to section 5(b) of the Banking Regulation Act, 1949, banking means

“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

order or otherwise”.

Functions of Bank

According to section 6 of the Banking Regulation Act, 1949, the primary functions of

Banks are;

The borrowing, raising or taking up of money, the lending or advancing of money

either upon or without security, and drawing, making accepting, discounting, buying,

selling, collecting, and dealing in bills of exchange, hundies, promissory notes,

coupons, drafts, bill of lading, railway receipts, warrants, debentures, certificates etc.

besides the two main functions of lending and investment, a commercial banks also

performs variety of other functions.

Carryout the standing instructions of customers for making payments; including

subscription, insurance premium, rent, electricity, and telephone bills etc.

Undertake government business like Payment of Pension, Collection of direct

Tax and Indirect Taxes.

Money Surplus Units Money Deficit Units

Collects Dividends, Cheques, Bills of Exchange and Promissory notes.

Acts as an agents for any government or local authority or any other person,

also carry on agency business of any description including the clearing and

forwarding of goods.

Contract for Public and Private Loans and negotiating and issuing the same.

The issue of Letter of Credit, international money orders, travellers’ cheque,

foreign currency, circular notes and bank drafts.

Safe custody services through provision of lockers and safe deposit vaults for

safe keeping of documents, cash, jewellery, etc.

Remittance of funds through electronic fund transfer service, bank draft, etc.

STRUCTURE OF INDIAN BANKING SYSTEM

The Indian financial system comprises a large number of commercial and co operative

banks, specialized developmental banks for industry, agriculture, external trade and

housing, social security, institutions, collective investment institutions, etc.

Commercial Banks Regional Rural Banks Co operative Banks

Reserve Bank of India

State Co operative Banks

Central/District Cooperative Banks

Primary credit societies

Public Sector Banks Private sector Banks

Indian Foreign

Old Banks

New Banks

Local Banks

Nationalized BankState Bank Group

State Bank of India

Subsidiary Banks

INDIAN BANKING SYSTEM