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Unit 1: Introduction to Banks

broadened to include financial institutions that conduct current accounts for customers and Notes
enable customers to pay and be paid by third parties, even if they do not pay and collect checks.
H.L. Henry defined a banker as, “One who in the ordinary course of business honours cheques drawn
upon by persons from and for whom he received money on current account”. This definition is very
restrictive in the sense that any person or institution engaged in the business of attracting
deposits may be called as bank.
Kinley’s definition, “A bank is an establishment which makes to individuals such advance of money as
may be required and safely made and to which individuals entrust money when not required by them for
use”.
The definition of R.S. Sayers, however, reveals the true character of a modern bank. In his words,
“Banks are institution whose debts usually referred to as bank deposits are commonly accepted in final
settlement of other people’s debts”.

Under British Law, “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”. (Dr. Herbert L. Hart)
Under Indian law, Banking Regulation Act of India, 1949, “Accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or otherwise and withdrawal by
cheque, draft and order or otherwise” (Section 5b).

1.1.1 Origin of the Word ‘Bank’

The name bank is derived from the Italian word banco “desk/bench”, used during the Renaissance
by Florentine’s bankers. These bankers used to make their transactions above a desk covered by
a green tablecloth.

There are traces of banking activity even in ancient times. In fact, the word traces its origins back
to the ancient Roman Empire, where moneylenders would set up their stalls in the middle of
enclosed courtyards called macella on a long bench called a bancu. It is from here that the words banco
and bank are derived.

As a money changer, the merchant at the banco did not invest much money but merely converted
the foreign currency into the only legal tender in Rome that is the Imperial Mint.
In simple terms, a bank is an institution that accepts various types of deposits and then advances
money in form of loans to people requiring it.
Money and credit provide the pivot (axle) around which all the economic activities revolve.
Banks are institutions, which accept deposits and use these funds to grant loans. Banks collect the
surplus funds of millions of individual savers who are widely scattered. The money so collected
is channelised to the investors i.e. people asking for loans for further investment purposes.
Banks help in money growth and capital formation. They are reservoirs of resources for economic
growth and development of the nation. They help in building the infrastructure, boosting the
agriculture, setting up industries and aid to global trade. Thus, a bank, by discharging its functions
effectively enhances the productive and industrious capacity of the nation and boosts the pace of
growth. Banks are the heart of the financial system.

Notes Banks are a medium through which economic and fiscal policies of the government
are materialized.

Financial sector reforms were initiated in India in early 90s with a view to improving efficiency
in the process of financial intermediation; these reforms have facilitated greater choice for

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