Page 7 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes Know the Banker-customer relationship and social responsibility of banks.
Determine the nature of public and private sector banks in India.

Introduction

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 receives 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 institutions 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 Nature and Origin of the Word ‘Bank’

The name bank is derived from the Italian word banco “desk/bench”, used during the Renaissance
by Florentine 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 bancuit. It is from here that the
words banco and bank are derived.
As a moneychanger, the merchant at the banco did not invest much money but merely converted
the foreign currency into the only legal tender in Rome that was 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 productive and industrial capacity of the nation and boosts its pace of
growth.

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