How Do Banks Works In India? (2021)

Banks play an important role in our economy. Banks’ primary purpose is to put their account holders’ money to use by renting it to others, who can then use it to buy houses, start companies, send their children to college, and so on. Then How Do Banks Works In India?

How Do Banks Works In India?
How Do Banks Works In India?

How Do Banks Works In India?

  • When an individual deposits money into their bank account, the bank has the ability to lend the money to anyone.
  • The depositing customer receives a small amount of money in return (interest on deposits), while the lending customer pays the bank a greater amount of money in return (interest on loans).
  • The bank keeps the difference to make money for itself.

In reality, many people seem to believe that banking is “free,” due to banks’ constant promotion of free checking accounts, free direct deposit, free budgeting features, and so on. Since banks do not produce physical goods, it can be difficult to understand what they do.

India’s banking system

Banks and banking have been split into various classes in India. Each group’s operations have their own set of advantages and disadvantages. They have their own targeted market. Some work mostly in rural areas, while others work in both rural and urban areas. The majority of them only serve cities and major towns.

India’s financial governments

In India, there are primarily three financial governments:

The Reserve Bank of India (RBI) controls the banking sector, while the Securities Exchange Board of India (SEBI) controls the capital markets and mutual funds, and the Insurance Regulatory and Development Authority (IRDA) controls insurance companies.


Banks are broadly categorised into the following sub-categories:

Has the most branches in metro, urban, and rural areas across the country. Contributes approximately 75% of total deposits.These are the banks listed in the Reserve Bank of India Act, 1934’s second schedule.
Nationalized banks and the State Bank Group: Is a partnership of 27 banks.These banks are expected to maintain certain amounts with the RBI in exchange for financial accommodation and remittance facilities at lower prices from RBI.
Contributes approximately 75% of total deposits.State Co-operative Banks.
Contributes roughly 70% of overall advances made by all commercial banks in India.Banks in the commercial sector
Most have a wide branch network that covers the entire world.
Have a substantial deposit and asset base.  AND
Perform both core and modern banking functions
Banks sub-categories

The banking system is critical in promoting economic growth not only by channelling savings into investments, but also by enhancing resource allocative efficiency. 

In fact, recent empirical evidence indicates that the banking system contributes to economic growth more by improving capital allocative efficiency than by channelling money from savers to investors. An efficient banking system is now regarded as a pre-requisite for development.

The central bank (Reserve Bank of India – RBI), commercial banks, cooperative banks, and development banks represent India’s banking system. These institutions, which serve as a meeting place for savers and investors, are at the heart of India’s financial sector. 

Banks play an important role in the growth of underdeveloped countries by mobilising capital and allocating them more effectively.

An Overview of Indian Banking

How Do Banks Works In India?
How Do Banks Works In India?

The country’s central bank of India is the Reserve Bank of India. This was formed in 1935, in connection with the Reserve Bank of India Act of 1934. The RBI regulates banking in India and is responsible for the following main functions:

  • Functions as a monetary authority.
  • Acts as a financial market regulator and supervisor.
  • Controls foreign exchange.
  • Produces money
  • Carry out related tasks

In India, there are 6 types of banks:

  • Commercial banks
  • Scheduled banks
  • Non-scheduled banks
  • Regional rural banks
  • Co-operative banks
  • Foreign banks

How do bank earn?

Banks usually make money by lending cash from customers and reimbursing them with a certain interest rate. Banks would lend the money to borrowers, charging them a higher interest rate and profiting from the interest rate spread.

What is a bank in a nutshell?

A bank is a financial institution that is permitted to accept deposits and make loans. Banks may also provide financial services like wealth management, currency exchange, and safe deposit boxes.

What is the purpose of interest charged by banks?

Banks borrow money from you in the form of deposits, and interest is what they pay you in exchange for the use of the money you deposit. 2 They use the funds from deposits to make loans. Borrowers are charged marginally higher interest rates than depositors. The distinction is their benefit.

What causes banks to fail?

When the value of a bank’s assets falls below the market value of the bank’s liabilities, which are the bank’s responsibilities to creditors and depositors, this is the most common cause of bank failure. This could happen if the bank loses too much money on its investments.

Who made money?

In 600BC, King Alyattes founded the first known currency in Lydia, which is now part of Turkey. A roaring lion appears on the first coin ever minted. Around 1661 AD, coins developed into bank notes.

Why can’t governments simply print money?

So, why can’t governments just print money to fund their policies in normal times? Inflation is the short response. When countries literally print currency, it historically contributes to cycles of rising prices — there are so many resources chasing too few commodities.

What is the primary feature of a bank?

A bank’s purpose is to collect public deposits and lend those deposits for the growth of agriculture, industry, trade, and commerce. The bank pays lower interest rates to depositors while receiving higher interest rates on loans and advances from them.

I hope you learned some thing new. Thanks for reading.

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