What is banking and what is the role of banking in an economy?

In simple words, Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit.    However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks.  The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.

It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform financial intermediation by pooling savings and channelizing them into investments through maturity and risk transformations, thereby keeping the economy’s growth engine revving.

Banking business has done wonders for the world economy.  The simple looking method of accepting money deposits from savers and then lending the same money to borrowers, banking activity  encourages the flow of money to productive use and investments. This in turn allows the economy to grow. In the absence of banking business,  savings would sit idle in our homes,  the entrepreneurs would not be in a position to raise the money, ordinary people dreaming for a new car or house would not be able to purchase cars or houses.

Ads by Google

What is a bank ?  Define a Bank ?

In simple words, we can say that Bank is a financial institution that undertakes the banking activity ie.it accepts deposits and then lends the same to earn certain profit.

What is a Banking Company ?

Any company, which transacts the business of banking defined above is termed as Banking company

What is Banking System ?

Banking systems can be defined as a mechanism through which the money supply of the country is created and controlled.

Which are the oldest banks in India  :

In 1839, some Indian merchants in Calcutta established India’s first bank known as “Union Bank”, but it could not survive for long and failed in 1848 due to economic crisis of 1848-49.  Similarly, in 1863, “Bank of Upper India” was  formed but it failed in 1913.


In 1865, “Allahabad Bank” was established as a joint stock bank.  This bank has survived till date and is now considered as the oldest surviving bank in India.

How Do the Banks Work / What is the most important element for a bank to survive:

Trust is the most important element for a bank to survive.  People keep money in a bank only when they trust that it will be given back to them as and when they demand the same on at least on the date of maturity in case the same has been given in the shape of fixed deposits.   Of course, there are other reasons also for which people prefer to keep money in a bank rather than keep at home in their own safe.  They can earn some extra money when the money is kept in saving or fixed deposits.   Moreover, they can make payment by issuance of cheques and need not carry money for their day to day needs.

Leave a Reply

Your email address will not be published. Required fields are marked *