Banking is a financial intermediation system consisting of banks, other types of financial institutions, and the various systems they use to issue currencies, make loans, and invest.
A bank is a financial institution that accepts deposits and channelizes these deposits into lending activities, either directly by loaning or indirectly through capital markets.
The primary role of banks is to connect those with funds, such as investors and depositors, to those seeking funds, such as individuals or businesses needing loans.
They may also provide other services, such as wealth management, currency exchange, issuing credit cards, etc. While many banks have physical locations, banking activities are now frequently conducted through apps and websites.
Let’s Understand the Role of Banks
Banks provide funds for business and play a vital role in the development of a nation. So let us know some essential functions performed by banks.
- It encourages people’s saving habits and makes funds available for productive use.
- It is an intermediary between people with surplus money and those requiring money for various business activities.
- It facilitates business transactions through receipts and payments by cheques instead of currency.
- It provides loans and advances to people in business for short-term and long-term purposes.
- It facilitates import-export transactions.
- It helps national development by providing credit to farmers, small-scale industries, self-employed people, and extensive business houses, which leads to balanced economic growth in the country.
- It helps raise people’s living standards by providing loans to purchase consumer durable goods, houses, automobiles, etc.
What are Different Types of Banks?
Banks provide a multitude of financial services beyond the traditional practices of holding deposits and lending money. Different types of banks perform these financial services. Types of banks are; central bank, commercial, retail, cooperative, etc. Let’s understand more about these types of banks in detail.
Central Bank
A central bank is formed, owned, and regulated by the government of a country to manage, control, and protect the money supply and the other banking institutions. A central bank guarantees stable monetary and financial policy in a country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official interest rates, acting as bankers to the government and other banks, and regulating and supervising the banking industry. Central banks serve as the government’s bankers. A central bank issues currency and implements monetary policy.
Commercial Banks
These banks are financial institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loans to business enterprises. Nowadays, some commercial banks are also providing housing loans on a long-term basis to individuals.
Retail Banks
These banks help individuals not served by commercial banks. Retail banks provide essential banking services to individual consumers. These institutions help customers save money, acquire loans, and invest. They also offer a wide range of financial services to a broad customer base.
Cooperative Banks
A cooperative bank is a financial entity that belongs to its members, simultaneously the owners and the customers of their bank. Cooperative banks are often formed by persons belonging to the same local or professional community or sharing a common interest. Cooperative banks generally provide their members with a wide range of banking and financial services. People who come together to serve their common interests jointly often form a harmonious society under the Cooperative Societies Act.
Specialized Banks
Some banks cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI, and NABARD are examples of such banks. They engage in some particular place or activity and thus, are called specialized banks.
Development Banks
Business often requires medium and long-term capital for purchasing machinery and equipment, using the latest technology, or for expansion and modernization. Development Banks provide such financial assistance. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.
How to Choose Which Bank Fits Your Investments Needs?
If you’re looking to invest your money in a bank, it’s essential to understand how banks work and what they offer. Banks offer various financial services, including savings accounts, loans, investments, mortgages, and credit cards. So before investing in a bank that’s right for you, it’s essential to know the basics of what banks do.
Different types of banks offer various services for investors. It can be challenging to know which bank is best for your needs because each has different levels of interest rates and fees. To help make the decision easier for you, here are some questions that will help narrow down the choices:
- What types of products does the bank provide?
- What types of investment accounts does the bank offer?
- What is the interest rate on savings accounts and deposits?
- What are the fees on savings and other financial services?
The Future of Banking
The banking industry is changing rapidly. New technologies are causing a shift in how people bank and interact with their financial institutions.
In the future, banks can offer their customers a personalized experience through AI-powered chatbots, digital assistants, and other innovative technologies.
The banking industry is slowly shifting from physical branches to digital channels. This change will allow the banks to provide better and more efficient customer service for their customers.
Conclusion: What’s Next for Banks and the AI Revolution?
When it comes to banking, the industry is changing rapidly. With the advent of Artificial Intelligence and blockchain, banks are redesigning their strategies to compete with other financial institutions and gain a higher market share.
The future of banking is uncertain, but one thing is sure – banks will invest heavily in technology research and development to stay ahead of the curve.
AI technology is advancing rapidly and has already given us fantastic results, such as facial and speech recognition. As AI grows, we can expect more innovations to change how we do banking.
