Banking Introduction - What is Banking & How does Banking Work

Banking – Introduction and how it works

Key Takeaways

Banking refers to a financial activity to manage and safeguard your hard-earned money.
Banks cater to all sorts of individuals, small businesses, and large corporations.
Banks offer financial management products, including various types of accounts and loans.
They also provide easy access to funds via facilities like ATMs, debit cards, credit cards, etc.
You can also utilise internet and mobile banking facilities offered by your bank.

Financial management is integral in leading a quality life. A bank is a financial institution that enables you to manage your finances, thereby empowering you to live a financially secure life. Banks provide an array of financial services encompassing savings and investments, which help you gradually build a corpus. This article attempts to decode the age-old puzzle – what is banking and how it works. Read on to know more.

What Is Banking?

Banking implies an activity where a licensed financial institution safeguards your money. You can park your hard-earned money in Current and Savings Accounts. You can also earn attractive interest income by investing in interest generating term deposits. Banks also offer a wide variety of loans and overdraft facilities, depending on the type of account you open. Banks cater to a wide variety of customers – from retail investors to small and large business corporations. As a bank customer, you can visit your bank branch or enjoy remote banking services online through mobile or net banking.

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How Does Banking Work?

Banks accept deposits and lend money to customers, other individuals, and businesses. They earn money from the facilities they provide. Banks also offer several products and services to their retail and corporate customers.

Interest Rate

When you open a savings account or a term deposit, the bank pays you interest against your investment. While savings accounts generate meagre interest rates, you can earn higher interest rates by opening fixed and recurring deposits. Banks also offer loans and charge competitive interest rates to build their customer base.

Bank Cards

Banks offer complimentary ATM-cum-Debit Cards when you open an account with them. Some banks also provide credit card facilities, but the provision is subject to your relationship with the bank and the funds you maintain in your account. Banks typically charge a meagre annual fee for maintaining your ATM-cum-debit card, whereas you may get complete waivers or have to pay a nominal fee for credit card maintenance.

Additional Services

Additional Banking services include various insurance products (offered complimentarily with specific credit and debit cards), overdraft facilities, foreign exchange currency, and remote banking facilities. While banks levy competitive charges for most services, they offer free internet and mobile banking services.

Why Is Banking Necessary?

Banking allows individuals, governments, and corporations to get the necessary financial support.
It enables you to borrow funds at competitive interest rates.
It allows borrowers to manage their cash flow.
It empowers you to initiate instant money transfers and make payments remotely.
It assists with high-value investments and transactions.

Final Note

In India, all banking policies and financial transactions are governed by the Reserve Bank of India. The RBI overseas financial transactions, frames policies, determines base interest rates, and more. Banks can then set reasonable interest rates and earn money from the various products and services they offer. The idea is to ensure fair trade practices for banks and their customers.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.