Banking Functions of India


The word bank comes or we can say was derived from the french word ‘Banco’ which has a meaning ‘Bench’. In the olden days, there was a barter system carried till the establishment of gold coins, silver coins, copper coins, and mainly the starting of banks. In simple words, a bank refers to an institution that deals in money. This institution works on depositing money and gives loans for a long-term period. Keeping this on another hand bank also deals with other functions like credit creation, agency job, and lastly, general service Bank is a financial institution which deals with a deposit of money who wants to save for the future benefit then bank lends this money to the one who is in need of it

Reserve Bank Of India

Reserve bank of India performs all the functions of a central bank Viz, issue of notes, banker to the state, foreign exchange control, credit control, etc It meets up the financial needs of agriculture, industry, trade, transport, small industries for the economic development of the country. In short, it performs both the banking and development functions of the country.

Functions of RBI

They can be classified into two parts
  1. Traditional Function
  2. Development Function

There are several types of banks



The central bank is the highest financial institution of the banking system or we can say in the banking industry in the country. Every country in the world owns a central bank. The main function of the central bank is to produce or issue currency notes of its country and acts as a banker’s bank. The central bank issues all types of currency with any denomination number Different country has different central bank e.g; RBI, Bank Of England, Federal Reserve System are the central bank of the respective country i.e India, England, U.S.A. The very first central bank of the world was started in late 1668 in Sweden but by carrying all its features/characteristics, nature, and all objectives it was made with the establishment of the Bank of England in 1694.
Some main functions of our country’s central bank are as follows:-
  • 1]Monetary Policy
  • 2]Issuing all Currency notes
  • 3]Act as Bankers bank
  • 4]Leads as the banker to the government


These are the banks that undertake banking business to earn and to make a profit. The motive is to earn profit and minimize the loss. Commercial banks are those banks that give loans and advances for a short period of time on the decided percentage of interest. These banks do not issue notes but create credit on the basis of their cash deposited.

There are two functions of a commercial bank:

1)Primary function:
Accepting deposit and lending money to the needy one is the primary function
2)Secondary function:
Handles Agency functions and utility function
These banks also give long term loans to agriculture and industry sector organization
The State bank of India, Punjab national bank, Indian bank, Canara bank are some of the best examples of commercial bank

These are further divided into 3 groups:

(A)Public Sector:
  • Bank of India
  • State Bank of India
(B)Private Sector:
  • AXIS Bank
  • HDFC Bank
(C)Foreign Sector:
  • Citi Bank
  • Standard Chartered
  • HSBC Bank


The main principle function of these banks is to collect small savings across the country and to allocate them together for various productive use. The main motive to start saving the bank was to motive or encourage the general public/people/society to start saving some amount of money for future use. Specially zoning the rural areas. E.g; postal saving bank. one can open an account in the post office to save money. The main impact of saving banks has done in two large countries i.e Germany and Japan Saving banks were first started in late 1765 in Hamberg city of Germany. In India, a department called the post office functions as a saving bank.


The agricultural bank is those bank which provides credit to the agricultural sector of the economy. In this, the farmers are given a short period of the loan or we can say credit facility to purchase seeds for cultivation of the crop, pesticides, fertilizers, machines, animals for harvesting, and other inputs as needed. They also take long term loan for making permanent improvements to their cropped land. At the village level, the loan provider is primary agricultural co-operative societies at the tehsil level co-operative union and at district level central co-operative bank and lastly at state level co-operative bank functions in India To fulfill agricultural credit needs (NABARD) i.e National bank for agriculture and rural development has been established
NABARD is set up as an apex development bank for financing credit flow promotion and development of agriculture, small scale industries, cottage, and village industries, handicrafts, and other rural crafts.
NABARD is entrusted with
  • 1)refinancing to lending institutions in rural areas
  • 2)Evaluating
  • 3)Monitoring
  • 4)Inspecting the client’s banks
  • 5)Promoting institutional development


Foreign banks are those banks which are geographically located in foreign countries.many of the foreign banks have set up their branches worldwide including India. Their principal function is to make credit arrangements for (EXIM) import and export of the country and they deal in foreign exchange only. They convert their received currency into the currency of the country they needed and thereafter foreign currencies are converted into domestic currencies To perform these functions the banker has to keep all country’s currencies for transaction purposes. The head office is located in a foreign country while its branches are all over the world. E.g; Barclay Bank, Bank of Tokyo In India foreign exchange banks are Bank of America, Hongkong Bank, Chartered Bank, Grindlays Bank
Some functions of foreign exchange banks are:
  • ☆Discounting of bills of exchange
  • ☆Financing foreign trade transactions
  • ☆Issue of letter of credit(LC)
  • ☆Remittance of dividend, interest, and profit

Characteristics/Features of a Bank

  • ¤Bank is a financial institution that deals with other peoples money i.e money given at the time of deposit
  • ¤A bank can be a person or firm or it can be a company. A banking company means a company which is involved in business related to bank
  • ¤Bank accepts money from the people who all are depositing for further use on demand. Till the time of withdrawal the bank act as the custody holder of the money
  • ¤Bank gives the money in the form of loans and advances to whom so required for different purposes
  • ¤The bank provides easy payme3and withdrawal  facility
  • ¤A bank is a profit-making institution

Characteristics of a good banking system:

#To see the country’s economic growth:
The Indian economy is still an underdeveloped agricultural economy. The banking system should create or indemnify various sources of a suitable credit system.
#sound financial basis:
Every business needs to be sound in nature the same is applied to the banking sector too.
They should take every possible action to get the public’s faith towards them.
They should always keep a minimum general reserve to create credit giving in the future.
A good banking institution should create awareness of money-saving policy
#credit control:
They should undertake all necessary actions to control the credit
They should have qualitative and quantitative measures to take credit control
In short, we can say that a good banking system should be friendly to overall programs of growth and progress and development of a nation

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