What is Banking?
At its core, banking is the intermediation of funds between lenders and borrowers. Banks accept deposits from savers, pool those funds, and then use them to provide loans and other financial products to individuals and businesses. This process facilitates the flow of money in the economy and promotes economic growth.
How does banking work?
Deposit Accounts:
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These are accounts where people can store their money safely and earn some interest.
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Examples include checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs).
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FDIC insurance protects the money in these accounts up to $250,000 per depositor, per account type, and bank.
Loans:
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Banks offer products where they lend money to individuals or businesses for a specific period, charging interest.
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Examples include mortgage loans, auto loans, personal loans, and business loans.
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Banks use the money from deposit accounts to make loans and earn interest income.
Credit Cards:
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Banks provide revolving lines of credit to individuals or businesses through credit cards.
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Credit cards allow users to make purchases and pay them back later, with interest accruing on unpaid balances.
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Banks earn money from credit cards by charging interest on unpaid balances and fees for late payments, cash advances, etc.
Insurance:
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Banks offer products that provide protection against financial losses due to unexpected events.
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Examples include life insurance, health insurance, property insurance, and liability insurance.
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Banks earn money from insurance by collecting premiums from customers and paying out claims when needed.
Wealth Management:
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Banks offer services to help customers manage their money and investments.
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Examples include financial planning, retirement planning, portfolio management, and estate planning.
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Banks earn money from wealth management by charging fees for their advice and expertise.
Types of Bank
There are various types of banks in India that perform different functions and cater to different sectors of the economy. Some of the major types of banks in India are:
Central Bank: The Reserve Bank of India (RBI), the nation's financial guardian, controls the money supply, issues currency, oversees banks, and supports the government.
Commercial Banks: Public, private, foreign, and regional rural banks handle deposits and loans for individuals and businesses.
Cooperative Banks: Serving farmers and related sectors, operating on a mutual aid principle under RBI and state regulations.
Small Finance Banks: Providing basic banking services to underserved communities like farmers, small businesses, and low-income families. Minimum capital of Rs. 100 crore, licensed by RBI.
Payments Banks: Accepting deposits up to Rs. 1 lakh, issuing debit cards, and enabling money transfers. No lending or credit cards. Promoting financial inclusion and digital payments.
Specialized Banks: Focusing on specific sectors like industry, trade, housing, and infrastructure. Examples: IDBI, EXIM Bank, NHB.