What is Banking System

           Gone are the days when bank accounts had relevance only for the people making huge savings or borrowings. The present world is characterized by evolving financial institutions who have come to shape our lives in more ways than once. The banking system has come to be an integral part of today’s society. Either a person has a bank account or not, he/she cannot escape the presence of the banking system.

            Banking system in simple words refers to a chain of financial institutions that provide financial services like deposits, loan, money transfer, etc. to individuals and institutions with interest as the determining factor of the transaction. Banking system plays the role of an intermediary between the ones saving and the ones who borrow money for investments.

          The functions of the banking system can be classified into primary functions and secondary functions.

• Primary functions: The primary or banking functions include two components namely depositing and disbursement of loans. The depositing function of the banking system has come to be highly developed providing a range of deposit option. Some of the popular deposits are saving deposits, fixed deposits, current deposits and recurring deposits. The disbursement of loans from the capital of savings constitute the determinant for the bank’s earnings, as the loans disbursed are charged with an interest rate levied to the borrowed amount. Some of the key loan advancements include loans, cash credits, overdraft and discounting of the bill of exchange.

• Secondary functions: Accompanying the primary functions are a pair of secondary functions which the bank performs, namely agency functions and general utility functions. The agency functions refer to services like funds transfer, cheque collections, portfolio management, etc. performing the role of an agent to the customer. The general utility functions refer to the special facilities or services which banking institutions provide, namely locker facilities, project reports, foreign exchange, etc. Not all utilities are provided by every bank, their disposal depends on the resources and nature of the banking institution. 

Types of Banking System:

• Private Banking: it refers to a complete asset management of the client. It serves all the financial dealings of the client namely investment, tax planning, securities, etc. with a high amount of equity.

• Home Banking: it refers to all the services, technology and tools which the banking institutions are continuously developing. It provides banking services to the people at the press of a button, removing the hassles of making errands to the bank for minor services.

• Wholesale Banking: it refers to the provision of banking services big corporations or institutions thus involving personalized and major scale operations.

• Mixed Banking: banking institutions which perform both the functions of commercial i.e. retail as well as the wholesale functions or corporate banking are called mixed banking systems.

• Fractional Reserve banking: it is this banking system which led to the distinguished phenomenon of the money multiplier. The banks are not allowed to hold the complete deposits in reserve; they only hold a fraction of the deposit in reserves and use the rest in lendings and investments generating revenue for the banks.