Introduction to Banking
Banks are an integral part of our life. Whether it is about sending money to someone or receiving the payments, or for instance, taking a home loan or a car loan, the banks play a pivotal role in all financial transactions. So, to make you understand the banking system, let's share a story of a young man named Sathish.
Satish was delighted to get the appointment letter for a job in a prestigious software company after completing his engineering. It was a tough interview and he was the only student from his college who got through.
Upon meeting the HR, he got the pre-joining forms, one of which needed his bank account details. Being a student, he did not have any bank account. His father has a wholesale business with all dealings in cash. He has never had a bank account because he believes his money will remain safe with himself rather than with someone else. Since childhood, Satish has seen safe boxes in his house stashed with cash. So for him, the concept of a bank account was rather alien.
On his way back, Satish walked into the bank at the corner of his neighborhood and asked the helpful lady at the counter to explain to him all about a bank account. The lady was eager to help and clarified everything he needed to know.
What is a Bank account and why is it needed?
A bank account is a financial account maintained by the bank on behalf of a customer. It is an arrangement whereby a customer can deposit and withdraw money, in a physical form or in a digital form. By opening a bank account, a customer entrusts the bank to keep his/her money safe.
A bank account serves a lot of purposes to everyone. The three most important ones include:
- Safety: Banks provide safety to customers. Keeping large amounts of cash at home is susceptible to risks such as stealing or fire. However, banks are safe and well regulated. A certain amount of money is automatically insured against loss by the Government. Even if a bank is robbed or goes bankrupt, customers receive the insured amount.
- Convenience: Handling a bank account is very easy. All payments can be made through cheque or online transfer and money can be withdrawn through a debit card or from the branch itself.
- Savings: Bank accounts help in developing a habit of savings among individuals. Bank accounts are of various types, some of which pay interest. Instead of keeping cash idle at home, keeping it in the bank can help make the money grow.
Types of bank accounts in India
Next, Satish wanted to know what are the different types of bank accounts to decide which one would suit him.
The lady at the bank explained that truly speaking, bank accounts are of two types:
1. Deposit Accounts
2. Loan Accounts
Deposit Accounts are accounts where customers deposit money at a bank. In return, the bank may or may not pay interest on the money. (We will discuss more on ‘Deposit accounts’ in the next unit).
Loan Accounts, on the other hand, are accounts where a bank lends money to customers. The bank charges a certain amount of interest from the customers in lieu of such lending.
We will discuss more on Deposit and Loan accounts in our subsequent units.