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Term Paper on Banks

Term Paper Contents:

  1. Term Paper on the Meaning of Bank
  2. Term Paper on the Definitions of Bank
  3. Term Paper on the Principles of Investment Policy of Bank
  4. Term Paper on the Importance of Banks
  5. Term Paper on the Role of Banks in Economic Development

Term Paper # 1. Meaning of Bank:


‘Bank’ is an English word. The history of the use of the term bank is very old. Even at present, the term is very popular. But there is no evidence as to time and place associated with the origin of this term. There is dissension even among scholars in this regard. Some people held that ‘Bank’ has been derived from the Italian term ‘BANCO’ which was later called ‘BANKE’ in French. On the other hand some people consider the origin of this term from the German term ‘BANCK’.

Besides these, BANQUE, BANKE and BANC etc. are also considered as mythological terms for BANK. Whatsoever be the origin of this term, all the scholars agree on the concept that the present system of banking starred in Italy. Merchants in Italy and other European Countries used to sit on benches to exchange money in ancient times. These people kept money of different places with them and could change the money (currencies) of traders in the currencies of the desired place for their convenience.

These merchants used to lend money to one another. In this regard the origin of the term BANK can be considered from ‘BANCO’ because Banco means to sit around the benches. The benches of merchants were broken into pieces if they violated their agreements or failed in their enterprises. This was how the term ‘Bankrupt’ originated.

On the other hand, ‘BANK’ means—Joint Stock fund. It means centralisation of money deposited by many people at a place.


So long as the starting of modern banking is concerned, it is supposed to have taken place in the 17th century A.D. Bank of Amsterdam in 1609 in Holland; Bank of Hamburg in 1619 in Germany and Bank of England in 1694 were the initially set up banks in number on modern line of banks. Since then banks have been increasing gradually in different countries of the world.

Term Paper # 2. Definitions of Bank:

Today the term ‘bank’ simply means commercial banks.

The definitions of banks can be classified as follows for the convenience of study:

Definitions of Bank

(A) General Definitions:

Following are important general definitions of banks:

(1) According to H. L. Hart, “A banker is one who in the ordinary course of his business receives deposits and he pays by honoring cheques.”

(2) According to Kinley, “Bank is an establishment which makes to individuals such advances of money as may be required and safely made and to which individuals entrust money when not required by them for use.”

(3) According to Sayers, “Bank as an institution whose debts, or bank- deposits is commonly accepted in final settlement of other people’s debts.”

(4) According to Crowther, “The banker’s business is to take deposits of other people, to offer his own exchange facility and there by create money.”

(B) Functional Definitions:

Following are the functional definitions of bank:

(1) According to Findly Shirras, “A banker or bank is a person or a firm or company having a place of business where credits are opened by the deposit or collection of money or currency subject to be paid or remitted upon draft, cheques of order or where money is advanced or loaned on stock, bonds, bullion and bills of exchange and promissory notes are received for discount and sale.”

(2) According to Webster’s Dictionary, “Bank is an institution which trades on money, establishment for the deposit, custody and issue of money, as also for making loans and discount and facilitating the transmission of remittances from one place to another.”

(C) Legal Definitions:

The term ‘Bank’ has been defined in the Banking Regulation Acts of various countries.


Some prominent legal definitions are given below:

(1) According to England’s Bills of Exchange Act, 1882, “Banker includes anybody or person whether incorporated or not who carry on the business of banking.”

(2) According to the Negotiable Instrument Act, 1881, “Banker includes any person acting as a banker and any post office saving bank.”

(3) According to Indian Companies Act, 1936, “A company which carries on as its principal business by accepting the deposits of money on current account or otherwise subject to withdrawal by cheque, draft or order.”


(4) According to Indian Banking Companies Act, 1949, “The accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.”

After a thoughtful observation of the above mentioned all definitions, we come to a conclusion that the definitions given in the general category are incomplete. Functional and legal definitions have glimpses of completion. On this basis, a proper or ideal definition of bank can be given.

(D) Proper Definition:

In a nutshell, it can be said, “A Bank is an institution that performs the task of exchanging money and credits.” But in a detailed description, we can say, “A bank is such money-dealing institution where money is deposited, loans are granted and the facility of transactions of money is provided. With these the conservation of deposits and credit formation also take place.”

Term Paper # 3. Principles of Investment Policy of Bank:


Banks invest money received through various sources at one place or the other. Banks get interest through investments and give interest on money received from share and deposits. In this condition, it becomes essential that banks should invest their resources at proper places.

The policies and principles of bank keep on changing according to the circumstances of the country. So, the bank officials have to work on the basis of their prudence and experience.

At present banks keep the following principles under consideration while investing their capital:

(1) Safety of Funds:

Safety of funds is the most important among the principles of investment policy of banks. Safety mustn’t be overlooked due to the hope of earning high profits. If banks neglect safety of funds at the time of investment, there can be problem of existence.

Banks should keep in mind following points for the safety of investment:

(i) Banks should not invest their total capital with one person, in one area, one enterprise or one industry. If it is done and that class faces some crisis, the bank would also face that crisis. So banks should invest their capital in different areas.


(ii) Before advancing loans, banks should gather information regarding the nature/character, financial position and creditworthiness of the borrowers. Loans should be always granted to persons with good character, strong financial condition and good credit. Such loans don’t become Bad Debts.

(iii) Loans should be granted on safe and proper collateral. In case, the situation of non-repayment comes up the money can be obtained by selling the collateral.

(iv) As far as possible, banks should grant short-term loans only and avoid granting long-term loans. Short-term loans are considered safe.

(v) Banks should not very often grant loan on taking immovable assets at, collateral.

(vi) Banks should not adopt Cheap Credit policy because it develops the tendency of extravagance among borrowers.

(2) Liquidity of Funds:

Faith of people is essential for the success of banks. People deposit their money with banks with the hope that they can withdraw it any time they want to do so. To retain this faith of people banks should take care of liquidity, while investing their funds.


Thus banks should invest their funds in such securities that can be sold without any loss in the hours of need. However banks retain a certain percent of cash funds to meet the demands of customers, when it appears to be inadequate there emerges, situation of the selling of shares.

The points to be considered with the view of liquidity are:

(i) Bank should not invest their total capital. Instead they must retain 20 to 30 percent as Cash Funds. Though, the Cash Fund is a passive source, it is needed to retain the faith of people.

(ii) Funds should be invested in government securities, Blue chip companies and debentures which can be sold within a short time to obtain money.

(iii) In this respect Tannen says, “A true banker is one who well understands the differences between bill of exchange and Mortgage. Bill of exchange is short-term credit investment, which can be easily converted into money in the hour of needs. But mortgage is an asset which can’t be suddenly changed into money. Due to this, demand requiring cash can’t be fulfilled at short notice.”

(3) Profitability of Funds:

A Bank is a profit earning institution. It earns the maximum of its profit from investments. So, a bank should invest its surplus capital in such a way that it can get a good and steady income.


But it is worth- mentioning here that liquidity and profitability are contradictory to each other. If investment is done by keeping liquidity in mind, it will give less profit and if investment is done with the objective of earning more profit, it will have less liquidity.

In other words, the more a bank will stress on profitability, the farther it will become from liquidity. But for banks, at the time of investment both liquidity and profitability are necessary elements of consideration. In this condition banks should invest their resources in different areas in such a way that a proper balance between liquidity and profitability can be maintained.

(4) Diversification of Risks:

Diversification of Risks in the investment policy of the banks means that banks should not invest the entire surplus amount in one enterprise, industry, area or place but diversify it. If the whole sum is invested in one area and that collapses due to any reasons, the bank would fail.

So, for the sake of safety, the banks should diversify investment of their funds. For example, if the money is to be invested in shares only, then some part of it should be invested in equity shares and the remaining in preference shares, bonds and debentures. Similarly if loans have to be granted to industries, it should be distributed to different industries.

(5) Marketability:

While investing money, banks should take care of the marketability of shares and assets. Marketability refers to the availability of markets, where shares and assets can be sold easily without any loss.

Generally market for good shares and movable property is available, so these have the quality of marketability. On the contrary, there is no market for fixed assets like land, buildings etc. So with this point of view bank should not invest their money in fixed assets.

(6) Price Stability:


However nobody knows what is stored in the future; yet banks should invest their capital on the basis of their experiences in such shares in whose price there is less fluctuation/shares with high fluctuation may give better hopes of profit, but there is also an equal chance of acquiring loss.

(7) Exemption from Tax:

For increasing their income banks should invest their surplus money in such shares, income from which is exempted from income tax and other taxes.

(8) Productivity of Funds:

While investing money as loans, banks should give top priority to production sector. If it is done so, there is safety of investment.

(9) Study of Investment Policy of Central Banks:

The Central Bank of the country is also called the bank of banks. The Central Bank regulates all the commercial banks of the country, so the commercial banks should study the investment policy of the Central Bank and take care of its guidelines.

(10) National Interest:

It is true that the objective of a bank is to earn profit, but the social responsibilities are also associated with it. So while investing banks should keep the national interest also under consideration so that the maximum national development can be achieved.

Term Paper # 4. Importance of Banks:

Banks are the lifeline of modern economy. Banks have made important contribution in the prosperity of developed countries. It is not easy to overlook banks in the present day commercial system. Today, banks are considered the ‘Nerve Centre’ of commerce, trade and industries.

The importance and utility of banks in the economic development of a country can be understood from the following points:

(1) Capital Formation:

Banks accept the deposits from people and pay interest on them. This encourages the saving tendency in people and small savings lead to big capital formation. Besides, banks also accept deposits from the people.

(2) Promotion of Trade and Industry:

Banks give economic support to people associated with trade and industries. This leads to development of trade, industries and finally of economy. Due to this liberty of banks, new entrepreneurs enter the field of trade and industries.

(3) Mobility of Capital:

Banks not only help in capital formation, but also increase the mobility of capital. Banks accept deposits from people who have surplus money and give it to those who need it. This brings a balanced development of the economy and also of the country.

(4) Transfer of Money:

People, particularly those who are associated with the trade, have the need to transfer money from one place to another. Banks perform this task at a very low cost in so many different ways. Cheque, draft, EFT, RTGS etc. facilities given by banks help in transferring of money.

(5) Discounting of Trade Bills:

Trade bills are becoming of increasing in use in India also on the line of western countries. Banks give monetary help to traders by granting immediate discounting of trade bills. Some countries have special department for this purpose which are called Discount Houses.

(6) Advancing Loans:

Banks advance a big proportion of their deposits as loans for useful purposes. Entrepreneurs make important contribution in the national economy with the help of these loans. The national development would be hampered if banks stop granting loans.

(7) Safe Custody of Valuables:

Banks grant locker facility for keeping precious metals, important documents etc. Banks charge general annual rent for this facility.

(8) Provision of Foreign Exchange:

The field of trade and commerce has developed enormously recently. Trade has also expanded in terms of export and import. Foreign currency is needed for export and import. Banks manage foreign currency for their customers and hence help them in their trade.

(9) Facility of Letter of Credit:

A Letter of Credit is that which is not money but works like money. Banks encourage cheques, drafts and other kinds of letters of Credit and thus help in the development of trading system.

(10) Help to Government:

Contribution of the role of bank for the government is also important. Collecting different kinds of taxes on behalf of the government, making governmental payments, setting government loans etc. are works with banks devote to the government.

(11) Agency Functions:

Banks work as the agents of their customers and give them chance to save their time and money. They pay insurance premium and rents and sell and purchase shares on the behalf of their customers.

(12) Aid to Trade and Industry:

Besides other work for trade and industries, bank also collect and publish data. This helps trade and industries in deciding their directions.

Term Paper # 5. Role of Banks in Economic Development:

Banks play a vital role in the economic development of underdeveloped economies in number of ways:

1. Banks promote optimum utilization of resources.

2. Banks promote growth and stability.

3. Banks promote balanced regional development.

4. Banks promote capital formation.

5. Banks promote expansion and credit.

6. Banks finance priority sectors.

(i) Banks Promote Optimum Utilization of Resources:

It is difficult to see how, in the absence of banks, could small savings of the people be mobilised or even made possible. It is also difficult to see who would distribute these savings among enterprises. It is through the agency of the banks that the community’s savings automatically flow into channels which are productive.

The banks exercise a degree of discrimination which not only ensures their own safety but which makes for optimum utilisation of the financial resources of the community. We see in India that the period of economic development has coincided with a phenomenal increase in the bank deposits and increasing advances for agricultural and industrial development.

(ii) Banks Promote Growth and Stability:

Through their influence on the rate of interest the banks can regulate the rate of investment. If cheap money is helping development at too great a speed, they will raise interest rates under the direction of the central bank. On the other hand, they can encourage investment when the speed of development has slowed down. In this way, the banks promote growth with stability.

In India, the primary function of the Reserve Bank of India was to regulate the issue of bank notes and keep adequate reserves to ensure monetary stability. But now it has assumed wider responsibilities to help in the task of economic development. In addition, to traditional responsibility of regulating currency and controlling credit, the Reserve Bank of India has been playing a vital role in financing and supervision of the development programmes for agriculture, trade, transport and industry.

It has created special funds for promoting agricultural credit and it has created special institutions for widening facilities for industrial finance. The other banks too readily fall in line. They open new branches to tap the savings of the people and lend them to entrepreneurs. An increasing degree of control is exercised in respect of management financing and development of banks so that they do not sabotage the development programmes but are made to further these programmes.

(iii) Banks Promote Balanced Regional Development:

By opening branches in backward areas the banks make credit facilities available there. Also, the funds collected in developed regions through deposits may be channelised for investment in the underdeveloped regions of the country. In this way, they bring about more balanced regional development.

(iv) Banks Promote Capital Formation:

In any plan of economic development, capital occupies a position of crucial and strategic importance. No economic development of sizable magnitude is possible unless there is an adequate degree of capital formation in the country. A very important trait of an underdeveloped economy is deficiency of capital which is due to small savings made by the community.

Backward economies hardly save 5 per cent of the national income, whereas they should save and invest at least 12 per cent in order to secure a reasonable level of development. In 1950, Colin Clark estimating the capital needs of China, India and Pakistan pointed out that they must save 12.5 percent of the national income to absorb the increasing labour force and maintain the fast rate of increase in productivity.

The role of the banks in economic development is to remove the deficiency of capital by stimulating savings and investment. A sound banking system mobilises the small and scattered savings of the people and makes them available for investment in productive enterprises.

In this connection, the banks perform two important functions:

(a) They attract deposits by offering attractive rates of interest, thus converting savings which otherwise would have remained inert into active capital, and

(b) They distribute these savings through loans among enterprises which are connected with economic development.

(v) Banks Promote Expansion and Credit:

It is recognised that to maintain a high level of economic activity, credit must expand. In an era of economic development, banks create credit more liberally and thus make funds available for the development projects. In this way, the banks make a valuable contribution to the speed and the level of economic development in the country.

(vi) Banks Finance Priority Sectors:

In order to meet additional demands arising out of economic development, the banking system has to undergo certain changes in its structure and all other financial institutions must operate in such a manner as to conform to the priorities of development and not in terms of return on their capital. The banks have now to play a more positive role.

Thus, the central bank is not merely to content itself with its regulatory role i.e., regulation of bank credit but it must play a developmental role. It must create or help to create machinery or agencies for financing development plans. It must ensure that the available finance is diverted to the right channels. For successful implementation of the development programmes it becomes necessary to make credit facilities available to high priority sectors and to see that the available funds are not squandered a way in non-essential or non-plan expenditure.


The above descriptions make it clear that banks are very important for trade, commerce, industries, society and government. Banks are the basis of economic development and they serve us as the common path finder. In the present era, a society without banks is like a bloodless creature.