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Define Bank

A bank is a financial institution that collects society’s surplus cash and gives a part of that as loan to investors for earning profit. It is an intermediary institution that makes relationship between the owner of surplus savings and the investor of deficit capital. In this process, banks earn profit by receiving interest from borrowers who want to take short term and or long-term loans and making relatively lower interest payment to the depositors for providing their funds for use by the bank. To be a bank it must be authorized by the Central Bank. According to dictionary of banking & finance “Bank is an institution that is registered by central bank and mainly perform the following activities-
  • Receives current deposits and give the withdrawal facilities to clients through cheque
  • Receives term deposit and pay interest on it.
  • Discounting notes, approving loans, and invest in government and othet credit instrument.
  • Collect cheque, draft and note etc.
  • Issue draft and notify of depositors cheque
  • act as a trustee in accordance with government permission.”
Banks are the buyers and sellers of the use of money and the bank always uses the word 'bank' for itself. People can bank upon it. Banks are intermediaries between the surplus units of the society who save and the deficit units of the society who borrow.

Surplus units are those units which consume less than their incomes. Their savings are small but become big when put in a bank and they put their money in bank because they cannot start a viable venture with it. Deficit units are those who may be having large money but require still larger sums for their ventures. The deficit units do not know who the surplus units are and collecting funds from so many of them will elongate the period for performing the function. Besides the surplus units may not have trust in them. The surplus units cannot lend the money directly to the deficit units if their savings are small. Both of them require a financial intermediary of the bank type. Banks earn their profits from interest-spread and credit multiplier. That enables them to earn more than their costs. Bank as a cloak room of funds gives interest also to all depositors except depositors in current account. Just as the insurance companies work on the principle that 'all persons will not die on the same day; banks also function on the principle that 'all persons will not withdraw their money on the same day'. Credit creation is that element which distinguishes a 'bank' from a non-banking financial intermediary

According to American institution of bankers- A bank provides service activity and act as an intermediary between creditor and lender.”

Professor Gilbert “A banker is a dealer in capital, or more properly a dealer in money. He is the intermediate party and lends to another and the difference between the terms at which he borrows and those at which he lends, form the source of his profit.”

From the above definition we can say that a bank is a business institution that receives surplus funds of individuals, trading, or non-trading institution, government or private institution as deposit and supply money with assurance of repayment against security in exchange of profit or interest to trading or non-trading institution, government or non-government institution who has deficit fund and demand for money, and to facilitate this process, create various credit instruments and give facility of withdrawals of deposit as and when needed.