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Why do we need a Bank

WHAT IS A BANK?

The term ‘Bank’ is used generically to refer to any financial institution that is licensed to accept

Deposits and issue credit through loans. Banks are the backbone of any economy, as all monetary transactions end up touching banks.

The main functions of banks are to:

• Channelize Savings

• Provide credit facilities to borrower

• Provide investment avenues to investors

• Facilitate the trade and commerce dealings

• Provide financial backbone to support economic growth of the country

• Minimize Cash Transactions

• Provide Services

WHY DO WE NEED A BANK?

• They provide a return (pay interest) on our saving

• Safety of principal and interest

• Convenience of being able to write checks and use debit cards

• Raising funds when we need

From the business or economic point of view, however, banks are the primary source of finance. Since the deposits of the small investors are protected, bank deposits are considered a low risk

investment avenue. Due to their access to a large source of funds at very low cost, owing largely to the low interest rate on savings and term deposits, banks are in the best position to lend to

Businesses and individuals at competitive interest rates.

WHAT IS THE CENTRAL BANK AND WHAT ARE ITS ROLES?

The Central bank of any country can be called the banker’s bank. It acts as a regulator for other

Banks, while providing various facilities to facilitate their functioning. It also acts as the Government’s bank. The Federal Reserve is the central bank of the United States, while Reserve Bank of India is the central bank in India.

The main objective of a central bank is to provide the nation with a safer, more flexible, and more stable monetary and financial system.

They have the following responsibilities:

• Conducting the nation’s monetary policy. Central banks define the monetary policy and then take necessary actions to create an environment to make those policies feasible. E.g. if the central bank wants to maintain soft interest rate, they can reduce the CRR to pump in more money in the economy.

• Supervising and regulating banking institutions and protecting the rights of consumers

• Maintaining the stability of the financial system, i.e. stability of interest rates and foreign exchange rate.

• Ensuring that the interest rates remain at such a level as to make business viable

• Ensuring that sufficient funds are available for long term investment to businesses as well as government, without causing inflation to rise.

Providing certain financial services to the government, the public, financial institutions, and foreign official institutions

• Monitoring the foreign currency assets and liabilities and monitoring the inflow and outflow of foreign currency


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