What is Banking and how it works ??


 


What is Banking : Banking is an Industry which deals with the credit facilities, storage for the cash, Investments and the other financial transactions. The banking industry is one of the key drivers of the economies because it channels  funds to the borrowers with the productive Investments.


Banks perform an endless of functions in today’s scenario including deposits and withdrawals, Currency exchange, Forex trading and Wealth management. They work as a clinch between the depositors and the borrowers and they utilize the funds deposited by their customers to provide the credit facilities to the people who want to borrow the funds.

Banks make money by charging the interest rate on loans, where they make profit by charging a higher interest rate than the interest rate they pay on the customer deposits. However they must execute with the regulations set by the Central Bank or Government.

How the Banking Industry works :

In India the RBI is the Central Banking financial Institution. In India, The RBI regulates and operates the banking systems. Being the supreme, it supervises and administers the exchange control and banking regulations and also the government’s Monetary policy. The Banking system works according to the guideless as per the provided by the RBI in India. 

 

The banking system does not advance clean funds from (or give loan clean funds to) the RBI. The daily Liquidity Adjustment Facility (LAF) repo and reverse repo windows only allows the system to transform the excess SLR  into CRR and vice versa.

The banking system does not need liquidity surpluses to liquidate the fresh loans, because the fresh loans form their own fresh deposits.

Banks cannot change  the system liquidity status. The paths for increase or reduction in the banking liquidity , government spending, the demand for currency, and statutory reserve limits set by the RBI, are largely outward of the  bank control. The RBI consciously set the liquidity reference under its control.

The banking system cannot really “lend away” liquidity surpluses, nor it can actively source the deposits that may reduce any liquidity deficits. The banking system pursuit  its own tail, always  trying to remove the large liquidity surpluses or deficits.


Also Check :

Banking Services, Its roles and risks involved

Banking : Different types


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