Bank: definition, kinds of banks and their functions

1. The statutory definition

Section 5(b) of the Banking Regulation Act, 1949 defines banking as “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.” Section 5(c) defines a banking company as any company which transacts the business of banking in India. The same definition of banking appears in s.2(a) of the Deposit Insurance and Credit Guarantee Corporation Act, 1961.

The elements, each of which can be tested in a problem:

• Acceptance of deposits. A moneylender who lends only his own money is not a bank.
• From the public. Deposits from friends or partners do not make a business a bank; the offer must be to the public at large.
• For lending or investment. Deposits taken to finance one's own trade (a company taking deposits to run its factory) are not banking. The Explanation to s.5(c) says as much: a company engaged in manufacture or trade which accepts deposits only to finance that business is not a banking company.
• Repayable on demand or otherwise. Both demand deposits (savings, current) and time deposits (fixed) count.
• Withdrawable by cheque, draft, order or otherwise. The power of the depositor to withdraw by his own order is the mark of a banker.

Two supporting provisions. Section 7 forbids any company other than a banking company to use the words “bank”, “banker” or “banking” as part of its name or in connection with its business. Section 22 requires a licence from the RBI before any company carries on banking business in India. For the Negotiable Instruments Act the definition is wider: s.3 says “banker” includes any person acting as a banker and any post office savings bank.

The classic English definitions are worth a line: Sir John Paget said no one can be a banker who does not take deposits on current account, pay cheques drawn on himself and collect cheques for customers. The Court of Appeal in United Dominions Trust Ltd. v. Kirkwood (1966) accepted those three characteristics as the usual marks of a banker, while allowing that reputation in the business community could also be evidence.

2. Kinds of banks

Classify by ownership and by function.

• Central bank. The Reserve Bank of India, under the RBI Act, 1934: issuer of currency, banker to government and to banks, regulator. It does not deal with the public in the ordinary way.
• Commercial banks. Public sector banks (State Bank of India under the SBI Act, 1955, and the nationalised banks under the Acquisition Acts of 1970 and 1980); private sector banks (old private banks and the new ones licensed from 1993); and foreign banks operating through branches or wholly owned subsidiaries.
• Scheduled and non-scheduled banks. A scheduled bank is one included in the Second Schedule to the RBI Act. It must maintain the cash reserve under s.42 and is eligible for RBI refinance.
• Co-operative banks. Urban co-operative banks and the rural structure of State, district central and primary societies. They are registered under State co-operative laws or the Multi-State Co-operative Societies Act, 2002, but their banking business is regulated by the Banking Regulation Act through s.56. The Banking Regulation (Amendment) Act, 2020 brought them much closer to commercial banks in RBI control.
• Regional Rural Banks. Set up under the Regional Rural Banks Act, 1976, jointly owned by the Central Government, the State and a sponsor bank, to lend to small farmers, labourers and artisans in rural areas.
• Development banks. Institutions for long-term finance: NABARD (1981) for agriculture, SIDBI (1989) for small industry, EXIM Bank (1981), National Housing Bank (1987), and the National Bank for Financing Infrastructure and Development (2021). The old IDBI and ICICI converted into commercial banks.
• Differentiated banks. Payments banks, which accept limited deposits and offer payments services but cannot lend, and small finance banks, which must lend mostly to priority sectors. Both are licensed under s.22.

3. Functions of a commercial bank

Primary functions are those in the definition.

• Accepting deposits: current, savings, fixed and recurring.
• Lending: cash credit, overdraft, term loans, discounting of bills.
• Creating credit: every loan creates a deposit, which is why the RBI controls the reserve the bank must keep.

Secondary functions are permitted by s.6(1) of the Banking Regulation Act, which lists the forms of business a banking company may carry on in addition to banking. They fall into two groups.

• Agency functions: collecting cheques, bills, dividends and interest; paying insurance premia and bills on standing instructions; buying and selling securities for customers; acting as trustee, executor or attorney.
• General utility functions: safe deposit lockers, letters of credit and bank guarantees, remittances by draft and electronic transfer, foreign exchange, credit and debit cards, underwriting, and advisory services.

Section 6(2) is the control: a banking company shall not engage in any form of business other than those referred to in s.6(1). Section 8 forbids it to trade in goods, except in realising security. Section 9 requires it to dispose of immovable property not needed for its own use within seven years.

4. Multi-functional banks: growth and legal issues

Since the 1990s the large banks have become financial supermarkets. Through subsidiaries and tie-ups they sell insurance, mutual funds, broking and pension products; the term used is universal banking. The growth was driven by competition, the conversion of development financial institutions into banks, and technology.

The legal issues:

• Authority. Each new activity must fit s.6(1). Clause (o) allows business the Central Government notifies as lawful for a banking company, and the RBI's directions on para-banking activities control the rest.
• Subsidiaries. Section 19 restricts the subsidiaries a bank may form and its shareholding in other companies. Insurance and securities subsidiaries also come under IRDAI and SEBI, so a group answers to several regulators.
• Conflict of interest and mis-selling. A bank that is lender, adviser and seller of third-party products may push products that suit its commission. This is a deficiency in service under the Consumer Protection Act, 2019 and a ground of complaint under the RBI Integrated Ombudsman Scheme.
• Risk contagion. Losses in a subsidiary can threaten depositors' money. Capital adequacy norms and ring-fencing are the regulatory answer.
• Secrecy. Sharing customer data across group companies raises the duty of secrecy (Unit III) and now the Digital Personal Data Protection Act, 2023.

How this is examined

Regularly. “Explain the various types of banks and their functions” (June 2025) and “Explain on different kinds of banks” (January 2026) are the essays; “Definition of bank” and “Regional Rural Bank” (January 2026) are the short notes. For a 10-mark answer: s.5(b) with its elements, the classification above with the statute for each kind, primary and secondary functions tied to s.6, and a closing paragraph on multi-functional banking. For the RRB note: the 1976 Act, joint ownership, rural objective, priority lending, and the amalgamation of RRBs into fewer, State-level banks.