Banking: History and its importance

As you may know, the Banking sector is the lifeline of any modern economy. It is one of the fundamental and important financial pillars of the financial system which plays an important in the success or failure of an economy. Banks are one of the oldest financial intercessors in the financial system. For example, they play a vital role in the mobilization of deposits and the distribution of credit to various sectors of the economy.

Pic credits : Forbes

Definition

According to Section 5(1) (b) of the Banking Regulation Act, the definition of Banking is

“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.”

And according to Section 5(1) (c) of the act, the definition of a banking company is

“any company which transacts the business of banking in India.”


History

Banking has gained importance in the modern economic context but is not a new concept. The origin and existence of banks can be traced back to 2000 BC in the cities of Assyria and Babylonia. The system of banking in this period started with merchants giving grain loans to farmers and traders traveling from one city to another. During this period evidence for the existence of banking in India and China can also be found out.

Pic credits : Irish times

 The modern sense of the word Banking Started during the early medieval and Renaissance Italy. The oldest bank that is still in existence is Monte Dei Paschi di, Siena. It started in the year 1472. The headquarters of the bank is in Siena, Italy.


New era

During the 20th century with the entry of telecommunication and computing, there was a revolution in the way banking executed out across the world. Immediately the Banking Sector saw many improvements and thus expanding the size and geographic spread of the banks.

Bretton woods system

In 1944 the introduction of the Bretton Woods system led to the expansion and development of 2 important organizations: the International Monetary Fund (IMF) and the World Bank (IBRD). Banks agreed on a standard for machine-readable characters (MICR) in 1959, followed by the setting up of Automated Teller Machines (ATM) in the 1960s. In the 1970s new Payment Systems were introduced that would permit electronic payment systems for both domestic and international payments. International Society of Worldwide Interbank Financial Telecommunication (SWIFT) was found out in 1973and domestic payment systems were developed around the world by banks, in association with the governments.

Pic credits : The balance

The free trade of financial markets in a number of countries during the 1980s increased the scope of global banking. Furthermore, capital market services around the world were also changed. The ‘Big Bang’ in London in 1986 allowing banks to approach capital markets in a  new way led to astonishing changes in the way banks operated and accessed capital.


Conclusion

More than half of the Indian population is having no bank accounts. Most importantly India has the largest number of households excluded from banking. India has only a single branch of bank per 14000 people. This situation should have a significant change in the future. Banks are actually quite important in the economy. Therefore the understanding of banking and the banking system is quite essential.

Read more about: All the essentials you need to know about GST and GST return

Sandra Joseph
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