What is a Banking & How it Works - Meaning, Functions, & Types

Banking is an essential component of a thriving economy as it facilitates the efficient allocation of resources and promotes financial stability. The banking system in India has undergone significant transformation in recent years. These transformations have now given all individuals and businesses the opportunity to access various banking options. 

This article glances at how banking works. The article further gives some guidance on choosing the best bank to suit your independent needs.

How banking works

Banks facilitate the flow of money within the economy by acting as intermediaries between depositors and borrowers. Depositors place their funds in banks, which are then used to provide loans to borrowers. While depositors receive interest on their deposits from the bank, the bank earns income from the interest charged on loans. 

To ensure transparency and financial stability, the Reserve Bank of India (RBI) regulates the entire banking system in India.

Key banking services

Savings accounts and current accounts: Primarily, banks offer two types of accounts - savings accounts and current accounts. While savings accounts provide interest on deposits, current accounts enable smooth business transactions without accruing interest.

Loans: People can approach banks to help them with their diverse financial needs. Banks assist them by providing various types of loans like personal loans, home loans, auto loans, business loans, and more. 

Investment services: Banks also put forward investment options such as fixed deposits, recurring deposits and mutual funds to empower customers to grow their wealth.

Digital banking: Making transactions has become more accessible and convenient with the advent of technology. Banks now render digital banking services such as internet banking, mobile banking and Unified Payments Interface (UPI).

Types of banks

  1. Commercial Banks

These are India's most common type of banks and supply a full spectrum of banking services to individuals, businesses and government entities. They are further classified into public-sector, private-sector and foreign banks.

Public Sector Banks: These banks are majority-owned by the government of India. As of 2023, there are 12 public sector banks  including State Bank of India, Bank of Baroda and Punjab National Bank.

Private Sector Banks: Owned and operated by private entities, these banks focus on providing innovative banking solutions and a benchmarked level of customer service. Some of the well-known private sector banks are HDFC Bank, ICICI Bank and Axis Bank.

Foreign Banks: These banks are headquartered outside India with branches or subsidiaries operating within the country. Examples of foreign banks in India are Citibank, Standard Chartered Bank and HSBC.

  1. Cooperative Banks

Cooperative banks are owned and operated by multiple members. They chiefly focus on supporting the financial needs of specific communities or regions. 

Further, cooperative banks are distinguished as urban cooperative banks and rural cooperative banks.

Urban Cooperative Banks: These cater to the banking requirements of urban and semi-urban areas and lend services such as deposits, loans and remittances.

Rural Cooperative Banks: These banks focus on the agricultural sector by dispensing credit facilities to farmers and rural communities. They are further divided into State Cooperative Banks, District Central Cooperative Banks and Primary Agricultural Credit Societies.

  1. Specialised Banks

These banks deliver specialised financial services to specific sectors or industries.

Regional Rural Banks (RRBs): RRBs are jointly owned by the central government, the state government and a sponsor bank. They extend credit to rural areas and promote financial inclusion.

Small Finance Banks: These banks look after  financial needs of underbanked populations such as small businesses, micro-enterprises and low-income households.

Payments Banks: Payments banks offer limited banking services and concentrate  on remittances, bill payments and small savings accounts. They are not authorised to give out loans or issue credit cards.

How to choose the right bank for you

To choose the right kind of bank for you, consider the following factors.

Assess your financial needs: Before selecting a bank, evaluate your financial requirements like the type of account, loan facilities and investment options you need. This assessment will help you narrow down your choices so that you can select easily .

Consider the bank's reputation: Check the bank's reputation for reliability, stability and customer service. This can be done by looking at its history, financial performance and customer reviews.

Evaluate branch and the ATM network: A vast network of branches and ATMs will give you easy access to banking services. Which is why you should look for the availability of branches and ATMs in your vicinity or in areas that you frequently visit.

Analyse interest rates and fees: Interest rates on savings accounts, loans, and investment products vary significantly among banks along with service fees for ATM usage, fund transfers and account maintenance. Compare these factors so that you can make an informed decision.

Review digital banking facilities: The reliance on technology has increased which makes digital banking facilities an important factor to consider. Therefore, it is advisable to assess the availability and user-friendliness of platforms like internet banking, mobile banking and UPI.

Assess the additional services: Banks also offer additional services like insurance products, credit cards and wealth management solutions. Evaluate these services to choose a bank that aligns with your financial goals.

Seek recommendations: Ask your friends, family and colleagues about their experiences with different banks. Then choose per your needs, keeping the feedback under consideration.


India’s banking system offers a wide range of options. It caters to the diverse financial needs of individuals and businesses. If you understand the different types of banks and how they work and are able to evaluate factors such as reputation, branch network, interest rates and more, you will be able to make a suitable choice for what bank to choose for yourself. Remember, you should choose a bank that matches your personal financial requirements and long-term goals.

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The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved. 

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