Deposit Banking

Deposit banking is actually deposit taking from the members of the public. That is why banks are now-a-days called deposit taking banks. Technically, deposit taking is a borrowing from the market. But unlike other kinds of borrowings, they are not payable otherwise than on demand by cheques. Banks are at liberty to use those deposits any way they like. In fact banks use those funds for lending. That is why second important function of a bank is lending. It is, therefore, clear that a modern joint stock banks starts actually from deposit banking.

It is interesting to note that banking did not start by deposit taking. Historically it started initially with money exchanging followed subsequently by money lending. It is well known that Italian goldsmiths, money lenders and indigenous bankers did the business of money exchanging and lending. They did this job on their own financial strength. Considering strength, financial soundness and goodwill, people at one stage started, however, depositing their money and valuables with them. This not only strengthened their capability to lend but also helped them to pay some interest on deposit.

But till the emergence of Joint Stock Company in the seventeenth century in Europe Deposit banking was not popular. With the popularity of Joint Stock Company having limited liability concept, the deposit banking as such also became popular. In fact, a modern bank now starts with deposits followed by lending and other functions like investment, remittance, foreign exchange business and safe custody etc.

The function of taking deposit or borrowing money has become so much a routine job that many banks even do asses marketing (lending) first to be subsequently matched by liability marketing (deposit mobilization). With the growing importance of wholesale banking (service to corporate and other big clients), some of the banks even borrow from call money market to meet the demands of such clients with the hope of paying them back later by mobilized deposits. It is, therefore, amply clear that Deposit banking is practically the most important function of a modern joint stock bank unlike in the past.