What is a Bank, and How Can It Help You?

We are all familiar with the word ‘bank’. We may have heard or read about it multiple times in books, and some of us may even have visited it with our parents or grandparents. Today, we will talk about what a bank is and what it does. 

Let’s get started!

What is a bank?

It is an organisation that handles money, just like a school is an institution that deals with education. People keep their money in it because it is safer than keeping it in a desk drawer or piggy bank at home. We can also take out the money we have kept in the bank whenever we want.  

All these acts of putting in money and taking out money from the bank are recorded by the bank, which means that there is rarely any chance of a mistake. These records are securely kept for years. 

• Record (noun) – A written document that can be viewed and checked later.

Exercise: List the names of banks near your house with the help of your parents. 

How does it work?

We put money in the bank because they do not charge any fee to keep the money. Instead, they pay us interest in the form of extra money on the money we save in the bank, which makes our money grow. 

• For example: If we put in ₹20 for a year in the bank, it will give us ₹21 at the end of the year. We get ₹1 extra from them because we gave our money to them for safekeeping. 

It is impressive, right? But how does it get the extra money to give us? 

Similar to how we can put money in the bank for safekeeping, we can also borrow money from them when we need it. The only difference is that banks will charge a fee when we borrow money from them. 

• For example: If we borrow ₹20 for a year from a bank, we will have to return ₹22 at the end of the year. We have to give ₹2 extra to them for letting us borrow the money. 

Banks do both–take money from people in the form of deposits and let people borrow money in the form of loans. They earn money from loans. They make money from the difference between how much interest they pay people and how much interest they charge people who borrow money from them. 

• For example: Amy borrowed ₹20 from the bank and paid back ₹22. Seema deposited ₹20 and received ₹21. So, the bank earned ₹1 (₹22 – ₹21) from this transaction. 

Exercise: Ask your parents if they have ever borrowed money in the form of a loan from their bank. Discuss the reasons. 

What does it do?

Banks do much more than simply give and receive money.  

Here are a few things that they do:

• Help people transfer money to someone else. For example, Seema can transfer money to her daughter, who lives in a hostel, to buy books. 
• Help businesses collect payments. For example, Amy has a bakery business. She recently baked a cake for Ravi. Amy’s bank can now accept money as payment from Ravi for the cake. 
• Provide locker services to people so that they can keep their valuable stuff inside them. For example, Arian’s parents keep their gold jewellery and important documents in a bank locker to keep them safe. 
• Give traveller’s cheques to people when they go on a trip and do not want to carry a large amount of money in cash. A traveller’s cheque is a fixed-amount cheque provided by banks that can be exchanged for money in other countries while travelling.  They are a safe option since they can be replaced by the bank if stolen or lost. For example, Tim’s family is travelling abroad and has decided to carry traveller’s cheques so that they don’t have to worry about losing or someone stealing all the cash they are carrying. 

Exercise: Which of these services do you find most interesting? Give two reasons.

<Download the worksheet here>

Disclaimer: This blog has been written for children between the ages of 5 to 7. The information has been presented accordingly. Parental discretion is advised. 

You may read other articles in the financial literacy for children series here.