Legend
Legend has it that Hindu god, Ram paused at that spot on his way from Ayodhya to Lanka in pursuit of the demon king, Ravana who had kidnapped his wife, Sita. Then Lord Rama was advised to worship Shiv linga and he is said to have constructed the original linga of sand, after getting tired of waiting for his brother, Lakshman to bring an idol. The name is etymologically derived from the Sanskrit word for an idol made of sand -- Valuka Iswar, an Avatar of Shiva.
As the story progresses, later when Ram was thirsty, as there was no fresh water readily available (only sea water), he shot an arrow and brought Ganges over here. Hence Bana (arrow in Sanskrit) Ganges. The water that feeds the tank stems from an underground spring at that spot, despite its proximity to the sea.
Read more about this topic: Walkeshwar Temple
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