Types of Banking

Types of Banking is an important topic for anyone appearing for IBPS PO, SO, SBI or any such relevant exam. In the following section, we will learn about the different Types of Banking and see many examples and practice questions on the Types of Banking.

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Types of Banking

While walking in the streets of any town or city you might have seen some signboards on buildings with names – Canara Bank, Punjab National Bank, State Bank of India, United Commercial Bank, etc. What do these names stand for? Did you ever try to know about them? If you enter any such building you will find some kind of a business office. You will find that some are depositing money at one counter while some are receiving money at another counter. Behind the counters, in the office, you will see tables and chairs occupied by officers. On one side of the office, you will also see a chamber (small partitioned room) where the manager is sitting with papers on his table. This is the office of a ‘Bank’. Let us know in detail about banks and their activities.

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

Central Bank

A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Government’s banker, maintain deposit accounts of all other banks and advances money to other banks when needed.

The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker’s bank. The Reserve Bank of India is the central bank of our country. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

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Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give a medium-term and long-term loan to business enterprises. Nowadays some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial Banks

Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.

Public Sector Banks:

These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are State Bank of India, Corporation Bank, Bank of Baroda and Dena Bank, etc.

Private Sectors Banks:

In case of private sector banks majority of the share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.

Foreign Banks:

These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks

Business often requires medium and long-term capital for the purchase of machinery and equipment, for using the latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative society under the Cooperative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any cooperative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve
Bank of India.

Types of Co-operative Banks

Here are three types of co-operative banks operating in our country. They are primary credit societies, central cooperative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level.

Primary Credit Societies:

These are formed at the village or town level with the borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds.

Central Cooperative Banks:

These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks.

State Co-operative Banks:

These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state cooperative banks through the central co-operative banks and the primary credit societies.

Specialised Banks

There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialised banks. Let us know about them.

Export-Import Bank of India (EXIM Bank):

If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you with the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.

Small Industries Development Bank of India (SIDBI):

If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances the modernisation of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI are to promote, finance and develop small-scale industries.

National Bank for Agricultural and Rural Development (NABARD):

It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

Practice Question:

Q 1: Which of the following is not a cooperative Bank?

A) Primary Credit Societies                       B) Central Cooperative Banks                      C) Specialised Banks                  D) Both A) and D)

Ans: A) Primary Credit Societies

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