Types of Banking is considered as one of the most pivotal aspects of banking and finance competitive exams. Types of Banking is a topic that covers the various kinds of the banking institutions that exist in India. This article is intended to elaborate more on the types of banking observed in the country throughout these years. Let’s begin with knowing the topic much clearer and better.
There are various kinds of banks that have different target customers and perform varied functions. However, many people fail to understand the key differences between the types of banking in the country.Different types of banking can be categorized based on their functions, organization, and structure.Knowing the varied types of banking is not only essential from a banking and finance point of view but also for practical purposes. It is important to know how each bank functions in order to choose the right ones as per one’s needs and preferences.
Banking and finance aspirants are advised to read through the following Types of Banking study notes to prepare for the general banking awareness section.
First, let’s understand what a bank is.
What is a Bank?
A bank is a financial institution that is licensed to provide loans and receive deposits from its customers. Banks also provide various financial services such as currency exchange, wealth management, and safe deposit boxes, etc.
Broadly, banks can be categorized into retail banks, corporate or commercial banks, and investment banks. In most countries, banks are regulated by the central bank or the government. In India, the central bank, the Reserve Bank of India (RBI), is entrusted with the responsibility to regulate all the banks across the country.
What are the different types of banking?
To understand the different types of banking systems in India, the banks are broadly categorized on the basis of:
Agricultural banksPost office savings banksForeign banksRegional Rural BanksSmall BanksPayment BanksCooperative banksDevelopment banksRetail banksCentral banksInvestment banksOnline banks
Branch bankingUnit bankingMixed bankingChain bankingWholesale bankingRelationship bankingCorresponding bankingRural bankingUniversal bankingSocial bankingVirtual banking
Types of Banks – On the basis of Functions
Types of BanksDescriptionAgricultural BanksAn agricultural bank undertakes the following types of activities:Lend short term credit to buy seeds, fertilizers, and other inputsGive long term credit to purchase land, make permanent developments on land, to purchase agricultural machinery and equipment, etc.Post Office Saving BanksIt accepts deposits of small amounts only and provides withdrawal services to their customers.ATM facility is also available in such banks.Foreign Exchange BanksThey work for sale and purchase of the foreign exchange bills and exchange of one currency against another.The foreign exchange banks work via financial bodies and operate on several levels.In reality, banks transform into a smaller number of financial firms known as ‘dealers’, who are directly associated in large amounts of foreign exchange trading.These banks also undertake payment of export-import of securities, international loans, and forward exchange trade.Regional Rural Banks (RRBs)These banks are also called scheduled commercial banks but are established with the main aim of providing credit to the weaker sections of the society like marginal farmers, small enterprises, etc.Such banks operate at regional levels in different states of India with branches in urban areas as well.Providing banking and financial services to semi-urban and rural areas, disbursement of wages of MGNREGA workers, para banking facilities, etc. are some of the functions of the RRBs.Foreign BankThese banks are registered and are headquartered in their native country but operate their branches in India.These banks are regulated and supervised by the RBI, one of the financial regulatory bodies in India.Leading Foreign Banks in India:AB Bank Ltd. (Bangladesh)KBC Bank NV (Belgium)Industrial and Commercial Bank of China Ltd. (China)Deutsche Bank (Germany)HSBC Ltd. (Hong Kong)The Royal Bank of Scotland NV (Netherlands)Doha Bank (Qatar)DBS Bank (Singapore)Korea Exchange Bank (South Korea)Bank of Ceylon (Sri Lanka)UBS AG (Switzerland)Abu Dhabi Commercial Bank Ltd. (UAE)Barclays Bank Ltd. (UK)American Express Banking Corporation (USA)Cooperative BanksAll the banks listed under the Cooperative Societies Act of 1912 are called Cooperative Banks. These banks function in both rural as well as urban areas.Cooperative banks work on a “no profit no loss” basis. They are regulated and supervised by the RBI under the Banking Regulation Act of 1949 and Banking Laws Act of 1965.There are two types of cooperative banks:State Cooperative BanksDistrict/ Central Urban Cooperative BanksDevelopment BanksDevelopment banks provide medium and long term loans to the entrepreneurs at a relatively low rate of interest.These banks are specialized financial entities.Some examples of the development banks in India include:Retail BanksSuch banks operate for customers and offer basic banking services.Examples include savings banks, savings and loan associations, fixed deposits, and recurring deposits.Products and services include safe deposit boxes, consumer and car loans, certificate of deposits, checking savings accounting, etc.Payments BankIt is a relatively new type of banking in the Indian banking system, conceptualized by the RBI.Payments bank is allowed to accept a restricted deposit of INR 1 lakh per customer.These banks also offer services like ATM cards, net banking, debit cards, mobile banking, etc.Central BanksCentral banks are also known as banker’s banks. They assure monetary and fiscal stability from country to country and play an important role in economic development.Their activities include implementing monetary policy, making decisions regarding official interest rates, managing foreign exchange and gold reserves, acting as banker to the government and other banks, and regulating and supervising the banking industry.These banks purchase government debt, have an ownership on the issuance of paper money, and often act as a lender of last resort to the commercial banks.They manage and coordinate currency and credit policy of the country.The RBI is the central bank of India.Investment BanksAn investment bank is a financial entity that helps individuals, governments, and corporations in raising money by underwriting and/ or acting as the client’s agent in providing securities.Investment banks may also aid institutions participating in acquisitions and mergers and ease additional services like fixed income instruments, trading of derivatives, equity securities, market making, etc.Investment banks facilitate companies in acquiring funds and they also provide advice for a wide range of transactions.Small Finance BankSmall finance banks are considered as a niche in the banking industry as it aims to provide financial inclusion to all the unserved sections of the society.Micro industries, small and marginal farmers, small business units, etc. are the main customers of the small finance banks.Such banks are licensed under section 22 of the Banking Regulation Act of 1949 and are governed by the FEMA and RBI Act of 1934.Online BanksThey enable the customers to manage funds online so that the customers need not visit a bank branch.Such banks completely function online and there are no localized branch locations.Many physically localized banks also offer online services like viewing and paying bills online, however, online banks often offer competitive interest rates on savings accounts.
Types of Banks – On the basis of Organization
Types of BanksDescriptionBranch BankingIt is an ordinary type of banking and still considered as an integral part of Indian banking as many people still prefer cash transactions and visiting banks in person for regular banking operations.Bank branches are the front desks of the banks where customers can visit and talk to the officials for getting higher insights into new investment schemes, loans, other banking services, policies, etc.Unit BankingIt is a limited procedure of banking where banks work from only a single branch (or a few branches in some area), taking care of the local community.Unit Banking emerged in the USA.Mixed BankingWhen the banks undertake facilities of investment and commercial banking together, it is called mixed banking.Mixed banking helps rapid industrialization.Chain BankingIt is a system where a group of persons come together to own and control three or more independently chartered banks.Individuals collect enough stocks to earn the controlling interest in the banking entities involved.A board of directors can set up the bank’s management.Wholesale bankingIt includes banking facilities for high-worth clients like midsize companies, corporate, and commercial banks.The facilities in wholesale banking include wholesaling, joint ventures, underwriting, mergers and acquisitions, consultancy, etc.Relationship bankingIt includes going beyond the normal services and understanding customer’s requirements before offering them any special product.The information about existing and potential clients is important for all the banks.Corresponding bankingThese are financial entities that provide banking and/ or financial facilities on behalf of other equal or unequal financial entities.Such banks are used to operate banking functions in foreign countries as domestic banks restrict access to foreign markets and cannot directly reach clients.The facilities in corresponding banking are cash/ fund managements, drawing of demand drafts, international fund transfer, cheque clearance, etc.Rural BankingRural banking is an integral part of the Indian financial markets with a major Indian population still living in rural and/ or semi-urban areas.Universal bankingUniversal banking in general implies that the FI’s (Financial Institutions) and banks are allowed to carry out all kinds of activities of banking, financing, and related businesses.It is a structure of banking under which big banks undertake myriad services like mutual funds, commercial banks, insurance, investment banking, merchant banking, etc.Narrow BankingNarrow banking is most likely just the opposite of Universal Banking. It implies narrow in the sense of involvement of funds and not in activity.It is also known as a safe bank as narrow banking would restrict banks to holding liquid and safe government bonds.The deposit taking and payment activities would be separated from the financial intermediaries.The Tarapore Committee suggested that the Non Performing Assets (NPAs), which are incremental sources of the banks (called narrow banks) should be limited only to investments in government securities.Thus, the Tarapore Committee is best known for broadening the concept of narrow banking as a solution to the problem of the NPAs.Social BankingIt is established to facilitate banking for the population living under poverty, engaged for their developmental needs, giving them easy formal credit, minimum requirements to open accounts, ease of access to funds, and friendly staff.Virtual bankingIt is a structure where all the transactions of the bank are made online and there are no physical branches of the banks as in digital banking.
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Types of Banking FAQs
Q.1 What are the different types of banking in India?
The different types of banking in India are broadly categorized on the basis of their functions and organization structure.
Q.2 What is a bank?
A bank is a financial institution that is licensed to provide loans and receive deposits from its customers.
Q.3 What are the different types of banks on the basis of functions?
These include agricultural banks, foreign banks, retail banks, online banks, post office banks, small banks, etc.
Q.4 What are the different types of banks on the basis of structure?
These include branch banking, unit banking, rural banking, universal banking, virtual banking, corresponding banking, etc.
Q.5 Which is the central bank of India?
The Reserve Bank of India (RBI) is the central bank of India.
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