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July 27, 2014

Banking Awareness : Types of Banks


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For the purpose of academic discussion, the academicians and economists across the world have classified the banks into various types depending upon their primary or basic activities / functions. Following are various types of banks.
  1. Commercial Banks : Usually, a majority of the Commercial banks are joint stock companies. They are also known as deposit banks. These banks can also be established under a special legislation / Acts, a charter. They can be established either a public sector or a private sector bank. They may adopt either a unit banking system or a "branch banking system". Further, these commercial banks can be categorized as "domestic banks: or "foreign banks" depending upon their origin. The primary functions of these banks are accepting deposits, lending money through overdraft, loans, discount of bills etc. in addition, they also take up several non banking activities.
  2. Agricultural Banks : Since financing the agriculture has not been viewed by most of the commercial banks as a profitable business proposition (or as an unviable proposition), they could not concentrate on agriculture and / or rural areas in many parts of the world including India. This situation was led to the emergence of a vast credit gap in rural and / or agricultural sector. Further, this situation, among others also relegated the rural development to the backyard in many countries, acknowledge this situation, agricultural banks were established in many developing countries with a view to meet the banking needs (i.e, credit deposit etc.) of the agricultural sector.
  3. Industrial Banks : In the light of the definition of a bank, the "industrial banks" are, strictly speaking not considered as "banks". The simple reason being that the "industrial banks" will not accept the deposits from the public but simply provides medium and long-term credit for industrial purposes. These banks will be permitted to borrow funds form various sources for its operations. In order to be called any institution as a "bank" it must fulfill two basic functions such as "accepting the deposits" and "lending". Since, the industrial banks are not fulfilling these two basic objectives they can't be treated as "banks". But, economist's academicians have treated the "industrial banks" like a bank for discussion purpose. The "Industrial banks" are merely "term lending institution" which provides long-term and medium term finance for industrial purposes. For example, State Finance Corporations (SFC's), Industrial Development Bank of India (IDBI) come under the category of industrial banks. These institutions are very popular in Germany. 
  4. Cooperative Banks : Cooperative Banks are special type of financial institution established on the basic of cooperation. These institution deals in ordinary banking business. These institutions can be established either in rural areas or urban areas or metro cities to meet the specific requirements or purposes of their members / shareholders. These banks can be of different types such as agricultural cooperative banks, industrial cooperative banks, employee's cooperative banks etc. 
  5. Indigenous Bankers : According to the Indian Central Banking Enquiry Committee, an indigenous banker / bank has been defined as an individual or private firm which receives deposits, deal s in hundies or engages itself in lending money". They have been operating in different parts of the country with varying names. For example, in Chennai city they are called as "Chettys", in Northern India they are called as "Shahukars", "Khatries" and "Mahajans"; in Mumbai city they are known as "Marwaris" and "Seths". Some of these indigenous bankers deal in banking business; and some indigenous bankers combine their banking business with trade. In addition, they also directly or indirectly participate in speculative activities. The primary source of their capital is their own capital or/and that of their family members' or relatives'. These bankers were not regulated. Further, the Reserve Bank of India does not control them. The latest and detailed statistics about their activities are not available to access their role in the banking industry. 
  6. Foreign Banks or Exchange Banks : Foreign banks are those Banks which are foreign in origin and which have their head office located outside India. They are also known as exchange banks. Their  main function is to make international payments through the purchased and sale of exchange bills. These banks also do ordinary banking business such as accepting of deposits and advancing loans. Initially, some of these banks were started merely to finance India's foreign trade. These Banks are for quite sometime, enjoying a significant share in the field of foreign trade finance. But, their share in the total volume of banking business in India is highly insignificant. These banks have exerted a tremendous influence on the development of Indian joint stock banking and the growth of organized money market in India.
  7. Central Bank : The central bank is the apex financial institute in the banking and financial system of a country. It is the head of the banking system. It acts as the leader of the money market. It controls, monitors, supervises and regulates the activities of the commercial banks. It controls the volume of currency by its sole right of issuing currency notes. The oldest central bank was Ricks Bank of Sweden established in the year 1656. India's central bank is Reserve Bank of India established in the year 1935 and nationalized in 1949. The fundamental object of the RBI is to discharge purely central banking functions in Indian money market. A significant object of the bank has also been to assist the planned process of the development of economy. The importance of central banking institutions has thus gained universal recognition and thus now occupies a unique position in the economic map of every country. We shall discuss few more important details about Reserve Bank of India in our next post. Happy Reading :)
Read Origin and Evolution of Banking from here 

Read History of Banking from here 

Read complete Banking Awareness study material for RBI Grade B Exam from here

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  1. What is the meaning of joint stock companies? and what is Indigenous Banks, could you please explain me with examples...Thanks in advance.


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