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August 08, 2014

Mixed Banking System - Introduction, Advantages and Disadvantages

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The Mixed Banking is the combination of Deposit Banking and Investment Banking. The German Banking system presents the best example of mixed banking in the world. Infact the German Banks perform such as a large variety of functions that they are very often referred to as "universal banks". Under the Mixed Banking system, the banks finance the long term requirements of industries besides catering to the short term needs of trade and commerce.

In 1954 the Shroff committee recommended that the Indian Banks can indirectly help industrial finance. The RBI has taken steps to improve the resources of the banking system. By amalgamation, the weaker banks were eliminated. In India, new type of the banking has been developed, and the commercial banks confined themselves to short term lending. 

Advantages of Mixed Banking System

The following are some of the major advantages of mixed banking system. :
  1. Expert Guidance : The industrial units financed by the banks have the advantage of receiving their expert guidance on various financial issues. The bank helps the industrial co9ncerns in collecting large financial resources by selling their stocks and shares to the public. 
  2. Advice on Investments : Under mixed banking system, advises on better the banks may give investments so that the investors may be benefited by choosing better investment opportunities. 
  3. Credit Needs : Under the system the banks may give both short term and long term finance, it can satisfy the full credit needs of the industry. They need not go to other banks for the securing loans. 
  4. Direct Contact with Industries : When banks provide long-term finance, directly it can appoint its official on the board of directors of the company and they have close intimacy with the company.
  5. Rapid Industrialization : In countries where special industrial banks have not developed, mixed banking promotes rapid industrialization. Mixed banking has helped rapid development of industries in Germany.

Disadvantages of Mixed Banking System

The system of mixed banking also suffers from a few disadvantages. Those are,
  1. Bad debts : The system constitutes a serious threat to the stability of banks. If the industries suffer losses due to depressive business, the profitability of the banks will also receive a setback, because the banks shall not be able to recover their loans from the industries during depression period. 
  2. Speculative Business : During the boom period the share values of companies will be going up. Banks engaged in mixed banking may be tempted to indulge in speculative business liek selling in company shares. If there is a crash in the stock market, banks will incur losses. 
  3. Scope for over lending : When a bank gives long and short-term finance to industrial concerns it may leads to scope for over lending. 
  4. Threat to liquidity : The bank trade with short-term deposits payable on demand. It is not safe to lock up these resources in long-term loans. Long term financing is a threat to the liquidity of the banks. 
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