Banking System in India: 12

Types of Banks
Banking is defined as the accepting purpose of lending or investment of
deposits, money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, and order or otherwise this definition is
given in Indian Banking Regulation Act (1949). From this definition, we can
say that a bank has two main features: (1) the bank accepts deposits of
money which are withdrawable by cheques, (2) the bank uses the deposits
for lending. To be recognised as bank the institution must use the deposits
to give loans to the general public.
If an institution accepts deposits withdraw able by cheques but uses the
deposits for its own purpose, such an institution cannot be regarded as a
bank. Post office, savings banks are not banks, because they accept
chequable deposits but do not sanction loans. In the same way. Lie is not
bank because it does not grant loans in general. LITI, LIC, IDBI etc. are
regarded as the non- banking financial institutions as they do not create
money.
Types of Banks:
Some important types of banks in countries like India are discussed
below:
(a) Organized and unorganized banking:
Indian banking system can broadly be classified into two categories:
(i) Organized banking and

(ii) Unorganized banking.

That part of Indian banking system which does not fall under the control of
our central bank (i.e. Reserve Bank of India) is called as un-organised
banking. For example, Indigenous banks. Whereas, organized banking
system refers to that part of the Indian banking system which is under the
influence and control of the Reserve Bank of India. For example.
Commercial Banks, Industrial Banks, Agricultural Banks.
(b) Scheduled and Non-scheduled banks:
Under the Reserve Bank of India Act, 1939, banks were classified as
scheduled banks and non scheduled banks.. The scheduled banks are
those which are entered in the second schedule of RBI Act, 1939.
Scheduled banks are those banks an which have a paid up capital and
reserves of aggregate value of not less than Rs 5 lakhs and which satisfy
RBI.
All Commercial Banks, Regional Rural Banks, State Cooperative Banks are
scheduled banks. On the other hand, non-schedule banks are those banks
whose total paid up capital is less than Rs. 5 lakh and RBI has no specific
control over these banks. These banks are not included in the second
schedule of RBI Act, 1934.
(c) Indigenous Bankers:
From very ancient days indigenous banking as different from the modern
western banking has been organized in the form of family or individual
business. They have been called by various names in different parts of the
country as Shroffs, Sethus, Sahukars, Mahajans, Chettis and so on. They
vary in their size from petty money lenders substantial shroffs.

(d) Central Bank:

In each country there exists central bank which controls a countrys money
supply and monetary policy. It acts as a bank to other banks, and a lender
of last resort. India Reserve Bank of India (RBI) is the Central Bank.
(e) Commercial Bank:
A bank dealing with general public, accepting deposits from making loans
to large numbers of households and firms. Through the process of
accepting deposits and lending, commercial banks create credit in the
economy. Some examples (commercial banks in India are State Bank India
(SBI), Punjab National Bank (PNB) etc.
(f) Development Banks:
Development banks are specialised financial institutions. To promote
economic development, development banks provide medium term and long
term loans the entrepreneurs at relatively low rate o interest rates. Some
examples of development banks in India are Industrial Development Bank
of India (IDBI), Industrial Financial Corporation of India (IFCI), Industrial
Credit and Investment Corporation of India (ICICI) etc.
(g) Co-Operative Banks:
Co-operative banks are organised under the provisions of the Co- operative
societys law of the state. These banks were originally set up in India to
provide credit to the farmers at cheaper rates. However, the co-operative
banks function also in the urban sectors.
(h) Land Mortgage Banks:

The primary objective of these banks is to provide long-term loans to

farmers at low rates in matters related to land, The land mortgage banks
are also known as the Land Development Banks.
(i) Regional Rural Banks:
Regional Rural Banks (RRBs) are established in the rural areas to meet the
needs of the weaker section of the rural population.
(j) National Bank for Agricultural and Rural Development (NABARD):
This bank was established in 1982 in India in view of providing the rural
credit to the farmers. Actually, it is an apex institution which coordinates the
functioning of different financial institutions working in the field of rural
credit. NABARD has been making continuous efforts through its microfinance programme or improving the access of the rural poor to formal
institutional credit. The self help group (SHG) Bank linkage programme
was introduced in 1992 as a mechanism to provide financial services to the
rural poor people on a sustainable basis.
(k) Exchange Banks:
These banks are engaged in buying and selling foreign exchange. These
banks help the growth of international trade.
(i) Exim Bank:
It is popularly known as Export Import Bank. Such banks provide long
term financial assistance to the exporters and importers.

THE DIFFERENT TYPES OF BANKS

There are various types of banks. The necessity for the variety
among these banks is because each bank is specialized in their
own field. Each bank has its own principles and policies. Different
rates of interests are also noted among these banks. All these
banks are listed as below:
Savings Banks these banks are suited for employees with a monthly salary.
Low waged people may open an account in the savings bank.
Commercial Banks These bank collects money from people in various
sectors and gives the same as a loan to business men and make profits in interests
these business men pay. Since the loan is large the interest rates are also high.
Industrial Development Bank these banks are committed towards
enhancing the growth of industries by providing loans for a very long period of
time. This is vital for the long term growth of the industries.
Land Developments Bank these banks promote growth in the food
sector, by giving loans to farmer at a relatively lower interest rate. The loan is
usually given on the basis of land. If a farmer has lots of agricultural fields then the
more will be the loan provided.

Indigenous Banks native banks. They are normal moneylenders; only this
time, handling huge amounts of money. They collect money from the community
and provide loans to business men and industrialists for a short amount of time.
Mortgage Banks these banks are specialized in providing mortgage loans
alone. In order to sell loans they depend solely on the secondary market.

Federal or National Banks these banks control the principles and

policies of other banks across the country. These banks are managed and run by the
government. This bank provides benchmarks which other banks should follow.
Co operative banks: co operative banks as the name suggests gets money from the
general community without any bias and provide loans to all sections of people in
the neighborhood. Their motto is not profit alone, but service.
Exchange Banks these banks will be available in more than a single
country. They provide services for the buying and selling of gold and silver;
transactions will be in foreign currencies.
Consumers Bank these are consumer friendly banks; they encourage the
consumer in buying commercial products and provide options for easy repay of the
loan amount.
Community Development Banks these banks provide services to the
community; where there has been nothing or very little development over the
years.
Credit Unions they act just like a co operative bank except that they provide
services to only one employee union in the community. Low interest rates and easy
installment paybacks are features of this bank
Postal savings bank: these banks are oriented with postal services. People save
money for a defined period of time and are paid with standard interest rates.
Private Banks these banks are not for the general public or community.
They serve entirely for private personnels assets and transactions alone.
Offshore Banks they are also private banks except that they have little tax
to pay for their transactions; there is very little regulation for this bank.

Ethical Banks as the name implies ethical banks promote candid

transactions; between various customers of the bank. Policies and rules are
transparent in nature.
Internet Bank provides banking facilities only via internet. There will be no
physical contact with the bank. All transactions are permitted only through online.
Investment Banks these banks are pertinent to large organizations
investment ventures across the industry. They provide advice in the investments
and promote corporate transactions.
Merchant Banks these banks exist for a long time. They promote investing
in organizations that reap huge benefits for a long time rather than brand new
organizations.
Universal Banks these banks have a wide spectrum of financial assistances
to provide. Insurances to stocks, they promote everything across all countries
around the globe.
Islamic Banks these banks are based on the principles of the religion Islam.
There are no interests for loans acquired from this bank. Service charges may
apply.
The above are some of the types of banks around the globe. They may be further
classified according to their role and designation,

Commercial Bank: Meaning,

Types and Function
a bank is an institution which accepts deposits from the public and in turn
advances loans by creating credit. It is different from other financial
institutions in that they cannot create credit though they may be accepting
deposits and making advances.

Types of Banks:
Banks are of various types which are explained as under:

1. Commercial Banks:
Commercial banks are those banks which perform all kinds of banking
functions such as accepting deposits, advancing loans, credit creation, and
agency functions. They are also called joint stock banks because they are
organised in the same manner as joint stock companies.
They usually advance short-term loans to customers. Of late, they have
started giving medium term and long-term loans also. In India 20 major
commercial banks have been nationalised, whereas in developed countries
they are run like joint stock companies in the private sector. Some of the
commercial banks in India are Andhra Bank, Canara Bank, Indian Bank,
Punjab National Bank, etc.

2. Exchange Banks:
Exchange banks are those banks which deal in foreign exchange and
specialise in financing foreign trade. They are also called foreign exchange

banks. In India, these exchange banks have their head offices located
outside India. The Chartered Bank and the Brindlays Bank have their head
officers in England, whereas the American Express Bank, and Citi Bank
have their head offices in the USA. These banks also render other services
such as collecting and supplying information about the foreign customers,
providing remittance facilities etc.

3. Industrial Banks:
Industrial banks are those banks which provide medium term and long-term
finance to industries for the purchase of land, machinery etc. They
underwrite the debentures and shares of industries and also subscribe to
them. In India, there are a number of financial institutions which perform the
functions of industrial banks such as Industrial Development Bank of India,
Industrial Finance Corporation of India, Industrial Credit and Investment
Corporation of India, etc. Each State in India has its own State Financial
Corporation. These institutions are also known as Development Banks.

4. Agricultural Banks:
Agricultural banks are those banks which provide credit to farmers for
short-term, medium-term and long-term needs. In India, commercial banks,
regional rural banks and Agricultural Cooperative Banks provide short-term
loans to farmers. Land Development Bank give medium-term and long-term
loans to farmers on the mortgage of their land. The National Bank for
Agriculture and Rural Development (NABARD) provides refinance facilities
to all types of banks which give loans to agriculturists.

5. Cooperative Banks:
Cooperative banks are those financial institutions which are organised on
the principle of cooperation. They provide short-term and medium-term

loans to their members. In rural areas, there are agricultural cooperative

banks which accept deposits and give loans to agriculturists, rural artisans,
etc.
In urban areas, there are also cooperative banks which perform the
functions of ordinary commercial banks but give loans to their members
only. There is a State Cooperative Bank in every state of India with its
branches at the district level known as the Central Cooperative Bank. The
Central Cooperative Bank, in turn, has is branches both in urban and rural
areas.
Every State Cooperative bank is an apex bank which provides credit
facilities to the Central Cooperative Banks. It mobilises financial resources
from the richer sections of the urban population by accepting deposits and
creating credit like commercial banks and borrowing from the money
market. It also gets funds from the Reserve Bank of India.

6. Savings Banks:
Savings banks help promote small savings, and mobilise them. They have
been very successful in Japan and Germany. In India, post offices act as
savings bank.

7. Central Bank:
The central bank is the apex bank in a country which controls its monetary
and banking structure. It is owned by the government of the country and
operates in national interest. It regulates and issues currency, performs
banking and a agency services for the state, keeps cash reserves of
commercial banks, keeps and manages international currency, acts as the
lender of the last resort, acts as a clearing house, and controls of credit.
The Reserve Bank of India is the Central bank in India.

Functions of Commercial Banks:

Commercial banks perform a variety of functions which can be divided as:
(1) accepting deposits; (2) advancing loans; (3) Credit creation; (4)
financing foreign trade; (5) agency services; and (6) miscellaneous services
to customers. These functions are discussed as follows:

1. Accepting Deposits:
This is the oldest function of a bank and the banker used to charge a
commission for keeping the money in its custody when banking was
developing as an institution. Nowadays a bank accepts three kinds of
deposits from its customers. The first is the savings deposits on which the
bank pays small interest to the depositors who are usually small savers.
The depositors are allowed to draw their money by cheques up to a limited
amount during a week or year. Businessmen keep their deposits in current
accounts. They can withdraw any amount standing to their credit in current
deposits by cheques without notice. The bank does not pay interest on
such accounts but instead charges a nominal sum for services rendered to
its customers. Current accounts are known as demand deposits.
Deposits are also accepted by a bank in fixed or time deposits. Savers who
do not need money for a stipulated period from 6 months to longer periods
ranging up to 10 years or more are encouraged to keep it in fixed deposit
accounts.
The bank pays a higher rate of interest on such deposits. The rate of
interest increases with the length of the time period of the fixed deposit. But
there is always the maximum limit of the interest rate which can be paid.
For instance, the interest rate on fixed deposits over five years is 11 per
cent in India.

2. Advancing Loans:
One of primary functions of commercial banks is to advance loans to its
customers. A bank lends a certain percentage of the cash lying in deposits
on a higher interest rate than it pays on such deposits. This is how it earns
profits and carries on its business. The bank advances loans in the
following ways:
(a) Cash Credit:
The bank advances loan to businessmen against certain specified
securities. The amount of the loan is credited to the current account of the
borrower. In cash of a new customer a loan account for the sum is opened.
The borrower can withdraw money through cheques according to his
requirements buy pays interest on the full amount.
(b) Call Loans:
These are very short-term loans advanced to the bill brokers for not more
than fifteen days. They are advance against first class bill or securities.
Such loans can be recalled at a very short notice. In normal times they can
also be renewed.
(c) Overdraft:
A bank often permits a businessman to draw cheques for a sum greater
than the balance lying m his Current account. This is done by providing the
overdraft facility up to a specific amount to the businessman. But he is
charged interest only on the amount by which his current account is
actually overdrawn and not by the full amount of the overdraft sanctioned to
him by the banks.

(d) Discounting Bills of Exchange:

If a creditor holding a bill of exchange wants money immediately, the bank
provides him the money by discounting the bill of exchange. It deposits the
amount of the bill in the current account of the bill-holder after deducting its
rate of interest for the period of the loan which is not more than 90 days.
When the bill of exchange matures, the bank gets its payment from the
banker of the debater who accepted the bill.

3. Credit Creation:
Credit creation is one of the most important functions of the commercial
banks. Like other financial institutions, they aim at earning profits. For this
purpose, they accept deposits and advance loans by keeping small cash in
reserve for day-to-day transactions. When a bank advances a loan, it
opens and account in the name of the customer and does not pay him in
cash but allows him to draw the money by cheque according to his needs.
By granting a loan, the bank creates credit or deposit.

4. Financing Foreign Trade:

A commercial bank finances foreign trade of its customers by accepting
foreign bills of exchange and collecting them from foreign banks. It also
transacts other foreign exchange business and buys and sells foreign
currency.

5. Agency Services:
A bank acts as an agent of its customers in collecting and paying cheques,
bills of exchange, drafts, dividends, etc. It also buys and sells shares,
securities, debentures, etc. for its customers. Further, it pays subscriptions,
insurance premium, rent, electric and water bills, and other similar charges

on behalf of its clients. It also acts as a trustee and executor of the property
and will of its customers. Moreover, the bank acts as an income tax
consultant to its clients. For some of these services, the bank charges a
normal fee while it renders others free of charge.

6. Miscellaneous Services:
Besides the above noted services, the commercial bank performs a
number of other services. It acts as the custodian of the valuables of its
customers by providing them lockers where they can keep their jewellery
and valuable documents. It issues various forms of credit instruments, such
as cheques, drafts, travellers cheques, etc. which facilitate transactions.
The bank also issues letter of credit and acts as a referee to its clients. It
underwrites shares and debentures of companies and helps in the
collection of funds from the public. Some commercial banks also publish
journal which provide statistical information about the money market and
business trends of the economy.

Commercial Banks
According to the RBI, Commercial Banks refer to both scheduled and non-scheduled
commercial banks which are regulated under Banking Regulation Act, 1949. Commercial
banks operate on a for-profit basis. They primarily engage in the acceptance of deposit and
extend loans to the general public, businesses and the government.
Scheduled Banks
By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act,
1934 is considered a scheduled bank. The list includes the State Bank of India and its
subsidiaries (like State Bank of Travancore), all nationalised banks (Bank of Baroda, Bank of
India etc), regional rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA)

and some co-operative banks. These also include private sector banks, both classified as old
(Karur Vysya Bank) and new (HDFC Bank Ltd).
To qualify as a scheduled bank, the paid up capital and collected funds of the bank must not
be less than Rs5 lakh. Scheduled banks are eligible for loans from the Reserve Bank of India
at bank rate, and are given membership to clearing houses.
Non-scheduled Banks
Non-scheduled banks by definition are those which are not listed in the 2nd schedule of the
RBI act, 1934. Banks with a reserve capital of less than 5 lakh rupees qualify as nonscheduled banks. Unlike scheduled banks, they are not entitled to borrow from the RBI for
normal banking purposes, except, in emergency or abnormal circumstances. Jammu &
Kashmir Bank is an example of a non-scheduled commercial bank.
Co-operative Banks
Co-operative banks operate in both urban and non-urban areas. All banks registered under the
Cooperative Societies Act, 1912 are considered co-operative banks. These are banks run by
an elected managing committee with provisions of members rights and a set of communally
developed and approved bylaws and amdendments.
In the urban centers, they mainly finance entrepreneurs, small businesses, industries, selfemployment and cater to home buying and educational loans. Likewise, co-operative banks in
the rural areas primarily cater to agricultural-based activities, which include farming,
livestocks, dairies and hatcheries etc. They also extend loans to small scale units, cottage
industries, and self-employment activities like artisanship.
Unlike commercial banks, who are driven by profit, co-operative banks work on a no profit,
no loss basis. These are regulated by the Reserve Bank of India under the Banking
Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act, 1965.
Regional Rural Banks
Regional Rural Banks or RRBs, simply put, serve the rural areas and agricultural sectors with
basic banking and adequate financial services. They were set up in 1975, based on the
recommendations of a committee. Based in Moradabad, Prathama Bank, established on 2
October 1975, is the first RRB to open in India. It was sponsored by Syndicate Bank. The

RRBs are owned by the central government (50%), the state government (15%) and the
sponsor bank (35%). Several commercial banks have sponsored RRBs. Prominent examples
include the Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra) and the
Himachal Gramin Bank (sponsored by Punjab National Bank). RRBs were set up to eliminate
other unorganized financial institutions like money lenders and supplement the efforts of cooperative banks.