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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
Types of Banks:
Some important types of banks in countries like India are discussed
(a) Organized and unorganized banking:
Indian banking system can broadly be classified into two categories:
(i) Organized banking and

1939. All Commercial Banks. 1934. Regional Rural Banks. On the other hand. For example. They vary in their size from petty money lenders substantial shroffs. Agricultural Banks. They have been called by various names in different parts of the country as Shroffs. That part of Indian banking system which does not fall under the control of our central bank (i. For example. 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. Indigenous banks. Commercial Banks. (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. Chettis and so on. . Mahajans.e.. The scheduled banks are those which are entered in the second schedule of RBI Act. banks were classified as scheduled banks and non scheduled banks. State Cooperative Banks are scheduled banks. Reserve Bank of India) is called as un-organised banking. 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. These banks are not included in the second schedule of RBI Act. Sahukars. Industrial Banks. Sethus. (b) Scheduled and Non-scheduled banks: Under the Reserve Bank of India Act. 5 lakh and RBI has no specific control over these banks.(ii) Unorganized banking. Whereas. 1939. non-schedule banks are those banks whose total paid up capital is less than Rs.

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

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. NABARD has been making continuous efforts through its microfinance programme or improving the access of the rural poor to formal institutional credit. Actually. Such banks provide long term financial assistance to the exporters and importers. it is an apex institution which coordinates the functioning of different financial institutions working in the field of rural credit. (k) Exchange Banks: These banks are engaged in buying and selling foreign exchange. . (i) Exim Bank: It is popularly known as ‘Export Import Bank’. (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.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. These banks help the growth of international trade.

All these banks are listed as below: Savings Banks – these banks are suited for employees with a monthly salary. If a farmer has lots of agricultural fields then the more will be the loan provided.THE DIFFERENT TYPES OF BANKS There are various types of banks. This is vital for the long term growth of the industries. Each bank has its own principles and policies. by giving loans to farmer at a relatively lower interest rate. Land Development’s Bank – these banks promote growth in the food sector. 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. Industrial Development Bank – these banks are committed towards enhancing the growth of industries by providing loans for a very long period of time. Different rates of interests are also noted among these banks. . Since the loan is large the interest rates are also high. The loan is usually given on the basis of land. The necessity for the variety among these banks is because each bank is specialized in their own field.

where there has been nothing or very little development over the years. These banks are managed and run by the government. They collect money from the community and provide loans to business men and industrialists for a short amount of time. Private Banks – these banks are not for the general public or community. Exchange Banks – these banks will be available in more than a single country. 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.Indigenous Banks – native banks. 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. only this time. They provide services for the buying and selling of gold and silver. They are normal moneylenders. transactions will be in foreign currencies. People save money for a defined period of time and are paid with standard interest rates. Community Development Banks – these banks provide services to the community. Credit Unions – they act just like a co operative bank except that they provide services to only one employee union in the community. handling huge amounts of money. Their motto is not profit alone. there is very little regulation for this bank. but service. they encourage the consumer in buying commercial products and provide options for easy repay of the loan amount. Low interest rates and easy installment paybacks are features of this bank Postal savings bank: these banks are oriented with postal services. Offshore Banks – they are also private banks except that they have little tax to pay for their transactions. They serve entirely for private personnel’s assets and transactions alone. . Consumer’s Bank – these are consumer friendly banks.

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

Types of Banks: Banks are of various types which are explained as under: 1. Some of the commercial banks in India are Andhra Bank. Commercial Banks: Commercial banks are those banks which perform all kinds of banking functions such as accepting deposits. Of late. Punjab National Bank. whereas in developed countries they are run like joint stock companies in the private sector. they have started giving medium term and long-term loans also. Canara Bank. In India 20 major commercial banks have been nationalised. and agency functions. Exchange Banks: Exchange banks are those banks which deal in foreign exchange and specialise in financing foreign trade. They are also called joint stock banks because they are organised in the same manner as joint stock companies. Types and Function a bank is an institution which accepts deposits from the public and in turn advances loans by creating credit. Indian Bank. 2. credit creation. It is different from other financial institutions in that they cannot create credit though they may be accepting deposits and making advances.Commercial Bank: Meaning. etc. They usually advance short-term loans to customers. advancing loans. They are also called foreign exchange .

Land Development Bank give medium-term and long-term loans to farmers on the mortgage of their land. medium-term and long-term needs. providing remittance facilities etc. They underwrite the debentures and shares of industries and also subscribe to them. In India. these exchange banks have their head offices located outside India. These institutions are also known as Development Banks. The Chartered Bank and the Brindlays Bank have their head officers in England. 4. Industrial Banks: Industrial banks are those banks which provide medium term and long-term finance to industries for the purchase of land. commercial banks. In India. regional rural banks and Agricultural Cooperative Banks provide short-term loans to farmers. 3. These banks also render other services such as collecting and supplying information about the foreign customers. Industrial Finance Corporation of India. Agricultural Banks: Agricultural banks are those banks which provide credit to farmers for short-term. They provide short-term and medium-term . whereas the American Express Bank. 5. The National Bank for Agriculture and Rural Development (NABARD) provides refinance facilities to all types of banks which give loans to agriculturists. Cooperative Banks: Cooperative banks are those financial institutions which are organised on the principle of cooperation. In India. there are a number of financial institutions which perform the functions of industrial banks such as Industrial Development Bank of India. machinery etc. and Citi Bank have their head offices in the USA.banks. Industrial Credit and Investment Corporation of India. Each State in India has its own State Financial Corporation. etc.

performs banking and a agency services for the state. It is owned by the government of the country and operates in national interest. keeps and manages international currency. in turn. there are also cooperative banks which perform the functions of ordinary commercial banks but give loans to their members only. and controls of credit. 6. rural artisans. there are agricultural cooperative banks which accept deposits and give loans to agriculturists. In rural areas. Central Bank: The central bank is the apex bank in a country which controls its monetary and banking structure. The Reserve Bank of India is the Central bank in India. etc. . acts as a clearing house. It also gets funds from the Reserve Bank of India. There is a State Cooperative Bank in every state of India with its branches at the district level known as the Central Cooperative Bank. has is branches both in urban and rural areas. Savings Banks: Savings banks help promote small savings. The Central Cooperative to their members. 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. acts as the lender of the last resort. 7. and mobilise them. It regulates and issues currency. Every State Cooperative bank is an apex bank which provides credit facilities to the Central Cooperative Banks. In urban areas. In India. post offices act as savings bank. They have been very successful in Japan and Germany. keeps cash reserves of commercial banks.

These functions are discussed as follows: 1. Deposits are also accepted by a bank in fixed or time deposits. They can withdraw any amount standing to their credit in current deposits by cheques without notice. (5) agency services. The bank does not pay interest on such accounts but instead charges a nominal sum for services rendered to its customers. .Functions of Commercial Banks: Commercial banks perform a variety of functions which can be divided as: (1) accepting deposits. 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. (3) Credit creation. Businessmen keep their deposits in current accounts. For instance. 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. But there is always the maximum limit of the interest rate which can be paid. The rate of interest increases with the length of the time period of the fixed deposit. (4) financing foreign trade. and (6) miscellaneous services to customers. 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 interest rate on fixed deposits over five years is 11 per cent in India. (2) advancing loans. Current accounts are known as demand deposits. The depositors are allowed to draw their money by cheques up to a limited amount during a week or year.

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

etc. It also transacts other foreign exchange business and buys and sells foreign currency. debentures. they accept deposits and advance loans by keeping small cash in reserve for day-to-day transactions. 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. securities. they aim at earning profits. Further. it pays subscriptions. dividends.(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. 4. 5. For this purpose. etc. for its customers. 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. electric and water bills. 3. rent. Like other financial institutions. When a bank advances a loan. insurance premium. the bank gets its payment from the banker of the debater who accepted the bill. the bank creates credit or deposit. When the bill of exchange matures. drafts. By granting a loan. and other similar charges . Agency Services: A bank acts as an agent of its customers in collecting and paying cheques. Credit Creation: Credit creation is one of the most important functions of the commercial banks. Financing Foreign Trade: A commercial bank finances foreign trade of its customers by accepting foreign bills of exchange and collecting them from foreign banks. bills of exchange. It also buys and sells shares.

the bank charges a normal fee while it renders others free of charge. regional rural banks (RRBs). businesses and the government. It also acts as a trustee and executor of the property and will of its customers. Bank of India etc). It issues various forms of credit instruments. Miscellaneous Services: Besides the above noted services. Commercial Banks According to the RBI. It acts as the custodian of the valuables of its customers by providing them lockers where they can keep their jewellery and valuable documents. the commercial bank performs a number of other services. 1949. foreign banks (HSBC Holdings Plc. 1934 is considered a scheduled bank. It underwrites shares and debentures of companies and helps in the collection of funds from the public. They primarily engage in the acceptance of deposit and extend loans to the general public. The bank also issues letter of credit and acts as a referee to its clients. such as cheques. Citibank NA) . drafts. 6. For some of these services.” Commercial banks operate on a ‘for-profit’ basis. all nationalised banks (Bank of Baroda. Scheduled Banks By definition. Moreover. any bank which is listed in the 2nd schedule of the Reserve Bank of India Act. etc. the bank acts as an income tax consultant to its clients. Some commercial banks also publish journal which provide statistical information about the money market and business trends of the economy.on behalf of its clients. The list includes the State Bank of India and its subsidiaries (like State Bank of Travancore). which facilitate transactions. “Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act. travellers cheques.

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

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