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Types of Banks: They are given below:

1. Commercial Banks:
These banks play the most important role in modern economic
organisation. Their business mainly consists of receiving deposits,
giving loans and financing the trade of a country. They provide short-
term credit, i.e., lend money for short periods. This is their special

2. Exchange Banks:
Exchange banks finance mostly the foreign trade of a country. Their
main function is to discount, accept and collect foreign bills of
exchange. They also buy and sell foreign currencies and help
businessmen to convert their money into any foreign money they
need. Their share in the internal trade of a country is usually small. In
addition, they carry on ordinary banking business too.

3. Industrial Banks:
There are a few industrial banks in India. But in some other countries,
notably Germany and Japan, these banks perform the function of
advancing loans to industrial undertakings. Industries require capital
for a long period for buying machinery and equipment. Industrial
banks provide this type of Mock capital. Industrial banks have a large
capital of their own. They also receive deposits for longer periods.
They are thus in a position to advance long-term loans.


In India, the Central Government set up an Industrial Finance

Corporation of India (IFC1) in 1948. Its activities have since then been
greatly enlarged. Further the States have also set up State Financial
Corporations. The Central Government has also established the
Industrial Credit and Investment Corporation of India (ICICI) and the
National Industrial Development Corporation for the financing and
promotion of industrial enterprises. In 1964 the Industrial
Development Bank of India (1DBI) was established as the apex or top
term-lending institution. These new institutions fill important gaps in
our system of industrial finance.

4. Agricultural or Co-operative Banks:

The main business of agricultural banks is to provide funds to farmers.
They are worked on the co-operative principle. Long-term capital is
provided by land mortgage banks, nowadays called land-development
banks, while short-term loans are given by co-operative societies and
co-operative banks. Long-term loans are needed by the farmers for
purchasing land or for permanent improvements on land, while short-
period loans help them in purchasing implements, fertilizers and
seeds. Such banks and societies are doing useful work in India.

5. Savings Banks:
These banks (perform the useful service of collecting small savings.
Commercial banks too run “savings departments” to mobilise the
savings of men of small means. The idea is to encourage thrift and
discourage hoarding. Post Office Saving Banks in India are doing this
useful work.

6. Central Banks:
Over and above the various types of banks mentioned above, there
exists in almost all countries today a Central Bank. It is usually
controlled and quite often owned by the government of the country.

7. Utility of Banks:
An efficient banking system is absolutely necessary for a country, if it
is to progress economically. The services that an efficient banking
system can render a country are indeed very valuable. Undeveloped
banking system is not only an index of economic backwardness of a
country, it is also an important cause of it. The banking system can be
useful in the following ways, in addition to what has been mentioned
in the functions of banks.

(i) The banks create instruments of credit which are very convenient
substitutes for money. This means a great saving Actual movement of
money is avoided and expenses saved.
(ii) The banks increase the mobility of capital. They bring the
borrowers and the lenders together. They collect money from those
who cannot use it, and give it to those who can. Thus, they help the
movement of funds from place to place, and from person to person, in
a very convenient and inexpensive manner.

(iii) They encourage the habit of habit by providing safe channels of

investment. In the absence of banking facilities, people would just
squander their funds.

(iv) By encouraging savings, the banks bring about accumulation of

large amount of capital in the country from small individual savings.
In this way, they make the resources of the country more productive,
and thus contribute to the general prosperity and welfare, of the

Different Types of Services | Bank Accounts

Individual Banking—Banks typically offer a variety of services to assist individuals in
managing their finances, including:
 Checking accounts
 Savings accounts
 Debit & credit cards
 Insurance*
 Wealth management
Business Banking—Most banks offer financial services for business owners who need to
differentiate professional and personal finances. Different types of business banking services
 Business loans
 Checking accounts
 Savings accounts
 Debit and credit cards
 Merchant services (credit card processing, reconciliation and reporting, check collection)
 Cash management (payroll services, deposit services, etc.)
Digital Banking—The ability to manage your finances online from your computer, tablet, or
smartphone is becoming more and more important to consumers. Banks will typically
offer digital banking services that include:
 Online, mobile, and tablet banking
 Mobile check deposit
 Text alerts
 eStatements
 Online bill pay
Loans—Loans are a common banking service offered, and they come in all shapes and
sizes. Some common types of loans that banks provide include:
 Personal loans
 Home equity loans
 Home equity lines of credit
 Home loans
 Business loans
 ank Accounts are classified into four different types. They are,
 1) Current Account
 2) Savings Account
 3) Recurring Deposit Account
 4) Fixed Deposit Account

 What is Current Account?

 Current account is mainly for business persons, firms, companies, public enterprises
etc and are never used for the purpose of investment or savings.These deposits are
the most liquid deposits and there are no limits for number of transactions or the
amount of transactions in a day. While, there is no interest paid on amount held in
the account, banks charges certain service charges, on such accounts. The current
accounts do not have any fixed maturity as these are on continuous basis accounts.

 What is Savings Account?

 Savings Account is meant for saving purposes. Any individual either single or jointly
can open a savings account. Most of the salaried persons, pensioners and students
use Savings Account. The advantage of having Savings Account is Banks pay interest
for the savings. The saving account holder is allowed to withdraw money from the
account as and when required.
 The rate of interest ranges between 4% to 6% per annum in India. There is no
restriction on the number and amount of deposits. But withdrawals are subjected to
certain restrictions. Some banks recommend to maintain a minimum amount to keep
it functioning.

 What is Recurring Deposit Account?

 Recurring deposit account or RD account is opened by those who want to save
certain amount of money regularly for a certain period of time and earn a higher
interest rate. In RD account a fixed amount is deposited every month for a specified
period and the total amount is repaid with interest at the end of the particular fixed
 The period of deposit is minimum six months and maximum ten years. The interest
rates vary for different plans based on the amount one saves and the period of time
and also on banks. No withdrawals are allowed from the RD account. However, the
bank may allow to close the account before the maturity period.

 These accounts can be opened in single or joint names. Banks are also providing the
Nomination facility to the RD account holders.

 What is Fixed Deposit Account?

 In Fixed Deposit Account (also known as FD Account), a particular sum of money is
deposited in a bank for specific period of time. It’s one time deposit and one time
take away (withdraw) account. The money deposited in this account can not be
withdrawn before the expiry of period.

 However, in case of need, the depositor can ask for closing the fixed deposit
prematurely by paying a penalty. The penalty amount varies with banks.

 A high interest rate is paid on fixed deposits. The rate of interest paid for fixed
deposit vary according to amount, period and also from bank to bank.

 he global banking industry has experienced healthy growth in recent years, registering a compound annual
growth rate (CAGR) of 4.7% between 2012 and 2016 to reach a value of $134.1 trillion, according to data
from research firm MarketLine.
 The company’s latest report states that Asia-Pacific continued to be the largest region in terms of asset
value, accounting for over 42% of the global total in 2016. Europe followed with over 38%, while the United
States remained a large industry influence with 12%.
 China once again reigned supreme as the single biggest country market, with over $31.8 trillion of assets.
This equated to over 55% of the Asia-Pacific region’s total, demonstrating its importance on a regional and
global scale.
 Nicholas Wyatt, Project Leader for MarketLine, says: “This is a double-edged sword, as despite China’s
slowing domestic growth, it very much remains healthy by global standards. This continues to generate
wealth and bring more working and lower-middle class people in to the creditworthy bracket. Wealth
management is particularly buoyant due to a culture that places great importance on saving and all of this
factors in to our projections of dynamic, double-digit growth through to 2021.”
 However, issues with non-performing loans (NPLs) continue to cause concern, with ICBC’s most recent
financial report showing that NPL rates continue to rise.
 Wyatt continues: “ICBC is not alone. CCB, Agricultural Bank and Bank of China have all announced similar
trends and Fitch believes NPL rates in China could be 10 times higher than official numbers suggest, which
would make it a ticking time bomb. Typically, this would necessitate tighter credit conditions, but the state’s
stake in the banks and desire for economic growth may mean this does not happen as it should and the
industry in China continues to grow apace.”
 MarketLine also expects the US to drive growth, especially if the Trump administration delivers on its
promises with regards to scaling back banking regulation.
 “Although this could lead to another financial crisis caused by an overheated industry and bad debt,
deregulation looks certain and this should help drive growth, particularly in the areas of consumer and
corporate loans,” Wyatt concludes.
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Bank Capital

Bank capital is the value of the bank's assets minus its liabilities, or debts. Assets include cash,
loans and securities, while liabilities cover customer deposits, and money owed to other banks and
If all the assets were sold and all the debts repaid, the value which would be left over is equal to the
bank’s equity. A bank's capital is made up of certain loss-absorbing bonds, as well as its equity.
These bonds include additional tier 1 bonds and tier 2 bonds. These bonds have equity-like features,
which is why regulators allow them to count towards a banks' capital.

The more capital there is, this means the bank can absorb more losses on its assets before it
becomes insolvent.
Since the 2008 global financial crisis began, bank capital has been in the spotlight. Regulators,
which act on behalf of governments, require this to be above a prescribed minimum level. Typically
capital is measured as a ratio against a bank's risk-weighted assets.

What is Bank Capital

Bank capital is the difference between a bank's assets and liabilities, and it
represents the net worth of the bank or its value to investors. The asset portion of
a bank's capital includes cash, government securities, and interest-earning loans
(e.g., mortgages, letters of credit, and inter-bank loans); the liabilities section of a
bank's capital includes loan-loss reserves and any debt it owes. A bank's capital
can be thought of as the margin to which creditors are covered if the bank would
liquidate its assets.


Bank capital represents the value of a bank's equity instruments that can absorb
losses and have the lowest priority in payments if the bank liquidates. While bank
capital can be defined as the difference between a bank's assets and liabilities,
national authorities have their own definition of regulatory capital. The main
banking regulatory framework consists of international standards enacted by
the Basel Committee on Banking Supervision through international accords
of Basel I, Basel II, and Basel III. These standards provide a definition of the
regulatory bank capital that market and banking regulators closely monitor.

Book Value of Shareholders' Equity

The bank capital can be thought of as the book value of shareholders' equity on a
bank's balance sheet. Because many banks revalue their financial assets more
often than companies in other industries that hold fixed assets at a historical cost,
shareholders' equity can serve as a reasonable proxy for the bank capital.
Typical items featured in the book value of shareholders' equity include preferred
equity, common stock and paid-in capital, retained earnings, and accumulated
comprehensive income. The book value of shareholders' equity is also calculated
as the difference between a bank's assets and liabilities.

Regulatory Bank Capital

Because banks serve an important role in the economy by collecting savings and
channeling them to productive uses through loans, the banking industry and the
definition of bank capital are heavily regulated. While each country can have its
own requirements, the most recent international banking regulatory accord of
Basel III provides a framework for defining regulatory bank capital.

According to Basel III, regulatory bank capital is divided into tiers. These
are based on subordination and a bank's ability to absorb losses with a sharp
distinction of capital instruments when it is still solvent versus after it goes
bankrupt. Common equity tier 1 (CET1) includes the book value of common
shares, paid-in capital, and retained earnings less goodwill and any other
intangibles. Instruments within CET1 must have the highest subordination and no

Tier 1 capital includes CET1 plus other instruments that are subordinated
to subordinated debt, have no fixed maturity and no embedded incentive for
redemption, and for which a bank can cancel dividends or coupons at any
time. Tier 2 capital consists of unsecured subordinated debt and its stock surplus
with an original maturity of fewer than five years minus investments in non-
consolidated financial institutions subsidiaries under certain circumstances. The
total regulatory capital is equal to the sum of Tier 1 and Tier 2 capital.

What is bank capital? There are several consistent definitions of a bank’s capital (or, equivalently,
its net worth). First, capital is the accounting residual that remains after subtracting a bank’s fixed
liabilities from its assets. Second, it is what is owed to the banks’ owners—its shareholders—after
liquidating all the assets at their accounting value. Third, it is the buffer that separates the bank from
insolvency: the point at which its liabilities exceed the value of assets.

The following figure shows the balance sheet of a simple bank that finances its assets (composed of
cash, securities, loans, and other instruments) with deposits and other debts, as well as the equity
and retained earnings that constitute its net worth. The proportions shown correspond to the
average shares of these components in the U.S. commercial banking system at the end of 2017
(see here). In this example, the bank’s capital is 11.3% of assets, corresponding to the gap between
total assets (100%) on the one hand and the combination of deposits and other fixed liabilities
(88.7%) on the other. This fraction is also known as the bank’s leverage ratio: the ratio of capital to
assets. For comparison, the leverage ratio a decade earlier (amid the financial crisis) was 7.2% (see
data here).

A Simple Bank: Percent Shares of Assets and of Liabilities and Net Worth (Capital)

Source: FRED (based on Federal Reserve Board H.8 for U.S. Commercial Banks, December 2017).

Importantly, capital is a source of funds that the bank uses to acquire assets. This means that, if a
bank were to issue an extra dollar worth of equity or retain an additional dollar of earnings, it can
use this to increase its holding of cash, securities, loans, or any other asset. When the bank finances
additional assets with capital, its leverage ratio rises.
Banks (and many other financial intermediaries) issue a far larger proportion of debt (relative to
equity) than nonfinancial firms. Recent data show that nonfinancial firms have between $0.80 and
$1.50 worth of debt liabilities for each dollar of equity (see here and here). By contrast, as we can see
from the figure above, the average U.S. commercial bank has a debt-to-equity ratio of roughly 8. This
reliance on debt boosts both the expected return on and the riskiness of bank equity, and makes
banks vulnerable to insolvency.

In addition to their balance-sheet risks, banks also tend to have a variety of large off-balance-sheet
exposures. The most prominent are derivatives positions, which have gross notional value in the
trillions of dollars for the biggest global banks, and credit commitments (for a fee), which appear on
the balance sheet only after the borrower exercises their option to draw down the loan. As a result,
simple balance sheet information understates the riskiness of banks, especially large ones.

Role of bank capital. Bank capital acts as self-insurance, providing a buffer against insolvency and,
so long as it is sufficiently positive, giving bank management an incentive to manage risk prudently.
Automobile insurance is designed to create a similar incentive: auto owners bear part of the risk of
accidents through deductibles and co-pays, which also motivate them to keep their vehicles road-
ready and to drive safely.

When capital is too low relative to assets, however, bank managers have an incentive to take risk.
The reason is straightforward. Shareholders’ downside risk is limited to their initial investment,
while their upside opportunity is unlimited. As capital deteriorates, potential further losses shrink,
but possible gains do not. Because shareholders face a one-way bet, they will encourage bank
managers to gamble for redemption. This problem goes away as the level of capital rises. That is, when
shareholders have more skin in the game, they will be exposed to greater losses and will encourage
the bank managers to act more prudently. (See Myers for a discussion of this debt overhang problem).

The role of self-insurance is most important for those banks that are too big to fail (TBTF). As we
have discussed in a recent post, governments cannot credibly promise to avoid future bailouts if the
alternative is economic disaster (see the primer on time consistency). Consequently, anticipating a
bailout, TBTF banks have an incentive to take risks that will spill over to the financial system as a
whole. Making TBTF banks resilient through increased self-insurance both ensures their
shareholders will bear losses and prompts these firms to internalize the spillovers that otherwise
would occur.
Finally, a banking system that is short of capital can damage the broader economy in three ways.
First, an undercapitalized bank is less able to supply credit to healthy borrowers. Second, weak
banks may evergreen loans to zombie firms, adding unpaid interest to a loan’s principal to avoid
taking losses and further undermining their already weak capital position (see here). Finally, in the
presence of a widespread capital shortfall, the system is more vulnerable to widespread panic,
reflecting fears that some banks may be lemons (see the primer on adverse selection).

Measuring bank capital and exposures. The definition of bank capital makes it seem deceptively
simple to measure: just subtract liabilities from assets. Unfortunately, it is often very difficult to
measure the value of assets. (And even more difficult to figure out how to treat off-balance sheet

At any moment in time, assets are worth what buyers will pay for them. Determining the value of a
liquid instrument, like a U.S. Treasury bond, is easy. However, most securities—like corporate,
municipal, and emerging market bonds, are significantly less liquid than Treasuries (see here). And
since most bank loans, which represent more than one-half of U.S. commercial bank assets, do not
trade at all, no one knows their market price. Finally, in periods of financial strain, even active
markets can freeze, making the value of a bank’s assets even more difficult to value.

Aside from liquidity, the value of an asset may depend on the solvency of the bank. At one extreme,
some intangible assets only have value when the bank is a going concern. For example, when one
bank acquires another, the excess of the purchase price over the accounting value of the target
becomes goodwill on the balance sheet of the newly merged entity. Another example is deferred tax
assets (DTAs). A bank is allowed to use past losses to reduce future tax payments, assuming that
they become profitable and would otherwise owe taxes. Neither goodwill nor DTAs typically have
value if the bank fails.

We should emphasize that this is not a small matter. As of mid-2017, for the eight U.S. global
systemically important banks (G-SIBs), goodwill plus DTAs corresponded to 26% of tangible equity
(see here). Five years, earlier, that ratio was 39% (including a whopping 48% for Bank of America).

The presence of intangibles means that the book value of capital may tell us relatively little about the
ability of a bank’s balance sheet to absorb unforeseen losses on its assets (on- and off-balance sheet)
without becoming insolvent. For that purpose, regulators often exclude things like DTAs from their
computation of net worth.
In addition to capital, we also need to compute the assets or exposures against which net worth
provides a buffer. Derivatives and accounting conventions complicate this calculation. The five
largest U.S. banks held more than $200 trillion of gross notional value as of end-2015 (see here). To
take account of these off-balance-sheet exposures, regulators apply credit conversion factors (CCFs)
to translate derivatives exposures into asset equivalents that they then use to calculate capital ratios.
But, accounting frameworks differ significantly: under U.S. GAAP, a bank may use collateral it
receives from a counterparty to offset (or net) a derivatives exposure. Under International Financing
Reporting Standards (IFRS), which apply outside the United States, it cannot.

Doubts about GAAP netting—which generously assumes that collateral is of high quality, has not
been re-lent, and can always be sold—lead us to prefer IFRS measures of capital adequacy. For the
largest banks that dominate global derivatives trading, the difference is enormous. As the chart
below shows, for the U.S. G-SIBs, in 2017 the leverage ratio was 8.24% under GAAP, but only 6.62%
under IFRS. Back in 2012, the levels were lower and the disparity even larger: 6.17% vs. 3.88%. Put
differently, under IFRS in 2012, the effective debt of the biggest banks was nearly 25 times their
capital. That ratio is still greater than 15.

U.S. G-SIB Capital-to-Asset Ratios (Percent): GAAP, IFRS, and Basel Risk-Weighted Assets
Note: The 2012 and 2017 measures for Basel Risk -Weighted Assets were calculated under Basel I and

Basel III standards, respectively. Source: FDIC Global Capital Index (2Q 2012 and 2Q 2017).

Furthermore, these exposure measures ignore the riskiness of the assets themselves. A bank that
holds Treasury debt will be significantly less risky than one that makes illiquid loans with a
comparable duration. For these reasons, regulators also measure risk-weighted assets. The risk
weights range from zero (for Treasury debt) to more than 100% (for the riskiest loans).

Using risk-weighted measures, capital ratios appear higher (see chart above). But this ignores the
ability of banks to “game” the risk-weighted measures by concentrating their holdings in assets with
understated risk weights (including, in some cases, sovereign debt). Moreover, hypothetical
portfolio exercises reveal that banks’ internal models generate vastly different measures of risk-
weighted assets for the same portfolio. For these reasons, supervisors view leverage ratios as a
useful supplement to those that are risk weighted.
Capital requirements. Minimum capital requirements are the leading regulatory tool for ensuring
resilience of the banks (and bank-like intermediaries). In addition, regulators use stress tests to limit
concealed risk and to measure the capital adequacy of banks in scenarios where asset prices are
assumed to decline dramatically, markets cease to operate and funding dries up. The combination of
higher capital requirements and stringent stress tests has led to a sharp rise in banking system
capital in the decade since the financial crisis. But how much capital is enough?

The fundamental theorem of corporate finance—the Modigliani-Miller (MM) theorem—states that,

under a specific set of circumstances, firms (including banks) will be indifferent between debt and
equity finance. The MM assumptions are clearly violated. If we let the banks choose, they typically
minimize reliance on equity funding, which they perceive as expensive (see the opening quote from
Jamie Dimon and the reply from Neel Kashkari).

The question of how to set capital requirements depends in part on the factors causing the MM
violations that lead banks to prefer debt to equity. The candidates are numerous, ranging from
distortionary government debt subsidies (in the form of explicit and implicit guarantees) to
information asymmetries that make collateralized short-term debt finance relatively attractive.
Raising capital requirements will raise a bank’s private costs. But, to the extent that higher capital
requirements reduce the distortions from subsidies and compensate for banks’ ability to conceal risk
off balance sheet, social cost will decline.

MM is not the end of the story. As requirements rise on banks, the opportunity to reduce private
costs will encourage a shift of risk-taking to non-banks—beyond the regulatory perimeter. One
solution to this is to focus regulation on the economic function rather than the legal form of the
intermediary (see here). Absent such a system, there will be a point where higher capital
requirements, while making banks more resilient, will make the financial system less safe as a result
of risk-shifting.

Accordingly, there is a range of views about the appropriate level for capital requirements. At the
top end, proponents of narrow banking call for all risky assets to be 100% financed by
equity. Admati and Hellwig advocate a leverage ratio of 20% to 30%. The Minneapolis Plan to End
Too Big to Fail would set the number in the 15% to 24% range, while Dagher et al argue that 15%
would be sufficient to absorb the losses in 90% of past OECD banking crises. Notably, all these
proposals far exceed current capital requirements—which are between 3% and 5%—as well as
current leverage ratios (computed using a variant of IFRS) of the 30 largest global banks. The latter
range from 3.4% to 7.6% (see G-SIBs "Fully phased-in" column of Annex Table C.35 here). In
contrast, the Treasury argued in June 2017 that capital requirements for the largest U.S. banks
should be “recalibrated” in cases where they exceed international standards.

We do not know the optimal capital ratio for banks. But, in contrast with the Treasury (and with
Jamie Dimon), we believe that current capital requirements are not high enough. Our practical
suggestion is to raise capital requirements gradually until we observe either a reduced supply of
bank credit or a shift of risk-taking to de facto banks. Absent these negative side effects, more bank
capital means a safer financial system without loss of efficiency.

Tags: Assets, Liabilities, Net worth, Capital, Capital adequacy, Capital requirements, Loss-absorbing
capacity, Exposure, Leverage ratio, Debt-equity ratio, Self-
insurance, Incentives, Solvency, Liquidity, Risk-weighted assets, Derivatives, Balance sheet, Off-
balance sheet, Debt overhang, Gamble for redemption, Skin in the game, Too big to fail, Time
consistency, Adverse selection, Goodwill, Intangible capital, Deferred tax assets, Credit conversion
factor, US GAAP, IFRS, Hypothetical portfolio exercise, Modigliani-Miller theorem, Minneapolis
Plan, Narrow banking, De factor bank, Credit supply, De facto bank, Primer



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Banking Risks

The financial industry in the US is the most liquid and the largest
market in the world. In 2014, finance and insurance represented 7.2
percent of U.S. GDP. The banking industry in the US supports the
world’s largest economy with the greatest diversity in banking
institutions and concentration of private credit. The banking industry
has awakened to risk management, especially since the global crisis
during 2007-08. But what are the day to day risks and the long term
risks faced by banks? Why do dedicated risk management practices at
companies like FIS Global even exist? Which risks are their risk
management products and services meant for? Here’s the list of 8 risks
faced by banks:
Credit risk According to the Bank for International Settlements (BIS),
credit risk is defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed
terms. Credit risk is most likely caused by loans, acceptances,
interbank transactions, trade financing, foreign exchange transactions,
financial futures, swaps, bonds, equities, options, and in the extension
of commitments and guarantees, and the settlement of transactions. In
simple words, if person A borrows loan from a bank and is not able to
repay the loan because of inadequate income, loss in business, death,
unwillingness or any other reasons, the bank faces credit risk.
Similarly, if you do not pay your credit card bill, the bank faces a credit
Hence, to minimize the credit risk on the bank’s end, the rate of
interest will be higher for borrowers if they are associated with high
credit risk. Factors like unsteady income, low credit score,
employment type, collateral assets and others determine the credit
risk associated with a borrower. As stated earlier, credit risk can be
associated with interbank transactions, foreign transactions and other
types of transactions happening outside the bank. If the transaction at
one end is successful but unsuccessful at the other end, loss occurs. If
the transaction at one end is settled but there are delays in settlement
at the other end, there might be lost investment opportunities.

Look at it like person A sending US dollars to his family in India at the

rate of 60 INR (Indian Rupee) per dollar. The person B, who is the
recipient however receives the payment late and doesn’t get the
exchange rate of 60 INR. Instead he receives the money at the
exchange rate of 58 INR. This means they incurred a loss in the
transaction. Similar situations occur during big transactions in banks.
If the bank is not able to settle a transaction at an expected time or
during an expected time duration, they may incur a credit risk.
However, this kind of risk is called “Settlement Risk” and it is closely
associated with credit risk. It depends on the timing of the exchange of
value, payment/settlement finality and the role of intermediaries and
clearing houses.
While some credit risk is a result of macro forces affecting the
economy or specific markets or even specific individuals, there is
another important risk that can be classified under credit risk: this is
the risk of deliberate fraud that is usually borne by the banks who
issue credit products such as credit cards.
Market risk
McKinsey defines market risk as the risk of losses in the bank’s trading
book due to changes in equity prices, interest rates, credit spreads,
foreign-exchange rates, commodity prices, and other indicators whose
values are set in a public market. Bank for International Settlements
(BIS) defines market risk as the risk of losses in on- or off-balance
sheet positions that arise from movement in market prices. Market
risk is prevalent mostly amongst banks who are into investment
banking since they are active in capital markets. Investment banks
include Goldman Sachs, Bank of America, JPMorgan, Morgan Stanley
and many others.
Market risk can be better understood by dividing it into 4 types
depending on the potential cause of the risk:
 Interest rate risk: Potential losses due to fluctuations in interest rate

 Equity risk: Potential losses due to fluctuations in stock price

 Currency risk: Potential losses due to international currency exchange rates (closely associated
with settlement risk)

 Commodity risk: Potential losses due to fluctuations in prices of agricultural, industrial and energy
commodities like wheat, copper and natural gas respectively
Operational risk
According to the Bank for International Settlements (BIS), operational
risk is defined as the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. This
definition includes legal risk, but excludes strategic and reputation
risk. Operational risk can widely occur in banks due to human errors
or mistakes. Examples of operational risk may be incorrect
information filled in during clearing a check or confidential
information leaked due to system failure.
Operational risk can be categorized in the following way for a better
 Human risk: Potential losses due to a human error, done willingly or unconsciously

 IT/System risk: Potential losses due to system failures and programming errors

 Processes risk: Potential losses due to improper information processing, leaking or hacking of
information and inaccuracy of data processing

Operational risk may not sound as bad but it is. Operational risk
caused the decline of Britain’s oldest banks, Barings in 1995. Since
banks are becoming more and more digital and shifting towards
information technology to automate their processes, operational risk
is an important risk to be taken into consideration by the banks.
Security breaches in which data is compromised could be classified as
an operational risk, and recent instances in this area have underlined
the need for constant technology investments to mitigate the exposure
to such attacks.
Liquidity risk
Investopedia defines liquidity risk as the risk stemming from the lack
of marketability of an investment that cannot be bought or sold
quickly enough to prevent or minimize a loss. However if you find this
definition complex, the term ‘liquidity risk’ speaks for itself. It is the
risk that may disable a bank from carrying out day-to-day cash
Look at this risk like person A going to a bank to withdraw money.
Imagine the bank saying that it doesn’t have cash temporarily! That is
the liquidity risk a bank has to save itself from. And this is not just a
theoretical example. A small bank in Northern England and Ireland
was taken over by the government because of its inability to repay the
investors during the 2007-08 global crisis.
Reputational risk
The Financial Times Lexicon defines reputation risk as the possible
loss of the organisation’s reputational capital. The Federal Reserve
Board in the US defines reputational risk as the potential loss in
reputational capital based on either real or perceived losses in
reputational capital. Just like any other institution or brand, a bank
faces reputational risk which may be triggered by bank’s activities,
rumors about the bank, willing or unconscious non-compliance with
regulations, data manipulation, bad customer service, bad customer
experience inside bank branches and decisions taken by banks during
critical situations. Every step taken by a bank is judged by its
customers, investors, opinion leaders and other stakeholders who
mould a bank’s brand image.
Business risk
In general, Investopedia defines business risk as the possibility that a
company will have lower than anticipated profits, or that it will
experience a loss rather than a profit. In the context of a bank,
business risk is the risk associated with the failure of a bank’s long
term strategy, estimated forecasts of revenue and number of other
things related to profitability. To be avoided, business risk demands
flexibility and adaptability to market conditions. Long term strategies
are good for banks but they should be subject to change. The entire
banking industry is unpredictable. Long term strategies must have
backup plans to avoid business risks. During the 2007-08 global crisis,
many banks collapsed while many made way out it. The ones that
collapsed didn’t have a business risk management strategy.
Systemic risk and moral hazard are two types of risks faced by banks
that do not causes losses quite often. But if they cause losses, they can
cause the downfall of the entire financial system in a country or
Systemic risk
The global crisis of 2008 is the best example of a loss to all the
financial institutions that occurred due to systemic risk. Systemic risk
is the risk that doesn’t affect a single bank or financial institution but it
affects the whole industry. Systemic risks are associated with
cascading failures where the failure of a big entity can cause the failure
of all the others in the industry.
Moral hazard
Moral hazard is a risk that occurs when a big bank or large financial
institution takes risks, knowing thatsomeone else will have to face the
burden of those risks. Economist Paul Krugman described moral
hazard as "any situation in which one person makes the decision about
how much risk to take, while someone else bears the cost if things go
badly. Economist Mark Zandi of Moody's Analytics described moral
hazard as a root cause of the subprime mortgage crisis of 2008-09

It is often said that profit is a reward for risk bearing. Nowhere is this truer than in the case of
banking industry. Banks are literally exposed to many different types of risks. A successful banker is
one that can mitigate these risks and create significant returns for the shareholders on a consistent
basis. Mitigation of risks begins by first correctly identifying the risks, why they arise and what
damage can they cause. In this article, we have listed the major types of risks that are faced by every
bank. They are as follows:

Credit Risks

Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers.
Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of
delayed payments within this category.

Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk
can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and
businesses that are not likely to run out of income over the period of the loan. Credit rating agencies
provide adequate information to enable the banks to make informed decisions in this regard.
The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a
small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such
risks banks have come up with a wide variety of measures. For instance, banks always hold a certain
amount of funds in reserves to mitigate such risks.

The moment a loan is made, a certain amount of money is appropriated to the provision account.
Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization
helps remove the concentrated risk from the bank’s books and diffuse it amongst the various
investors in the capital markets. Credit derivatives like credit default swap have also come into
existence to help banks survive in the event of a credit default.

Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern
banks have realized this and are prepared to handle the situation without becoming insolvent until a
catastrophic loss occurs.

Market Risks

Apart from making loans, banks also hold a significant portion of securities. Some of these securities
are held because of the treasury operations of the bank i.e. as a means to park money for the short
term. However, many securities are also held as collateral based on which banks have given loans to
their customers. The business of banking is therefore intertwined with the business of capital

Banks face market risks in various forms. For instance if they are holding a large amount of equity
then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange
exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real
estate which exposes them to commodity risks as well.

In order to be able to mitigate such risks banks simply use hedging contracts. They use financial
derivatives which are freely available for sale in any financial market. Using contracts like forwards,
options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Operational Risks

Banks have to conduct massive operations in order to be profitable. Economies of scale work in the
favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an
extremely difficult task.

Operational risk occurs as the result of a failed business processes in the bank’s day to day activities.
Examples of operational risk would include payments credited to the wrong account or executing an
incorrect order while dealing in the markets. None of the departments in a bank are immune from
operational risks.

Operational risks arise mainly because of hiring the wrong people or alternatively they could also
occur if there is a breakdown of the information technology systems. A lapse in the internal
processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up
bankrupt because of its failure to implement appropriate internal controls. One trader was able to
bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank
simply ceased to exist.

Moral Hazard

The recent bailout of banks by many countries has created another kind of risk called the moral
hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the
taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive
risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses
are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to
become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe
business practices are followed, banks nowadays indulge in risky business the moment they are not
under regulatory oversight.

Liquidity Risk

Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk
that the bank will not be able to meet its obligations if the depositors come in to withdraw their
money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a
percentage of the deposits received are held back as reserves, the rest are used to create loans.
Therefore, if all the depositors of the institution came in to withdraw their money all at once, the
bank would not have enough money. This situation is called a bank run. This has happened countless
times over the history of modern banking.

Modern day banks are not very concerned about liquidity risk. This is because they have the backing
of the central bank. In case there is a run on a particular bank, the central bank diverts all its
resources to the affected bank. Therefore, the depositors can be paid back when they demand their
deposits. This restores depositor’s confidence in the banks finances and the run on the bank is

Many modern day banks have faced bank runs. However, none of them have become insolvent due
to a bank run post the establishment of central banks.

Business Risk

The banking industry today is considerably advanced and diversified. Banks today have a wide
variety of strategies from which they have to choose. Once such strategy is chosen, banks need to
focus their resources on obtaining their strategic goals in the long run.

Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this
wrong choice, the bank may suffer losses and end up being acquired or may simply collapse.
Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the
subprime route to growth. Their strategy was to be the preferred lender to people who have less
than perfect credit scores. However, the whole area of subprime lending went bust and since these
banks had heavy exposures to such loans, they suffered dire consequences too.
Banks have no possible way to mitigate the risks that are created by following inappropriate business
objectives. Which objectives were right and which were wrong? This question can only be answered
in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have
seemed like the strategically right thing to do!

Reputational Risk

Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan
bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years
and have stellar reputations. These reputations enable them to generate more business more

Customers like their money to be deposited at places which they believe follow safe and sound
business practices. Hence, if there is any news in the media which projects a given bank in a negative
light, such news negatively impacts the banks business. For instance Citibank was recently viewed as
manipulating the Forex rates via conducting false trades with its own trading partners. When
regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.

Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the
customers found out that they tend to resort to market manipulation. Many prospective customers
may have shifted their business away from Citibank as a result of this discovery causing monetary
loss as a result of reputation loss.

Banks can save their reputation by ensuring that they never participate in any unfair or manipulative
business practices. Also, banks need to continuously ensure that their public relations efforts project
them as a friendly and honest bank.

Systemic Risk

Systemic risk arises because of the fact that the financial system is one intricate and connected
network. Hence, the failure of one bank has the possibility to cause the failure of many other banks
as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one
bank fails, the credit risk event for the other banks becomes a reality.

They have to write off certain assets as a result of the failure of their counterparty. This writing off
often leads to the bankruptcy of other banks and an unstoppable domino seems to take over.
Systemic risk is an extremely bad scenario to be in. For instance when the subprime crisis happened
in 2008, it seemed like the entire global financial system would collapse.

The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do
not affect an individual bank rather they affect the entire system. Hence, there is very little that an
individual bank can do to protect itself in the event that such a risk materializes.

Thus, the management of banks requires a lot of skill since multiple types of risks need to be
mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to
minimize their damage.
Types of Bank Accounts: Explained in Details
Published on Wednesday, October 25, 2017

This topic is important for bank exams, as generally many questions are asked in bank exams
and interview on bank accounts like what are different types of accounts in the bank , what is
the difference between a current account and saving the account.So understanding this topic is
very important.

Various Types of Bank Accounts

1. Saving Account
2. Regular Savings
3. Current Account
4. Recurring Deposit Account
5. Fixed Deposit Account
6. DEMAT Account
7. NRI Accounts

a) Basic Savings Bank Deposit Accounts (BSBDA)
o This account will be considered as normal banking service.
o For this account, maintenance of minimum balance is not required.
o ATM card/ ATM cum Debit card, Rupay card will be given for the account holders.
o There are going to be no limit on the number of deposits that can be made in a month
but, account holders will be allowed most of 4 withdrawals in a month, which includes
ATM withdrawals also.
o The above facilities will be given without any charge. There will be no charge levied for
non-operation/ activation of in-operative basic saving bank deposit account.
o For this account, overdraft facility will be provided up to Rs. 5000/-.

b) Basic Saving bank Deposit Accounts Small scheme (BSBDS)

o These are accounts with relaxed KYC, with a minimum document requirement of self-
attested address proof & photograph.
o Total credit should not exceed 1Lakh rupees in a year.
o Maximum balance should not exceed Rs. 50,000/- at any time.
o Cash withdrawals & transfers must not exceed Rs.10, 000/- in a month.
o Remittance from foreign account cannot be credited to this account without completing
normal KYC formalities.
o This account can be opened only at Core Banking Solution linked branches of banks or
at such branches, where it is possible to manually monitor the fulfillments of the
o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs etc., are eligible for this account.
o Modest credit option available to the depositor.
o Two free cheque books will be issued per year.
o Internet banking facility will be provided without any charge.
o Balance enquiry, NEFT, Bill payment, Mobile recharge etc., are provided through mobile
o Students can open this account with zero balance by providing the required documents.

o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Limited companies, Religious Institutions, Educational Institutions,
Charitable Institutions, clubs etc., are eligible for this account.
o Payments can be done unlimited number of times.
o Funds can be remitted from any part of the country to the corresponding account.
o Overdraft facility will be available.
o Internet banking facility is available.


o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs, Institutions/Agencies specifically permitted by the RBI etc., are
eligible to open this account in single/joint names.
o Periodic/Monthly installments can be for any amount starting from as low as Rs.50/-
o Account can be opened for any period ranging from 6 months to 120 months, in multiple
of 1 month.
o The amount selected for installment at the start of the scheme will be payable every
o The number of installments once fixed, cannot be altered.
o Approved rate of interest is compounded every quarter.
o The amount after maturity will be paid to customers one month after the deposit of the
last installment.
o Pass book will be given to the depositor.
o TDS will be applicable on the interest, as per the latest changes in the Income Tax Act
on cumulative deposits also.
o Banks accepts deposits from customers varying from 7 days to a maximum of 10 years.
o The period of 7 days & above but not exceeding 179 days deposits is classified as ‘Short
o The minimum amount that can be deposited under this scheme is Rs. 5 lakh for a period
of 7-14 days.


o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Minors, societies, clubs etc., are eligible for this account.
o The minimum FDR in metro & Urban branches is Rs. 10,000/- & in rural & semi urban &
for Senior citizens is Rs.5000/- .
o For the subsidy kept under the government sponsored schemes, Margin money, earnest
money & court attached/ordered deposits, minimum amount criteria will not be
o Depositors may ask for repayment of their deposits before maturity. Repayment of
amount before maturity is allowable.
o Interest rate differs from bank to bank depending upon the tenure of the deposits & as
when the bank changes the rate.
o Additional interest of 0.50% is offered for senior citizens on deposits placed for a year &

o Used to conduct stress-free transactions on the shares.
o An individual, Non-Resident Indian, Foreign Institutional Investor, Foreign National,
Corporate, Trusts, Clearing Houses, Financial Institution, Clearing Member, Mutual
Funds, Banks and Other Depository Account.
o For opening this account, an individual has to fill a form, submit a photo of the applicant
along with a photocopy of Voter ID/ Passport/ Aadhar card/ Driving License & Demat
account number will be provided to the applicant immediately after the completion of
processing of the application.
o Facilities provided under this account are- Opening & maintaining of Demat accounts,
Dematerialization, Rematerialization, Purchases, sales, Pledging & Unpledging, safe

a) NRO ( Non-Resident Ordinary Rupees) Account
b) NRE ( Non-Resident External Rupees) Account
c) FCNR ( Foreign Currency Non-Resident ) Account
Specifics FCNR NRE NRO

NRIs/PIOs/OCIs(Individuals/entities NRIs/PIOs/OCIs(Individuals/entities Individual
of Bangladesh/Pakistan require of Bangladesh/Pakistan require resident
prior approval of RBI prior approval of RBI outside

In the
names of
two or
more non-
In the names of two or more non- In the names of two or more non- resident
resident individuals. With a local resident individuals. With a local individuals.
Joint Account
close relative on 'former or close relative on 'former or With a local
survivor basis' survivor basis' close
relative on
'former or

Money in
US dollar, pound sterling, Yen,
which account Indian
Euro, Australian dollar & Canadian Indian Rupees
is Rupees

Nomination Allowable Allowable Allowable

Savings, Current, Fixed, Recurring
Account Type Term Deposit only Fixed,

Banks are
allowed to
Banks are allowed to determine Banks are allowed to determine determine
Interest Rate
interest rates for Deposits interest rates for Deposits interest
rates for
Fixed deposits- not less than 1 year and not more Min- 1year applicable
period than 5 years Max- 10years to resident

TDS on
received on
Income Tax Not Taxable Not Taxable
deposits to
deducted at

Repatriability Repatriable Repatriable

Loans in India
1)To account Without any financial ceiling on Without any financial ceiling on
holder the loan amount subject to the loan amount subject to
2)To third standard margin requirements standard margin requirements

Loans in
Abroad 1) Without any financial ceiling on 1)Not
Without any financial ceiling on
1)To account the loan amount subject to permitted
the loan amount subject to
holder standard margin requirements 2)Not
standard margin requirements
2)To third 2)Not Permitted permitted

Currency loans
1) Not
1) Permitted 1) Not permitted permitted
1)To Account
2) Not permitted 2) Not permitted 2) Not
2)To third

The banking industry handles finances in a country including cash and credit. Banks are the
institutional bodies that accept deposits and grant credit to the entities and play a major
role in maintaining the economic stature of a country. Given their importance in the
economy, banks are kept under strict regulation in most of the countries. In India, the
Reserve Bank of India (RBI) is the apex banking institution that regulates the monetary
policy in the country.

Banks are classified into scheduled and non-scheduled banks. Scheduled banks can further
be classified into commercial banks and cooperative banks. Commercial Banks can be
further classified into public sector banks, private sector banks, foreign banks and Regional
Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural.
Apart from these, a fairly new addition to the structure is payments bank.

Schedules banks are covered under the 2nd Schedule of the Reserve Bank of India Act,
1934. A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule
bank category. These banks are eligible to take loans from RBI at bank rate.

Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business
model is designed to make profit. Their primary function is to accept deposits and grant
loans to the general public, corporates and government. Commercial banks can be divided

Public Sector Banks

These are the nationalised banks and account for more than 75 per cent of the total banking
business in the country. Majority of stakes in these banks are held by the government. In
terms of volume, SBI is the largest public sector bank in India and after its merger with its 5
associate banks (as on 1st April 2017) it has got a position among the top 50 banks of the

There are a total of 21 nationalised banks in the country namely below:

Private Sector Banks

These include banks in which major stake or equity is held by private shareholders. All the
banking rules and regulations laid down by the RBI will be applicable on private sector
banks as well. Given below is the list of private-sector banks in India-

Foreign Banks

A foreign bank is one that has its headquarters in a foreign country but operates in India as
a private entity. These banks are under the obligation to follow the regulations of its home
country as well as the country in which they are operating. Citi Bank, Standard Chartered
Bank and HSBC are some leading foreign banks in India.

Regional Rural Banks

These are also scheduled commercial banks but they are established with the main objective
of providing credit to weaker sections of the society like agricultural labourers, marginal
farmers and small enterprises. They usually operate at regional levels in different states of
India and may have branches in selected urban areas as well. Other important functions
carried out by RRBs include-

 Providing banking and financial services to rural and semi-urban areas

 Government operations like disbursement of wages of MGNREGA workers,
distribution of pensions, etc.
 Para-Banking facilities like debit cards, credit cards and locker facilities

Small Finance Banks

This is a niche banking segment in the country and is aimed to provide financial inclusion to
sections of the society that are not served by other banks. The main customers of small
finance banks include micro industries, small and marginal farmers, unorganized sector
entities and small business units. These are licensed under Section 22 of the Banking
Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934 and FEMA.

Co-operative Banks
Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are
run by an elected managing committee. These work on no-profit no-loss basis and mainly
serve entrepreneurs, small businesses, industries and self-employment in urban areas. In
rural areas, they mainly finance agriculture-based activities like farming, livestock and

Payments Bank

This is a relatively new model of bank in the Indian Banking industry. It was conceptualised
by RBI and is allowed to accept a restricted deposit. The amount is currently limited to Rs. 1
Lakh per customer. They also offer services like ATM cards, debit cards, net-banking and