CHAPTER – 2

Classification of Banks and

Banking Structure
 **Classification of banks:

a) Classification on the basis of ownership-

1. State owned bank:
2. Private ownership bank:
3. Govt’ and private ownership bank: RBL 93.11
and 6.89 percent
4. Autonomous bank:
 **Classification of banks:

b)Classification on the basis of function-

1. Central bank:
2. Commercial bank:
3. Co-operative bank:
4. Agricultural bank:
5. Industrial bank:
6. Exchange bank:
 **Classification of banks:
4

b) Classification on the basis of function-

7. Investment bank:
8. Merchant bank:
9. Saving bank:
10. Import and export bank:
11. Small and cottage industries bank:
12. Consumer bank:
13. Mortgage bank:
14. Mixed bank:
 **Classification of banks:
5

b) Classification on the basis of function-

15. Grameen bank:
16. Indigenous bank:
17. Regional bank:
18. Community development bank:
19. International bank:
 **Classification of banks:
6

c) Classification on the basis of organizational structure-

1. Unit banking
2. Branch banking
3. Chain banking
4. Group banking

d) Classification on the basis of scheduling-

1. Scheduled bank
2. Non scheduled bank
 *Group banking or Holding Banking
Definition;
According to professor Shekhar “According to
the holding company banking system, a
group of banks are brought under one
centralized management and this centralized
management exerts overall the units.”
Group banking first established 1930 in USA

This is a banking system where a number of small

banks or unit banks are supervised under a large
scale bank’s is called group banking.
 Features;

1. Nature
2. Objectives to established a strong banking network
under unique control
3. Management and control
4. Nature of holding company
5. Extensive operation; consortium loan, large
investment
6. Name and goodwill
7. Separate entity and management
 ADVANTAGES;

1. Banefits of large scale banking

2. Gaining economy
3. Advantages of liquidity
4. Granting Consortium loan
5. Exchange of technical knowledge and
experience
6. Benefits of competition
7. Providing better customer service
 Disadvantages;

1.Inefficient management
2.Unnecessary controlling
3.Maintaining interest of the holding company
4.Carrying burden of the problem of holding
company
5.Compelling inter-investment and loan
6.Creating monopoly tendency
7.Bad impact of the combination of banking and
non-banking organization
 *Chain banking

Definition;
When –an individual or
-A family or
-A group of company or
-A group of individual
Establish a number of unique or unit banks in different
locations is called chain banking.

When a number of same mentality’s peoples established

different banks in different places to operate banking
activities under a cooperation and coordination to
minimize their competition and expenses.
 Features;
1. Separate name and independent entity
2.Objectives
3.Management and control
4.Loose combination
5.Informal relation
 Advantages ;
1. Developing cooperation
2. Efficient management
3. Gaining economy
4. Transfer of capital
5. Advantage of liquidity
6. Granting consortium loan
7. Ensuring better customer service
Disadvantages;
1. Loose controlling
2. Inefficient management
3. Limited ability
4. Monopoly tendency
 *Differentiate between Group Banking
and Chain Banking
Subject G. B C. B
1. Nature Holding company Sole proprietorship, partnership or
company
2. Objectives Large scale banking To minimize competition and to
activities create co-operation
3. Ownership Large part of the share Group shareholder or individual
owner holding company shareholder
4. Board of Most of the directors or all Different board of directors. Some
director directors appointed by members of one board of directors
holding company may be director of another board
because of same ownership.
5. Management Controlled by the holding Combination and co-operation. But
and Control company. they are not bound to maintain any
restricted or special condition.
 *Differentiate between Group Banking
and Chain Banking
Subject G. B C. B

6. Use of fund Every bank can not collect Independently they can
or raise capital collect capital.
independently. They
depend on the holding
company’s decision.
7. Ability High ability Low ability

8. Possibility of Less chance of dissolution More chance of

dissolution dissolution

9. Impact on economy More impact on economy Less impact on economy

than Chain Banking than Group Banking
 Unit Banking

Definition;
According to Mr. Sewers “ the unit banking system is the unit or single
office bank serving its small local community”
Features
 Centralized management
 Non existence of branch office
 Limited area
 Limited functions
 Independence of work
 Centralization of the employees
 Centralization of decision making
 Small scale operation
 Advantages

Expert management
Prompt decision making
Less costly
Achieving economy
Employer- employee direct relationship
Worm relationship between banker and
client
Healthy relationship among the employees
Meeting regional demand
 Disadvantages

 Lack of specialization
 Difficulty in transfer of money
 Unable to form large capital
 Lack of efficient manager
 Problem in distribution of risk
 Lack of dynamism in capital
 Problem in expansion
 Liquidity problem
 Investment problem
 Apprehension of abolishment
 Branch Banking

Prof. Mclead “Branch Banking system is that system

of banking which control and maintain many
branches either inside the country or abroad”.
Prof. J.L. Hanson “Branch Banking means a banking
system with a small member of banks each with a
large number of branches”.
 Advantages
 Large scale operation
 Formulation of huge capital
 Dynamism in capital
 Scope of risk distribution
 Advantages of liquidity
 Efficient management
 Training facility
 Role in foreign trade
 Efficient banking service
 Provision of transfer of money
 Adopting of proper banking policy
 Good relationship with central bank
 Publicity
 Public confidence
 Contribution in the economy
 Disadvantages
Problem in management
Delay in decision making
Indifference to local need
Delay in giving loan
Monopolistic tendency
Extra expense
Corruption and fraud
Absence of direct relationship
Taking the liabilities of others failure
Effect of abolishment
 Difference between Unit Banking and
Branch Banking
subject U.B B.B
1. Nature Narrow scale Large scale

2. Formation procedures Easy formation Difficult

3. Origin and introduction USA UK

4. ownership Sole proprietorship Limited company

company
5. Scope of operation Limited scope More scope

6. Overhead expenditure Less More

7. Decision making Quick decision Delay decision

8. Liquidity It should maintain more It has the chance to

liquidity maintain less liquidity
 Difference between Unit Banking and
Branch Banking
subject U.B B.B
9. Formation of capital & Less More
loan sanction ability
10. Credit control
11. Amount of profit
12. Specialization
13. Transfer of money
14. Employee satisfaction
15. Role of foreign trade
16. Relation with Central
Bank
 Investment Banking and Mixed Banking
Investment Banking
The banking system which formulated and operated to provide long term
loan facility in industrial sector is called Investment Banking.
It is also called Industrial Banking. This kinds of bank first established in
Germany after 1853.

Mixed Banking
M.N. Mishra “ Mixed Banking refers to that type of banking system in
which banks accept deposits and grant long term loan”.
M.C. Vaish “ in Mixed banking the commercial banks promote the
industrialization of their country and come forward to provide the initial
capital to the newly started industries”. Alongside the task of providing
capital to industries mixed bank also perform the function of deposit banks.
 Difference between Investment Banking and Mixed Banking

subject I.B M.B

1. Objectives To develop industrial Perform as investment
sector this type of bank banker and deposit
established. banker
2. Nature Narrow scale than M.B Large scale than I.B
3. Collection of deposits Bank can not collect It can collect deposit from
deposit from depositors, general people and also
they mainly depends on they depend on their own
their own capital. capital.
4. General Banking Generally it is not It is perform as long term
perform deposit loan provider, long term
collection, cheque large investor also
payment, cash transfer, perform General Banking.
Bill discounting etc.
5. Opportunity of Better chance of Scope of function is large
specialization specialization number, so there is lower
chance of specialization.
 Difference between Investment Banking and Mixed Banking

Subject I.B M.B

6. Capital formation and It has lower chance of It has higher chance
investment capital formation and
investment.
7. Risk High risk Low risk
8. Role of economy In economic development Higher role.
it perform as lower role
than Mixed banking.
 Merchant Banking

Merchant is a specialized banking operation. It is

combination of – Exchange banking and Investment
banking.
Some Scholars argued that it is not as like as banking
institution. It is a specialized business organization
or non- banking financial institution.
Merchant banking is a financial institution which
provide financing subjective and consulting services
in home trade and foreign trade.
 Certain sound commercial banking principles

Principles means guidelines for action.

 Principles of liquidity
 Principles of solvency
 Principles of safety
 Principles of profitability
 Principles of collection of saving
 Principles of loan and investment
 Principles of economy
 Certain sound commercial banking principles

 Principles of efficiency of management

 Principles of providing services
 Principles of secrecy
 Principles of punctuality
 Principles of specialization
 Principles of good relation
 Principles of cooperation with central bank
 Principles of location: 4 : 1
END OF THE CHAPTER