Introduction to banks
1.INTRODUCTION TO
BANKS
A bank is
a financial institution and a financial intermediary that
accepts deposits and channels those deposits into lending activities,
either directly by loans or indirectly through capital markets. A bank is
the connection between customers that have capital deficits and customers with
capital surpluses.
Due to their
influence within a financial system and an economy, banks are
generally highly regulated in most of the countries. Most banks
operate under a system known as fractional reserve banking where they
hold only a small reserve of the funds deposited and lend out the
rest for profit.
The structure of the
organized banking sector in India are shown below. The number of banks are
indicated within the brackets.
TYPES OF BANKS IN
INDIA
Banks can be classified into various
types based on their functions, ownership, domicile, etc. the following are the
various types of banks:
Based
on its functions:
Banks are classified into six
categories based on their functions. They are:
Commercial banks:
It performs all
kinds of business banking and generally finance trade and commerce. Since their
deposits are only for a short period, these banks normally advance short term
loans to traders and businessmen. But they also now extended to medium and long
term lendings.
Industrial banks:
It is also known as investment banks,
mainly meet the medium and long term financial needs of the industries which
cannot be met by commercial banks. It accepts long term deposits and grant
working capital and long term loans to the industrialists. The sector wise
credit by banks are shown below, in which industries holds the maximum levels
of credits.
Agricultural banks:
Agricultural credit
needs are different from those of industry and trade. The agricultural banks
provides
§ Short term credits to buy seeds,
fertilizers, etc.
§ Long term credits to purchase land,
machineries, equipments, etc.
Exchange banks:
Exchange banks deal
in foreign exchange and specialize in financing foreign trade. They facilitate
international payments through the sale and purchase of bills of exchange and
thus plays an important role in promoting foreign trade.
Saving banks:
The main purpose of
this bank is to promote saving habits among general publics and mobilize their
small savings. In India, postal saving banks deals with it.
Central banks:
Central bank is an
apex institution which controls, regulates and supervises the monetary and
credit system of the country. Important functions of this banks are:
§ It has the monopoly of currency issue.
§ It acts as a banker, agent and
financial advisor to the state.
§ It is the custodian of member banks
reserves, nation’s reserves of international currency.
§ It functions as the bank of central
clearance, settlement and transfer.
§ It act as the controller of credit.
Based
on the ownership:
Under this category, banks are
classified into three categories. They are:
Public sector banks:
These are owned and
controlled by government of India. The nationalized banks and regional rural
banks will fall under this category.
Private sector banks:
These banks are
private individuals or corporations and not by the government or cooperative
societies.
Cooperative banks:
Cooperative banks
are operated on the cooperative lines. In India, cooperative credit
institutions are organized under the cooperative societies law. It plays an
important role in meeting financial needs in the rural areas.
Based
on the domicile:
On the basis of domicile, banks are
classified into two categories. They are:
Domestic banks:
These are registered
and incorporated within the country.
Foreign banks:
These are foreign in
origin and have their head offices in the country of the origin.
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