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Types of Banking

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Banking is directly or indirectly linked to a country’s trade and each individual’s existence. It is a business that handles credit, currency, and other types of financial transactions.
The commercial bank is the most powerful entity in any country’s economy or in giving credit to its consumers.  In India, a banking corporation is responsible for all commercial transactions such as check withdrawals, payments, investments, and so on.

In other words, a bank is involved in the deposit and withdrawal of money, the repayment of money on demand, savings, and generating a reasonable profit through lending money. Banks also assist in mobilising an individual’s savings, making cash available to enterprises, and assisting them in starting a new company.

Banking is a function that requires credit, currency, and a variety of other financial operations. The term “bank” refers to a financial organization that provides loans to its customers while also holding their deposits. Banks then utilise these deposits to provide loans to consumers. It provides a variety of services, including savings accounts, balance checks and certificates of deposit. 

However, unlike commercial banks, private sector banks are owned, run, and governed by private investors and have the freedom to act in accordance with market forces.

Types of Banks:

1) Central Bank

A central bank is a financial organisation that has exclusive authority over the generation and distribution of money and credit for a nation or state. Central banks are non-market or even anti-competitive entities. The Reserve Bank of India is the central bank of our country. It controls all the currency and credit policies of a country and acts as a government bank. It also controls and guides all the commercial banks of our country, and implements monetary policies under the supervision of the Government.

2) Commercial Bank

Commercial banks are financial institutions that accept deposits and provide customers with short-term loans and advances. They provide medium-term and long-term loans to businesses in addition to short-term loans. It also provides individuals with long-term house loans.

Commercial banks serve the public interest by taking profits and granting loans. These loans act as commercial banks’ profit-seeking ventures. Commercial banks in India include the State Bank of India, United Bank of India, ICICI Bank, HDFC Bank, etc.

Commercial banks play a significant role in supplying funding to businesses for both immediate and medium-term needs. The bank grants a loan on the security of assets or by imposing a charge on the firm’s assets. They offer financial assistance in the form of cash credit, bill discounting, overdrafts, letter of credit, etc.

3) Cooperative Bank: 

Cooperative banks in India are established under the State Cooperative Societies Act and provide members with simple loans. Cooperative banks’ primary duty is to provide financial resources to rural people overall. In India, cooperative banks include New India Cooperative Bank Limited and Ahmedabad Mercantile Cooperative Bank Ltd.

Cooperative banks work on the basis of ‘one person, one vote’ because these banks are owned by their members. A Board of Directors is elected democratically and is responsible for supervising the organisation.

Farmers can obtain agricultural loans at low interest rates from cooperative banks. Providing quick and accessible loans and credit advantages in rural regions where banking facilities are limited.

The yearly profit is spent on financial reserves and necessary resources, and a portion of it is dispersed to Cooperative members within the defined limits.

4) Specialised Bank:

Banks which are formed to cater to  specific needs of society, country or people are called Specialised Banks.  For example, banks that specifically cater to the needs and development of cottage industries in India. SIDBI, EXIM, NABARD, etc., are some of the prominent examples of Specialised banks in India.  These banks provide financial aid by providing modern technology. They also assist and guide industries regarding investments, policies, etc., which small industries or entrepreneurs cannot afford. Besides this, they also help industries with heavy projects and foreign trade.

Functions of Commercial Banks:

Banks today, perform a variety of functions. Some of the important functions are given below:

1. Acceptance of Deposits: 

Commercial banks’ primary function is to receive deposits from its customers, who might be individuals or corporations. The bank accepts savings, current, and fixed deposits as deposits. Surplus balances obtained from firms and individuals are loaned to meet the short-term requirements of commercial transactions.

2. Availability of  Loans and Advances:

Another important function of this bank is to provide loans and advances to entrepreneurs and company owners while collecting interest. It is the primary source of earning profit for banks . In this method, a bank holds a limited number of deposits as a reserve and gives (lends) the balance to borrowers in the form of demand loans, overdrafts, cash credit, short-term loans, etc.

3. Facility of Cash Credit: 

When a consumer receives credit or a loan, they do not receive liquid cash. Firstly, the bank will open the customer account and then, transfer the funds to the accounts .
This procedure enables the bank to generate money. Credit creation is a distinct activity of commercial banks. Banks create a line of credit and transfer the loan to a firm or commercial entity all at once, rather than delivering liquid cash.

4. Bill of Exchange discount: 

In today’s world, the primary purpose of a commercial bank is to discount business invoices. Banks perceive bill discounting to be a beneficial investment. Bills generate a consistent flow of funds while not becoming a dangerous endeavour during payment because they are a negotiable instrument.  These bills do not involve the financial institution in any legal proceedings.

It is a formal agreement that acknowledges the amount of money to be paid against the products acquired at a future date. The amount can potentially be cleared before the given period by using a commercial bank’s discounting process.

5. Transferring Funds:  

These commercial banks also handle fund transfers or money transfers in general.  For certain commissions, funds can be transmitted using different channels such as IMPS, NEFT, RTGS, draught pay orders, and so on. That is a very helpful function for the customers who are  in urgent need of money.

6. Purchasing and selling securities: The bank provides customers with the option of selling and buying securities. With this function, they can opt to invest easily by investing online.

7. Other Services: In addition to above services, a bank provides a number of services such as locker services, underwriting services, bill payments, etc. For such services, banks charge a minimum of an annual fee.

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Last Updated : 06 Apr, 2023
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