Common Types of Banks

A bank refers to a financial institution which is licensed to receive deposits and make loans. Two of the most common types of banks are commercial/retail and investment banks. Mainly based on type, a bank may also provide different financial services starting from providing safe deposit boxes and currency exchange to wealth management and retirement.

Banks have made it easier to send money from one area to another by using cheques, bills of exchange, and draughts instead of cash. Payment by check is less secure and convenient; nonetheless, in the case of large payments, this feature is extremely beneficial to merchants and businesspeople. It emphasises the importance of banks in the corporate world.

Types of Bank

You may have noticed some sign boards on buildings with names such as Punjab National Bank, Canara Bank, State Bank of India, United Commercial Bank, and others when travelling through the streets of any town or city. What are the meanings of these names? Have you ever tried to learn more about them? If you go into one of these buildings, you’ll find a business office. You’ll see that some people are putting money at one counter and collecting money at another. Officers are seated at tables and chairs behind the counters in the office. You’ll notice a chamber (small partitioned area) on one side of the office where the manager is sitting with paperwork on his table. This place is known as the ‘Bank’. 

In our country, many types of banks exist to address the financial needs of various groups of people involved in agriculture, commerce, professions, and other activities. Banking institutions in India can be classified into the following categories based on their functions:

Central Bank

The Central Bank of a country is a bank that is charged with managing and supervising the country’s banking sector. A bank like this does not do business with the ordinary population. It serves as the government’s banker, maintaining all other banks’ deposit accounts and advancing money to them as needed.

When other banks run into difficulties, the Central Bank offers assistance. As a result, it is referred to as the banker’s bank. Our country’s central bank is known as the Reserve Bank of India. The issuance of currency notes, as well as the regulation of their circulation in the country, is another key duty of the Central Bank. Only the Central Bank possesses the authority to issue currency.

Function of Central Bank

A central bank’s functions often include:

• Monetary Policy: setting the official interest rate and managing the money supply.

• Financial stability: functioning as a banker for both the government and the bankers (“lender of last resort”);

• Reserve management: entails overseeing a country’s foreign exchange, gold, and government bond reserves.

• Financial supervision: refers to the process of regulating and overseeing the banking industry.

• Payments system: overseeing or supervising payment and clearing processes between banks;

Cooperative Bank

Under the Cooperative Societies Act, people who come together just to jointly serve their common interest often form a co-operative society. A Co-operative Bank is formed when a co-operative society enters the banking business. Before beginning banking operations, the society must get a licence from the Reserve Bank of India. Any cooperative bank must operate as a society under the supervision of the State Registrar of Cooperative Societies. In terms of banking, the society must adhere to the guidelines established and issued by the Reserve Bank of India.

Types of Co-Operative Banks

In our country, there are three sorts of cooperative banks. Primary credit societies, central cooperative banks, and state cooperative banks are the three types. These banks are divided into three categories: village or town, district, and state.

Primary Credit Societies

Primary Credit Societies are created at the village or town level, with borrower and non-borrower members living in the same area. Each society’s operations are limited to a local area so that members get to know one another and can keep an eye on each other’s activities to prevent fraud.

Central Co-operative Bank

These banks function on a district level, with some of their members being members of primary credit societies in the same district. These banks make loans to its members (primary credit societies) and serve as a conduit between them and state co-operative banks.

State Co-operative Bank

In all of the country’s states, these are the top (highest level) cooperative banks. They collect funds and assist in their efficient distribution across many sectors. Individual borrowers receive funds from state cooperative banks through central co-operative banks and primary credit organisations.

Functions of Co-Operative Banks

Only one simple rule governs cooperative banks: “One member, one vote.” Co-operative banks are more democratic than commercial banks, yet they perform all of the core functions that a commercial bank does. A federal structure exists for cooperative banks. Co-operative banks function as agents for its customers, accepting checks and draughts and lending money to other co-operative societies and banks at a lower interest rate. Listed below are some of the functions of Co-Operative Banks:

Primary Urban Co-operative Bank (PUCBs)

This form of cooperative bank primarily serves India’s metropolitan centres, primarily providing small businessmen with advances in shares and debentures, as well as loans and credit extensions.

District Central Co-operative Bank (DCCBs)

These banks cater to the needs of the district or the local community. They develop and implement policies at the district level, as well as providing credit to PACs and PUBCs.

Primary Agriculture Credit Society (PACs)

PACs are a sort of cooperative bank that offers less complicated loans to its customers while also encouraging them to learn to save money through deposits. It also contributes to the well-being and growth of a larger society.

State Co-operative Banks (SCBs)

SCBs are supervised by DCCBCs and are administered by NABARD.

Commercial Bank

Commercial banks are financial institutions that accept deposits and provide short-term loans and advances to their customers. Commercial banks provide short-term, medium-term, and long-term loans to businesses in addition to short-term loans. Individuals can now get long-term house loans from various commercial banks. Commercial banks also perform a variety of other services, which will be explored later in this article.

Types of Commercial Bank

Public sector banks, private sector banks, and foreign banks are the three categories of commercial banks.

Public Sector Banks

These are banks in which the Government of India or the Reserve Bank of India owns a majority share. Corporation Bank, Bank of Baroda,  State Bank of India and Dena Bank are examples of public sector banks.

Private Sector Banks

In the case of private sector banks, private persons own the bulk of the bank’s stock. These banks are incorporated as limited-liability corporations. For example, The Jammu and Kashmir Bank Limited, Bank of Rajasthan Limited, Development Credit Bank Limited, Lord Krishna Bank Limited, Bharat Overseas Bank Limited, Global Trust Bank Limited, Vysya Bank Limited, and others.

Foreign Sector Banks

These banks are registered and have their headquarters in another country, but their branches are located in the United States. Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, and other foreign banks operate in our country. Since the 1991 financial sector reforms, the number of foreign banks operating in our nation has expanded.

Functions of Commercial Bank

• Accepting Deposits: Commercial banks accept savings, fixed, and current deposits from their customers. 

• Savings Deposits: Savings deposits allow customers to deposit money into their accounts up to a specific amount. Individuals with a fixed income choose these deposits because they can be used to build savings over time. 

• Fixed Deposits: Fixed deposits have a set length of time during which they are locked in. Because the money is put for a defined period of time, fixed deposits are also known as time deposits. 

• Current Deposits: These accounts allow account users to deposit and withdraw funds as needed. Individuals and organisations can sometimes get overdrafts up to a predetermined maximum with current accounts.

Conclusion

Banks play a critical role in a country’s economic development since they regulate the supply of money in circulation to a significant extent and are the primary stimulus of economic growth. Economic development is a dynamic and continuous process that is largely reliant on resource mobilisation, investment, and the operational efficiency of various economic segments. The performance of a bank and other financial institutions must be examined since it is defined as a reflection of how a bank’s resources are employed in a way that allows it to achieve its objectives.