There are different types of banking in India, but before we move on to determine the various types of banking, let us refresh our memories about some basic concepts.
What is Banking?
The concept of banking encompasses such industry which covers credit, cash and various other financial transactions.
Bank meaning relates to such a financial institution that works in extending credit to its customers as well as storing their deposits. These deposits are further used by banks to grant loans to customers. It offers multiple services including saving accounts, checking of balance and providing certificate of deposits, among others.
Types of Bank Accounts
The major types of bank accounts are –
The facilities of savings account are only for savings purposes, and a bank is liable to pay interest on the funds which are deposited in the account. In India, the rate of interest for savings accounts ranges from anywhere between 4% to 7%.
Current account mainly contains liquid deposits that are utilised for business purpose and not for savings or investments. No interest is paid on such an amount, and there are no maturity periods as well due to the continuous nature of the account.
Fixed Deposit Account
A particular sum of money is deposited in a fixed deposit account for a given duration. If deposit is taken out before the maturity date, penalties will be imposed. Fixed deposits enjoy higher interest rates. The interest rate is subjected to variation from bank to bank and also periodic revisions.
Recurring Deposit Account
In case of recurring deposit account, deposit will have to be made by the account holder at regular intervals for a specified time period. The bank will have to pay the relevant rate of interest when the amount is repaid after the fixed time period.
Now that we have refreshed our memories let us start with the topic in hand.
Types of Banking
The types of banks in India can be divided into the following categories –
1. Central Bank
The central bank in this country is the Reserve Bank of India (RBI) which acts as the apex body for regulating and monitoring all other banks in the country. It also acts as banker to the government in certain situations. RBI is instrumental in laying down the repo rate, reverse repo rate, cash reserve ratio and statutory liquidity ratio.
2. Commercial Bank
Commercial banks perform the function for the public in terms of accepting profits or extending loans. These loans act as investments of the commercial banks with the objective of earning profit. Examples of commercial banks in India are State Bank of India, United Bank of India, ICICI Bank, HDFC Bank etc.
3. Specialised Bank
Specialised banks are formed with the specific goals of catering to a particular industry or sector. It may focus on export and import or provide financial services to some specific industries. Example of a specialised bank in India is Export Import Bank.
4. Cooperative Bank
Cooperative banks in India are established under the State Cooperative Societies Act, providing easy credit to the members of the cooperative banks. One of the core functions of cooperative banks is to provide financial resources to the rural population at large. Examples of cooperative banks in India are – New India Cooperative Bank Limited, Ahmedabad Mercantile Co-operative Bank Ltd.
Types of Commercial Banks
There are four types of commercial banks in India. Those are –
1. Public Sector Banks
Commercial banks in India where the government holds majority stakes in the bank (that is more than 50%) fall under the category of public sector banks.
Examples of public sector banks in India are – Bank of Baroda, Canara Bank, Punjab National Bank etc.
2. Private Sector Banks
Commercial banks in India in which higher equity stakes are held by individual shareholders as opposed to the government fall under the category of private sector banks.
Apart from the shareholding structure, both public sector and private sector banks offer the same set of services. The aspects on which those are different involve charges that are imposed as well as the duration and description of the services that are provided.
Examples of such financial institutions in India are – HDFC Bank, Axis Bank, IndusInd Bank, ICICI Bank etc.
3. Small Finance Banks
The objective of Small Finance Banks in India is to provide financial inclusion to less privileged sections of the economy, which ordinarily fails to gain access to financial institutions. Small Finance banks cover small and micro business units, marginal and small farmers and various entities in the unorganised sector.
Examples of Small Finance Banks in India are – Janalakshmi Small Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank etc.
4. Regional Rural Banks
Regional Rural Banks in India have very specific mandates such as granting loans to marginal and small farmers cooperative societies, agricultural labourers along with small entrepreneurs and artisans among others.
These banks were established pursuant to the recommendations of the Narsimha Committee on Rural Credit. Examples of Regional Rural Banks in India – Kerala Gramin Bank, Pragathi Krishna Gramin Bank etc.
Commercial Banks and its Functions
The major functions of commercial banks include the following –
One of the primary functions of commercial banks is to accept deposits from its customers, which can be both individuals or business entities. The deposits may be in the form of time deposits, savings deposits, and current deposits.
The deposits that are taken by the commercial banks are further invested by way of granting loans to its customers. Banks derive profits in this manner. However, the lending of funds may take different forms such as cash credit, advances, discounting bills, overdraft etc.
Fund remittance, or money transfer in general vernacular, is also done by these commercial banks. Funds can be transferred in various modes such as IMPS, NEFT, RTGS, draft pay orders, etc., for specified commissions.
Cheque facilities provided by commercial banks also help in drawing funds. Money can be withdrawn both by the owner or the payee. The bearer cheques can be cashed immediately, but the crossed cheques can only be deposited in the account of the payee.
Services of General Utilities
Banks provide general utility services too. For instance, traveller cheques are issued, locker facilities provide for safe custody, and facilities of credit and debit card services.
Services as Agent
Commercial banks may also serve the role of agents to their customers by way of various services. Services may include a collection of cheques, drafts and bills, insurance premium payment, trustee or executor or customers’ estate etc.
What is e-Banking?
Electronic banking or e-banking engages electronic medium enabling customers to access their funds. It does away with the need of the customer to visit the bank premises for a transaction.
With greater penetration of the internet, it has become easier for customers to avail the facilities of e-banking. E-banking has become convenient for both bankers and customers. Banks have to bear reduced transaction costs and also significantly less margin for human error. The fixed costs also lessen considerably.
Customers enjoy greater access round the clock and do not have to visit bank premises. It helps to save both time and money for the customer. It also removes geographical distance in case of certain banking transactions.
Types of e-Banking
Both financial and non-financial transactions can take place over the internet. Customers can engage in various transactions such as remitting funds, checking balance and account statements, and also pay utility bills, among others.
Automated Teller Machine (ATM) is a computerised electronic device that allows customers to withdraw funds, change Personal Identification Numbers, and (in some cases) also deposit funds. It does away with the need for any human interface.
Mobile banking app is an online portal of a bank, similar to internet banking. The app may be downloaded in iOS or Android and can be accessed to avail the banking services. Apart from usual services, it can also be used to locate the ATM nearest to the customer.
Debit cards allow customers to access funds directly from the bank account. In such a case, the transaction amount is directly deducted from the account. One can use a debit card for shopping online, paying at POS outlets and also withdrawing cash from ATMs.
The banking landscape in India is undergoing major changes lately, which is bound to have far-reaching effects in the sector. To test your knowledge, find out answers to the following questions.
1. Which of the Following Banks have the Largest Number of Branches Right after the State Bank of India?
Punjab National Bank
Bank of Baroda
2. Which of the Following Entities Decides the Bank Rate?
Government of India
Reserve Bank of India
Securities and Exchange Board of India
State Bank of India
3. Where is the Reserve Bank of India head Office Located?
4. Which Nodal Institution Solely Focuses on the Aspect of Refinancing for Agriculture and Rural Development in India?
5. Which of the Following Commercial Banks has Merged with Bank of Baroda?
Indian Bank and Dena Bank
Andhra Bank and UCO Bank
Dena Bank and Vijaya Bank
Vijaya Bank and Corporation Bank
[The solutions to the questions have been mentioned at the end of the article]
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1. What is a Bank?
A bank, in its elementary form, is a financial institution that has been provided with due regulatory approval for extending loans and receiving deposits from its customers.
Apart from these core functions, a bank can also extend various other functions being consistent with its nature of being a financial institution. Other services that a bank may provide include exchange of currency, wealth management, and also safe deposit boxes, among others.
2. What are the Different Types of Banks in India?
The different types of bank in India are – central bank, commercial banks, specialised banks and cooperative banks.
3. Which Organisation Acts as the Central Bank in India?
The central bank is the Reserve Bank of India which is entrusted with the function to monitor, check and manage activities and functioning of all other banks in India.
4. What types of Financial Institutions can be Categorised as a Commercial Bank?
Commercial banks belong to the category of a financial institution that is regulated under the Banking Regulation Act 1949. One of their core functions is to receive a public deposit, and in turn, engage it in lending or investment. Examples of commercial banks in India are – Bank of Baroda and Punjab National Bank, among others.
5. What is the Primary Role of a Specialised Bank?
Specialised banks perform certain particular functions which include specific financial services towards foreign trade and special industries or agriculture. Examples of specialised banks in India are –Small Industries Development Bank of India (SIDBI), National Bank for Agricultural and Rural Development (NABARD), etc.
6. What is a Cooperative Bank?
Cooperative Banks are formed under the State Cooperative Societies Act. The banks are mandated to provide cheap credit and other financial options to its members. Examples of cooperative banks in India are – Andhra Pradesh State Co-operative Bank Ltd., Haryana Rajya Sahakari Bank Ltd. etc.
7. What is the Importance of a Bank?
Banks play a critical role in the economy. It renders various services to the people as well as the governments. However, the commonplace understanding of the services extended by banks includes providing access to service for savings.
On the business front, it extends loan advances to various businesses which are seeking to engage in investment or looking for expansion of a business. Such investments in businesses, as well as an extension of loan, can be held to be crucial for spearheading economic growth.
(b) Punjab National Bank
(b) Reserve Bank of India
(c) Dena Bank and Vijaya Bank