The banking industry caters to various sections of society thus the focus of banking becomes varied, catering to the diverse needs of clients through different products, services, and methods. To meet this, we need distinctive kinds of banks addressing complex business & social needs. In this article, we will explain various types of banking institutions ranging from retail banks, commercial banks, co-operative banks, investment banks, central banks to various other types of specialized banks.
The focus of banking is varied, the needs diverse and methods different. Banking institutions offer an assortment of services from deposits in savings accounts to housing and business loans to check clearing, underwriting, and credit cards. The world is fast-changing and globalization in conjunction with technological advances is changing the landscape of the banking industry. Both individuals and business customers are demanding faster and innovative products & services. The banking industry is also heavily regulated and has its own share of challenges to deliver financial objectives to people and organizations.
Thus, distinctive kinds of banks are evolving to cater to various business demands, social needs, and global complexities. These different banking institutions conduct their operations in a different manner. However, on the basis of their functions, clientele served and products or services offered, we can classify banks as follows:
Retail banks provide basic banking services to individual consumers. Examples include savings accounts, recurring and fixed deposits and secured and unsecured loans. Products and services offered by retail banks include safe deposit boxes, checks and savings accounting, certificates of deposit (CDs), mortgages, consumer and car loans, personal credit cards, etc. The objective of retail banks is to provide services to individuals rather than commercial clients. They can be found in highly residential areas catering to the day to day banking needs of the public. They may additionally offer wealth management and consultancy to their clients. Some common examples of retail banks are community development banks, private banks, savings banks, and postal saving banks. They are explained below:
Provide services to underserved markets or populations, example Rural Banks in India, generally incentivized and regulated by the government.
Some private retail banks manage the assets of high-net-worth individuals and provide specialized services like wealth management.
These are deposit oriented branches, also could be an extension counter of an existing bank branch that accept savings deposits and provide basic banking.
Postal banks are the banks operated and controlled by National Postal Departments and provide basic banking services to retail customers. These banks are very effective in small towns and villages and provide financial inclusion to a section of society which otherwise would not have been catered by other banks.
Banking means accepting deposits of money from the public for the purpose of lending or investment. Deposit-taking institutions take the form of commercial banks, which accept deposits and make commercial, real estate, and other loans. Commercial banks in modern capitalist societies act as financial intermediaries, raising funds from depositors and lending the same funds to borrowers. The depositors’ claims against the bank, their deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly. Banks’ claims against their borrowers are much less liquid, giving borrowers a much longer span of time to repay money owed banks. Because a bank cannot immediately reclaim money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to withdraw all their money. The commercial bank serves the interests of its depositors by utilizing the funds collected in profitable ventures and in-return offers a variety of services to its customers.
Services provided by commercial banks include credit and debit cards, bank accounts, deposits and loans, and deposit mobilization. They also provide secured and unsecured loans. These commercial banks are the oldest institutions in banking history and generally have a wide network of branches spread throughout the area of their operations.
Commercial banks may either be owned by the government or maybe run in the private sector. Based on their ownership structure they can be classified as public sector and private sector banks.
Public sector banks are those in which the government has a major stake and they usually need to emphasize social objectives than on profitability. The main objectives of public sector banks is to ensure there is no monopoly and control of banking and financial services by few individuals or business houses and to ensure compliance with regulations and promote the needs of the underprivileged and weaker sections of society, cater to the needs of agriculture and other priority sectors and prevent the concentration of wealth and economic power. These banks play a revolutionary role in lending, particularly to the priority sector, constituting of agriculture, small-scale industries, and small businesses. In India, there are 27 public sector banks that have been nationalized by the government to protect the interests of the majority of the citizens. Some examples are State Bank of India, Union Bank of India, etc.
The private-sector banks are banks where the majority of their ownership is held by private shareholders and not by the government. Private sector banks are owned, managed and controlled by private promoters and they are free to operate as per market forces. To ensure their safety and smooth functioning there are generally entry barriers and regulatory criteria set like the minimum net worth etc. This ensures safety of public deposits entrusted with such institutions and they are also regulated by guidelines issued by Central Banks from time to time. Some examples of private sector banks in India are ICICI Bank, Yes Bank and Axis Bank.
Commercial banks play a very important role in the economic development of any country as they mobilize deposits that inculcates saving habit in the public. Commercial banks also facilitate payments through cheques and help happening of financial transactions without actual movement of cash providing a layer of security to comfort to such transactions. They also offer variety of business services like offering loans and credit facilities, allowing overdraft facilities, issuing letters of credit & guarantee (LC’s and LG’s). They also provide clearing services like discounting of bills, collection of cheques, drafts & bills of exchange etc. and facilitates remittance and receiving of money on behalf of its customers. The term “bank” has become synonymous nowadays and most often refers to these commercial banks.
The emerging environment offers ample opportunities for banks to venture into new and profitable areas. Also, due to deregulation, commercial banks are also now competing more with investment banks in money market operations, bond underwriting, and financial advisory work.
Cooperative banks are private sector banks. Co-operative banks are also mutual savings banks meant essentially for providing cheap credit to their members. A cooperative bank is a voluntary association of members for self-help and caters to their financial needs on a mutual basis. They accept deposits and make mortgages and other types of loans to their members. These banks are also subject to control and inspection by the Reserve Bank of India but they are generally governed by a different statue, which is more flexible and easy to comply with compared to central bank acts. In India, they are governed by the provisions of the State Cooperative Societies Act. Another type is credit unions, which are cooperative organizations that issue share certificates and make member (consumer) and other loans.
These institutions are an important source of rural credit i.e., agricultural financing in India. Co-operative banks get their resources from the issuance of their shares, accepting public deposits, and also taking loans from the state cooperative banks. They also get short and medium-term loans from the Reserve Bank of India. To enhance safety and public confidence in cooperative banks, the Reserve Bank of India has extended the Credit Guarantee Scheme to cooperative banks.
An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities. Investment banks aid companies in acquiring funds and they provide advice for a wide range of transactions. These banks also offer financial consulting services to companies and give advice on mergers and acquisitions and management of public assets.
Every country has a Central Bank of its own generally regulated by a special act. Central banks are bankers’ banks, and these banks trace their history from the Bank of England. It is called a Central Bank because it occupies a central position in the banking system and acts as the highest financial authority. The main function of this bank is to regulate and supervise the whole banking system in the country. It is a banker's bank and controller of credit in the country. They guarantee stable monetary and financial policy from country to country and play an important role in the economy of the country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official interest rates, acting as banker to the government and other banks, and regulating and supervising the banking industry.
These banks buy government debt, have a monopoly on the issuance of paper money, and often act as a lender of last resort to commercial banks. The Central bank of any country supervises controls and regulates the activities of all the commercial banks of that country. It also acts as a government banker. It controls and coordinates the currency and credit policies of any country. In India, the Reserve Bank of India is the central bank. It is the apex bank and the statutory institution in the money market of the country.
Specialized banks are dedicated banks that excel in a particular product, service, or sector and provide mission-based services to a section of society. Some examples of specialized banks are industrial banks, land development banks, regional rural banks, foreign exchange banks, and export-import banks, etc. addressing the specific needs of these unique areas. These banks provide distinctive services or products like financial aid to industries, heavy turnkey projects, and foreign trade. Some specialized banks are discussed below:
Industrial banks target to promote rapid industrial development. They provide specialized medium and long term loans to the industrial sector backed by consultancy, supervision, and expertise. They support industrial growth by rendering other services like project identification, preparation of project reports, providing technical advice and managerial services, etc. They also do underwriting of public issues by the corporate sector or help industrial units get finance through a consortium or provide a guarantee to other financial institutions. We have a number of such banks in India like the Industrial Development Bank of India (IDB), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India Ltd. (ICICI), Industrial Reconstruction Bank of India (IRBI), etc.
These banks support the development of agriculture and land. They provide long term credit to agriculture for purposes such as pump sets, tractors, digging up wells, land improvement, etc.
These banks get funding by issuing debentures, which are generally subscribed by the State Bank Group, other commercial banks, LIC, and Reserve Bank of India. These banks grant loans to farmers against the security of their land.
These banks support small and marginal farmers by extending credit to them in rural areas. They cater to the credit needs of small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs in rural areas. The RRB's are sponsored by scheduled banks, usually a nationalized commercial bank.
Import-Export banks are generally set up by government like central banks to promote trade activities in import and export. They support exporters and importers by providing financial assistance, acting as principal financial institutions, coordinating the working of other institutions engaged in export and import to facilitate the growth of international trade. They provide traditional export finance and also do financing of export-oriented units. The bank finances and insures foreign purchases of goods for customers unable or unwilling to accept credit risk. Some examples are Export-Import Bank of India (Exim Bank), Export-Import Bank of the United States, etc.
|Overview of Banking||What is Bank||Definition of Bank|
|History of Banking||Famous Banks||Gold Standard|
|Sectors in Banking||Segments in Banking||Different Types of Banks|
|Banking Transactions||Banking Operations||Banking Business Model|
|Banking Trends||Banking Value Chain||Banking Customers|
|Banking Functions||Bank Balance Sheet||Bank Revenue Model|
|Different Types of Payments||Modern Banking Products||Banking Regulations|
|Banking Projects||Banking Landscape||Risks in Banking|
|Types of Banks in India||Islamic Finance||Social Media in Banking|
|Digital Channels||Banking Challenges||Technology Risk|