Banking and Its Type

Banking is essential for the economy as it helps individuals and businesses manage their finances by connecting savers with borrowers. Understanding banking and its various types is essential for Commerce students, as it enhances their knowledge of financial systems.

Bank Definition

Enroll now for Commerce Batches

Functions of Banking

• Accepting Deposits: Banks offer a secure place for individuals and corporations to deposit their money. They offer different types of accounts, such as savings and current accounts, ensuring that depositors' money is secure and accessible.
• Providing Loans: Banks lend money to individuals and businesses for various needs, like buying homes or expanding businesses. They charge interest on these loans, which helps them earn revenue while assisting borrowers in reaching their financial goals.
• Facilitating Payments: Banks make it easy for customers to carry out transactions. They offer services like cheques, debit and credit cards, and electronic fund transfers, allowing for smooth and secure payments and fund transfers.
• Financial Advisory Services: Many banks offer financial advice to help clients manage their money, investments, and assets. They guide clients on investment strategies, retirement planning, and wealth management.
• Currency Exchange : Banks facilitate currency exchange for international transactions. They help customers convert one currency into another, making it easier to engage in global trade and travel.
• Safekeeping of Valuables: Banks provide safe deposit boxes for customers to securely store valuable items, offering peace of mind for those looking to protect their possessions.
• Promoting Economic Development: By providing loans to businesses and individuals, banks play a vital role in economic growth. They help finance projects, create jobs, and stimulate overall economic activity.

Also Check: Money and Banking

Types of Banks

1. Central Bank

• Regulating Other Banks: The RBI supervises and regulates all other banks in the country, ensuring their compliance with laws and regulations.
• Issuing Currency: The central bank has the exclusive authority to issue and manage the currency used in the economy.
• Implementing Monetary Policies: The RBI formulates and implements policies that control inflation and stabilize the economy.
• Acting as the Government's Bank: It manages the government's accounts and facilitates its financial transactions.

2. Cooperative Banks

• Regulated by the RBI and the state government, they serve as the apex institution at the state level.
• Funded by the RBI, state government, and NABARD (National Bank for Agriculture and Rural Development).

3. Commercial Banks

Also Read: Functions of Commercial Banks

4. Regional Rural Banks (RRBs)

• Established in 1975, they focus on providing concessional credit to farmers and rural businesses.
• A total of 196 RRBs were formed between 1987 and 2005, although mergers reduced this number to 82 by 2005.
• Each RRB operates in specific geographical areas, typically serving up to three connected districts.

5. Local Area Banks (LABs)

• They are privately organized and registered under the Companies Act, of 1956.
• LABs primarily cater to the financial needs of small businesses and local communities.
• Currently, there are only four LABs in operation, all located in South India, emphasizing regional economic development.

6. Specialized Banks

• Small Industries Development Bank of India (SIDBI): Provides financial assistance to small-scale industries to promote entrepreneurship and support the growth of small businesses.
• EXIM Bank (Export-Import Bank): Facilitates international trade by offering loans and financial support for import and export activities.
• National Bank for Agricultural & Rural Development (NABARD): Focuses on rural and agricultural development, providing financial assistance for projects in these sectors.

7. Small Finance Banks:

• They offer various banking services, including savings accounts, loans, and insurance products.
• Governed by the RBI, these banks aim to promote financial inclusion and provide accessible banking services.
• Examples include AU Small Finance Bank, Ujjivan Small Finance Bank, and Equitas Small Finance Bank.

8. Payments Banks:

• Customers can deposit up to Rs. 1,00,000, but they cannot avail themselves of loans or credit cards.
• Payments banks focus on facilitating digital banking services, including online and mobile banking , and provide ATM and debit card facilities.
• Examples include Airtel Payments Bank, Paytm Payments Bank, and India Post Payments Bank.

Also Read: Banking and Finance Services