Define bank. Explain Different types of banks?
Solution:
A bank is a financial institution which deals with deposits and advances and other related services. Bank provides various services related to money or financial requirements of consumers.
1) Central Bank :
The central bank is the apex financial institution in the banking industry in the country. Every country has its own central bank. In India, The Reserve Bank of India (RBI) is the central bank. The RBI was established in 1945 under the Reserve Bank of India Act, 1944. Some functions of RBI are as follows:
i) Frames monetary policy
ii) Issues currency notes
iii) Acts as a banker to the Government
iv) Acts as a banker's bank to commercial and other banks in India.
2) Commercial Bank:
Commercial banks play an important role in the economic and social development of a country.
Commercial banks perform important functions such as:
Primary Functions i.e. accepting of deposits and lending of money and Secondary Functions i.e. agency functions and utility functions. In India, commercial banks are divided into three groups:
a) Public sector banks where the majority of the capital is held by the government such as Bank of India, State Bank of India etc.
b) Private sector banks are owned by a group of individuals such as AXIS bank, HDFC bank, etc.
c) Foreign banks are those banks that are established outside India but these banks have branches in India such as Citi Bank, HSBC, Standard Chartered, etc.
3) Co-operative Bank:
In India, co-operative banks are registered under Indian Co-operatives Societies Act and regulated under the Banking Regulation Act. Co-operative banks are popular in semi-urban and rural areas. The main aim of the co-operative banks is to provide credit to economically backward people, farmers, and small scale units. Generally, the co-operative bank works at three different levels:
a) Primary Credit Societies:
Primary Credit Co-operative society's work at the village level. They collect deposits from members and the common public.
b) District Central Co-operative Bank:
These banks operate at the district level. They obtain deposits from the public at the district level and also get funds from the State Co-operative Bank for the purpose of lending.
c) State Co-operative Bank:
This bank operates at the state level. They provide funds to the central co-operative banks and primary credit societies as required.
4) Industrial Development Banks:
These are financial institutions that provide medium and long term funds to the business firms Examples of development bank are Industrial Finance Corporation of India (IFCI), State Finance Corporation (SFC), Maharashtra State Finance Corporation (MSFC), etc. Some functions of the development bank are as follows:
i) Provision of medium and long term funds to business units for the purpose of expansion and modernization.
ii) Underwriting of shares issued by public limited companies.
iii) Purchase of debentures and bonds.
5) Exchange Banks:
The exchange banks as well as large commercial banks facilitate foreign exchange transactions. Examples of exchange banks are Barclays Bank, Bank of Tokyo, etc. Some functions of the exchange bank are as follows:
i) Financing foreign trade transactions.
ii) Issue of letter of credit (LC)
iii) Discounting of bills of exchange.
iv) Remittances of dividends, interests, and profits, etc.
6) Regional Rural Bank:
Regional Rural Banks (RRBs) were established in 1975. These banks are sponsored by large public sector banks. The capital of RRB is contributed by Central Government 50%, State
Government 15% and Sponsored Banks 35%. RRBs mobilize deposits primarily from rural and semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural laborers, and rural artisans.
7) Savings Bank:
The main objective of the savings banks is to encourage savings of the people, especially in rural areas. Examples of such banks include postal saving banks, commercial banks, and cooperatives banks.
8) Investment Bank:
These banks provide financial and advisory assistance to their customers. Their clients generally include business firms and government organizations. Investment banks facilitate mergers and acquisitions by undertaking research and providing advice on investment decisions. Generally, investment banks do not directly deal with the general public.
9) Specialized Banks:
These banks cater to the requirements and provide overall support for setting up a business in specific areas.
i) Export and Import Bank (EXIM): This bank provides financial assistance to exporters and importers.
ii) Small Industries Development Bank of India (SIDBI): This bank provides financing and development of the micro, small, and medium enterprise (MSME) sector.
iii) National Bank for Agriculture and Rural Development (NABARD): It is an apex institution for financing agricultural and rural sectors. NABARD provides both short term and long term credit through regional rural banks.
