1.

1 Types of Banks

Generally, Banks are classified on the basis of their functions and operations. Following
are the important types of Banks:

1. Central Bank

Central Bank is the apex Bank in the any country. It controls and regulated the Banking
system in the country. It designs and implements the monetary policy and tries to bring the
monetary stability in the country.

Central Bank issues the currency notes and expands or contracts the note issue as per the
requirement of the economy.

Central Bank works as the Banker to the Banks. It controls the credit creation done by the
Commercial Banks. It is the lender of last resort for all types of Banks working under it’s
control. It works as a Banker to the Government and helps the Central Government in
formulation and implementation of the various economic policies.

Central Bank maintains the internal as well as external value of the currency. Thus, it
plays a vital role in the economic system of the country.

2. Commercial Banks

Commercial Banks accept various types of deposits and grant loans & advances to the
traders, businessmen, farmers, etc. as well as the needy people in the society. They play
prominent role in the Financial Market of the country. Also they occupy important place in
the Banking structure of the country. They are not supposed to do any business other than
Banking business of accepting deposits and granting loans & Advances.

Commercial Banks work usually in the private sector owned by the private shareholders.
There are some countries like Russia, France where all the Commercial Banks are owned by
the State. However, in India, major Commercial Banks have been nationalized for the benefit
of the weaker sections in the society. Thus, Indian Commercial Banks include Private Sector
Banks, public Sector Banks as well as the Foreign Banks.

Major portion of Banking business in the country is occupied by the Commercial Banks.
Besides accepting deposits and granting loans, they provide various types of utility services
and agency services to their customers and earn additional income through it.

3. Cooperative Banks

Cooperative Banks are promoted by the members to meet their banking and financial
needs. These Banks are based on the principles of self reliance and mutual help. They
perform the Banking functions like accepting deposits and lending money same like the
Commercial Banks.

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 Cooperative Banks are established both in rural as well as in urban areas. The rural
cooperative Banks supply finance for the agriculture and rural development while the urban
cooperative Banks provide finance to the urban citizens for various purposes like purchase of
household equipment, furniture, vehicle, homes, etc. They provide business loans to the small
and medium size business units on the security of certain assets and with a guarantee of
minimum two members as the guarantors.

Cooperative Banks are classified as the Urban Cooperative Bank, Land Development
Bank, etc. In India, Cooperative Societies including the cooperative Banks are regulated by
the provisions of the Cooperative Societies Acts of the separate States as the Cooperation
Ministry comes under the purview of the State Governments and not under the Central
Government. In Maharashtra, The State Cooperative Rules, 1962 are applicable to all types of
Cooperative Societies.

Three or Two Tier State supported Cooperative Banking Structure is seen in almost all
States in India. In Maharashtra, there is Three Tier Cooperative Credit Structure which
include State Cooperative Bank at Apex level, District Central Cooperative Bank at Middle
level and Primary Cooperative Credit Society at village level. Urban Cooperative Credit
Societies and Rural Non-Agricultural Cooperative Credit Societies also provide the banking
services like accepting the deposits and lending.

4. Development Banks

The Banks as well as the Financial Institutions which are established for the promotion and
development of the industry, agriculture, rural area, etc. and other key sectors in the
economy, are called as the Development Banks. These Banks aim at the social and economic
development of the country through their promotional and financing activities.

Development Banks are established by the Central Government by passing a Special Act
in the Parliament. State Government can also pass a resolution for the establishment of
Banking or Financial Development Institution at state level.

Development Banks may raise the funds by issuing shares and bonds. They provide
financial assistance in the form of long term loans for the development of housing, foreign
trade, etc. Expansion and modernization of industries are also financed by these Development
Banks.

Development Banks and Financial Institutions are classified as follows:-

a) Industrial Development Banks – IDBI, IFCI, SFCs, SIDBI, MIDC,etc.

b) Agricultural Development Banks – NABARD, Land Development Bank, etc.
c) Rural Development Bank – Regional Rural Bank
d) Housing Development Bank – HDFC, NHB, Grih Vitta Ltd., LICHFL., etc.
e) International Trade Development Bank – EXIM Bank

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 5. Indigenous Banks

Indigenous Banks are known by different names in different regions of our country. They
have been performing money lending business since ancient times in India. Still they are
active in the villages and even in urban areas as well. They grant loans to the needy people
out of their own funds on the mortgage of agricultural produce, gold ornaments, house, land,
etc. and a Promissory Notes. However, they charge very high rate of interest on the loans.

Generally, Money Lenders perform the joint business activities like farming, trading,
goldsmith, etc. along with their money lending business.

Marwari Money Lenders are found in majority parts of our county. The other examples of
Indigenous Bankers in various regions in India are as follows:

a) North India – Kabuli, Pathan, Multani, Baniya, Sahukar

b) Uttar Pradesh – Kishtwala
c) Bihar – Gosai
d) Orisa – Naga
e) Madhya Pradesh - Rohila
f) Maharashtra – Saraf, Mahajan
g) South India – Chettiayar
Nidhis and Chitfunds are also the popular indigenous Banking organizations
working in the southern parts of India.
6. Merchant Banking

“Merchant Banking means the Banking supporting the trade and business activities”.
Merchant Bank is not a separate type of Bank, but it is a separate type of functions performed
by the Commercial Banks. Big nationalised and private Banks perform the Merchant Banking
activities through their separate Divisions, Departments or Subsidiary Companies for the
benefit of the trade, business and industry.

Merchant Banks provide the following types of services:-

(i) Financing Domestic and International Trade

(ii) Raising of loans for overseas borrowers by new capital issues
(iii) Corporate Financial consultancy including issue of new securities, capital
reconstructions, mergers, acquisitions, etc.
7. Investment Banking

“Investment Banks assist business corporations and Government bodies to raise funds for
their long term capital requirement through the sale of shares, stock, debentures, bonds, etc”.

Investment Banks work as the middlemen between the business corporations and
investors. The functions of the Investment Bank include the following:-

1) Purchase of the entire issue of new securities of the business corporations or

government bodies and reissue them for the public subscriptions at a higher price.

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 2) Underwriting the issue of securities or acting an agent of the corporations for the issue
on commission basis.

Classification of Investment Bankers

1) Originators – They bring out the new issue of the corporate securities.
2) Underwriters – They underwrite the issue of the securities
3) Retailers – They retail the securities to the individuals and the institutional investors.
A single Investment Bank may act in all the capacities mentioned above.

8. Mixed Banking

“Mixed Banking means the extension of the operations of the Investment Banking to
the Commercial Banking field”.

In Mixed Banking, the funds collected from the depositors are used to underwrite the
shares and stock of the concerns in which the Bankers are directly interested.

Many times, the Banks performing mixed banking face the problem of liquidity. The fact
is that the deposits are mostly repayable on demand or short notice, but the same deposit
funds are invested by the Banks in the long term securities. It is the main reason of the
failures of many Mixed Banks in the past.

Hence, Investment Banking should not be mingled with the Commercial Banking. Many
countries have passed legislations to keep separate the existence of both the Investment
Banks and Commercial Banks.

9. Foreign Banks

“Foreign Banks are those Banks which have their Head Quarters in the countries other
than those where their branches are working”.

Functions of the Foreign Banks are as follows:-

1. Foreign Banks are mainly concerned with the financing of foreign trade.
2. They help in the remittance of money from one country to another country.
3. They discount the foreign bills of exchange.
4. They make the foreign currencies available to the importers and thus help the import
trade.
5. They are also engaged in buying and selling of gold and silver.
Standard Chartered Bank, City Bank, HSBC, Deutsche Bank, etc. are the examples of
Foreign Banks working in our country. The Branches of around 46 Foreign Banks from 23
different countries are engaged in banking business in India.