PES UNIVERSITY, BENGALURU

(Established under Karnataka Act No. 16 of 2013)

UM21BC133B – Principles and Practice of Banking & Insurance

Unit II: Commercial banks and Central Bank

The banking sector is an important dimension of the Indian Economy. There are various
aspects to its evolution and nationalization in the post-independence era. With liberalization
and privatization, the banking sector has seen tremendous growth, immensely contributing
to the service sector of the economy. Reserve Bank of India is the Central Bank of our country.
It was established on 1st April 1935 under the RBI Act of 1934. It holds the apex position in
the banking structure. RBI performs various developmental and promotional functions.

Scheduled Banks
Banks which are included in the second schedule of RBI act 1934 are called scheduled bank.
All the scheduled banks in India carry the following features:
 eligible for debts and are loan on bank rate from RBI
 automatically acquires membership of a clearing house

In order to be listed in the second schedule of RBI Act at Bank much satisfy the following
eligibility criteria :
 The paid up capital and reserves together should not be less than INR 500000
 The Schedule consists of those banks which satisfy various parameters, criteria under
clause 42 of this act.
 Working of the bank should not be detrimental to the interest of the depositors

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  They should be either be a company as per Companies Act 1956 or a State
Cooperative Bank or a corporation or any institution notified by government of India
in this regard
 Every week the scheduled banks have to provide the details of the activities to the
RBI on the RRB cooperative banks Indian and foreign commercial bank belong to
scheduled banks category.

Non scheduled banks

Non scheduled banks as the name suggests that are not included in the second section of The
Reserve Bank of India Act 1934 are called Non scheduled bank.
 Their paid up capital is less than INR 500000
 They don’t conform to all the criteria under clause 42, but dully follow specific
guidelines as laid down by RBI.
 Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.
 Bangalore City Co-operative Bank Ltd. Bangalore, Baroda City Co-op. Bank Limited are
a few examples.
 Such bank are not eligible to borrow funds from RBI for regular banking requirements
unless in case of emergency
 Non scheduled banks are sometimes legal entity however they do not have procedural
support from the government .
 these bank have to reimburse compulsorily a reserve amount of INR 500000 to the
RBI and their capital must be held throughout their operational phase.
 Non scheduled banks are not bound to the rules and regulations of the RBI

They are required to maintain CRR cash reserve ratio with themselves and not with RBI.
Example: All local area banks are called the Non-scheduled banks.

Commercial Banks
A commercial bank is the one whose primary business is accepting deposits and extending
loans . these banks can be scheduled commercial or nonscheduled commercial.
Such banks cater to the banking needs of individuals, businesses, and organizations. Their
services consist of opening different types of bank accounts as well as providing loans to
businesses. The commercial banks in India originally focus on providing short term loans for
agriculture , trade and industry.

Public sector banks-

Public sector banks are the ones in which government on the majority of shares for example
the SBI is one of the public sector bank whose 58.6 0% shares held by the government. such
banks are further divided into Nationalised banks and state bank and its Associates .In a
Nationalised banks the central government supervises and regulate the functioning of

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Banking institution . However the central government gives minimising the shares in PSU
banks as and when it sells shares.
This is done to minimise the government shareholding in such banks.
Bank of Baroda Indian Overseas Bank Andhra Bank Central Bank of India are the examples of
public sector bank in India.

Private sector banks

These are the banks in which majority of equity is held by private entity corporation
Institutions or individual apart from the government and are control and Management.
Private promoters since 1969 banking in India has been dominated by public sector banks at
the time when all the major banks were nationalized by the Indian government after
liberalisation in 1990 Bank like HDFC ICICI got permission and now are the new age private
sector bank in banking sector of India public sector bank consists of seven 2.9% share was
arrested by private entities there are 22 private sector banks.

Foreign bank
Several studies have shown that foreign banks play a positive economic role, especially in
emerging markets, by increasing local banks’ efficiency. India is no exception.
A foreign bank is compelled to follow the guidelines of both the home as well as host countries
most banks generally open a foreign branch to Cater to the additional needs and
requirements of their multinational corporate clients.
Foreign banks tend to be more effective in the countries with high taxes and Nations where
It is easy for international firms enter the market .
The foreign bank work through financial body and the operate on several level in reality,
Bank transform into a smaller number of financial firm known as dealer who are directly
associated in large amounts of foreign exchange trading.

For example, suppose that Bank of America opens a foreign bank branch in Canada. The
branch would be legally obligated to follow both Canadian and American banking regulations
in many cases. In actual practice, foreign bank branches are sometimes exempted from
specific rules in one country or the other.

Regional Rural Banks

RRB were established in 1975 as per the Narasimham Committee recommendations under
the RRB Act 1976.
RRBs are supposed to operate with in a limited area for which they are established.
The regional rural banks are regulated and supervised by the NABARD. These banks are
licensed by the RBI under the Reserve Bank of India Act 1934.
The RRBs are owned by 3 entities with their respective share as below:
 Central Government 50%
 Sponsor Banks 35%

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  State 15%
In order to become eligible to open a new branch, an RRB should satisfy the following:
 No default in SLR and CRR management in the last two years.
 Operational profits to be made
 Improvements in net worth
 Net NPA (Non Performing Assets ) ratio should not exceed 8%

Development Banks
Introduction

Development Banks are special industrial financing Institutions. This concept is of recent
origin. These banks were mostly set up after World War II in both developed and
underdeveloped countries. The role of Development Banks is more pronounced in developing
countries where governments have taken upon themselves the task of accelerating the pace
of economic development.
Development Banks do not mobilise savings like other banks but invest the resources in a
productive manner.

Definition of a Development Bank

A Development Bank may be defined as a financial institution concerned with providing all
types of financial assistance medium as well as long term two business units.

Features of a Development Bank

● A Development Bank does not accept deposits from the public like commercial
banks and other financial Institutions who entirely depend upon saving
mobilisation.
● It is a specialised financial institution which provides medium term and long term
lending facilities.
● It provides financial assistance to both private as well as public sector institutions.
● The objective of this bank is to serve Public Interest rather than earning profits.

Development banking in India

1. In 1949 Reserve Bank had undertaken a detailed study to find out the
need for specialised InInstitutions.
2. It was in 1948 that the first Development Bank Industrial Finance Corporation of
India IFCI was established. IFCI was assigned the role of a gap filler and it was not
expected to compete with the existing channels of industrial finance.
3. The Industrial credit and Investment Corporation of India Limited ICICI was
established in 1955 as a joint stock company.
4. In 1964 Industrial Development Bank of India IDBI was setup as an Apex institution
in the area of industrial finance. IDBI was a wholly owned subsidiary of RBI and was
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 expected to coordinate the activities of the Institutions engaged in financing
promoting or developing industry.
Need for Development Banks
● Lay Foundation for industrialisation
● Meet capital needs
● Need for promotional activities
● Help small and medium sectors.

Objectives of Development Banks:

The main objectives of the development banks are:

1. They promote industrial growth.
2. To develop backward areas.
3. To create more employment opportunities.
4. They generate more exports and encourage import substitution.
5. To encourage modernization and improvement in technology.
6. To promote more self-employment projects.
7. The revive sick units.
8. To improve the management of large industries by providing training.
9. To remove regional disparities or regional imbalance.
10. They promote science and technology in new areas by providing risk capital, and.
11. To improve the capital market in the country.

Operational activities of Development Banks

1. Project appraisal and Eligibility of applicant - every financial institution serves a
particular area of activity are there are certain limits prescribed beyond which we
cannot go. Before processing the application, it is important to find out whether the
applicant is eligible under the norms of the institution or not.
2. The second aspect which is looked into is to determine whether the enterprise has
fulfilled various conditions prescribed by the government.
3.Technical appraisal - Technical appraisal involves the study of :
● Feasibility and suitability of Technical process in Indian conditions.
● The scale of operations and its suitability for the planned project.
● The technical soundness of the projects etc
4.Economic viability - The economic appraisal will consider the national and
industrial priorities of the project export potential of the product employment
potential, study of market.
5. Assessing commercial aspects- The examination of commercial aspects related
to the arrangements for the purchase of raw materials and sale of finished
products. If the

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 concern has some arrangement for sale then the position of the party should be
assessed.

6. Financial feasibility -the analysis of existing capital structure contribution of owners

debt equity ratio past performance help in assessing the financial position of the
concern and viability for investing in the project.
7. Managerial competence
8. National contribution
9. Balancing of various factors
10. Loan sanction -if the Advisory Committee is satisfied by the proposal than it
recommends the case to the Managing Director or board of directors along with
its own report.

11. Loan disbursement - the loan is disbursed after the execution of loan Agreement the
execution of Documents of security or guarantee etc should proceed the
disbursement of loan.

Promotional activities of Development Banks

1. Surveys of backward areas -surveys studied the availability of resurveys,

demand potential and availability of infrastructure facilities.
2. Establishing technical consultancy organisations
3. Entrepreneurial development programs.
4. Technological improvements- the main thrust of EPP'S has been to
institutionalize entrepreneurship activities, generating, sharpening and
sharing knowledge through research documentation and publication,
developing a cadre of professionals.

Industrial Finance Corporation of India (IFCI)

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 Government of India set up the Industrial Finance Corporation of India (IFCI) in July 1948
under a special Act. This is the first financial institution set up in India with the main object
of making medium and long term credit to industrial needs.

The Industrial Development Bank of India, Scheduled banks, insurance companies,

investment trusts and co-operative banks are the shareholders of IFCI. The Union
Government has guaranteed the repayment of capital and the payment of a minimum
annual dividend.

The corporation is authorised to issue bonds and debentures in the open market, to borrow
foreign currency from the World Bank and other organisations, accept deposits from the
public and also borrow from the Reserve Bank.

Functions:

The functions of the IFCI base as follows:

i) The corporation grants loans and advances to industrial concerns.

(ii) Granting of loans both in rupees and foreign currencies.

(iii) The corporation underwrites the issue of stocks, bonds, shares etc.

iv) The corporation can grant loans only to public limited companies and co-operatives
but not to private limited companies or partnership firms.

Activities of the IFCI:

The promotional activities of IFCI are explained below:
1.Soft Loan Assistance:
This scheme provides soft loan assistance to existing industries in small and medium sector
for developing technology through in-house research and development.
2.Entrepreneur Development:
IFCI provides financial support to EDPs (Entrepreneur Development Programmes)
conducted by several agencies all-over India. in cooperation with Entrepreneurship
Development Institute of India.
3.Industrial Development in Backward Areas:
IFCI also take measures to promote industrial development in backward areas through a
scheme of concessional finance.

Subsidized Consultancy:
The IFCI gives subsidized consultancy for,
(i) Small Entrepreneurs for Meeting the Cost of Project.
(ii) Promoting Ancillary Industries
(iii) To do the Market Research.

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 (iv) Reviving Sick Units.
(v) Implementing Modernisation.
(vi) Controlling Pollution in Factories.

Management Development:
To improve the professional management the IFCI sponsored the Management Development
Institute in 1973. It established the Development Banking Centre to develop managerial,
manpower in industrial concern, commercial and development banks.

Industrial Credit and Investment Corporation of India (ICICI)

The Industrial Credit and Investment Corporation of India was registered as a private
limited company in 1955. It was set up as a private sector development bank to assist
and promote private industrial concerns in the country.

Broad objectives of ICICI

(a) to assist in the creation, expansion and modernisation of private concerns;
(b) to encourage the participation of internal and external capital in the private concerns;
(c) to encourage private ownership of industrial investment.

Functions of the ICICI

(i) It provides long-term and medium-term loans in rupees and foreign currencies.
(ii) It underwrites new issues of shares and debentures.
(iii) It guarantees loans raised by private concerns from other sources.
(iv) It provides technical,managerial and administrative assistance to industrial concerns.

Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was set up in July 1964, as a wholly-owned
subsidiary of the Reserve Bank of India. It was given complete autonomy in February 1976.
Today, the IDBI is regarded as an apex institution in the arena of development banking. The
IFCI and the UTI are the subsidiaries of the IDBI. As an apex development bank, the IDBI’s
major role is to coordinate the activities of other development banks and term-financing
institutions in the capital market of the country.

Functions of the IDBI

1. Planning, promoting and developing industries with a view to fill the gaps in the
industrial structure by conceiving, preparing and floating new projects.
2. Providing technical and administrative assistance for promotion, management and
expansion of industry.
3. Providing refinancing facilities to the IFCI, SFCs and other financial institutions
approved by the government.
4. Coordinating the activities of financial institutions for the promotion and
development of industries.

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 5. Purchasing or underwriting shares and debentures of industrial concerns.
6. Guaranteeing deferred payments due from industrial concerns and for loans raised by
them.
7. Undertaking market and investment research, surveys and techno-economic studies
helpful to the development of industries.
In short, the IDBI is the leader, coordinator and innovator in the field of industrial financing
in our country. Its major activity is confined to financing, developmental, coordination and
promotional functions.

State-Level Industrial Development Banks: (SFCs and SIDCs)

Some of the kinds of institutions to study the state-level industrial development banks are:

1. The SFCs and

2. The SIDCs/SIICs.

At the state-level, too, there is a combination of financing agencies and industrial

development banks, mainly for the development of medium and small-scale industries in
respective states, with some emphasis on the industrial development of their backward
regions. They are State Financial Corporation’s (SFCs) which are primarily financing
agencies. Besides, most individual states have either a State Industrial Development
Corporation (SIDC) or a State Industrial Investment Corporation (SIIC). In 1994-95, there
were 18 SFCs and 26 SIDCs/SIICs.
The SFCs:
The SFCs came to be organized in individual states after the enabling Central Act to this
effect came into force in August 1952. They are state-level organizations for the provision
of term finance to medium and small scale industries. The share capital has been
contributed by the state governments, the RBI (transferred to the IDBI after its separation
from the RBI in February 1976), the IDBI, scheduled banks, insurance companies, and
others.
The two most important items of liabilities were bonds and debentures and borrowings
from the IDBI. The IDBI, which is the main source of loans, provides funds mainly in the
form of refinance. It also administers the International Development Association (IDA)
credit to them in the form of foreign currency loans. The SFCs also borrow from the SIDBI
and IDBI.
The SFCs are authorized to provide financial assistance in all the four major forms, namely
loans and advances, subscription to shares and debentures, underwriting of new issues,
and guarantee of loans from third parties and deferred payments.

The SIDCs/SIICs:
The SIDCs/SIICs came on the scene much after the SFCs. Whereas the SFCs of the state

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 governments and IDBI (earlier, the RBI) the SIDCs/SIICs have been set up entirely by state
governments. Besides providing finance, these institutions perform a variety of functions,
such as arranging for land, power, roads, licenses for industrial units, sponsoring the
establishment of such units, especially in backward areas, etc.

National Bank for Agriculture and Rural Development (NABARD)

National Bank for Agriculture and Rural Development (NABARD) was established on 12 July
1982 by an Act of the Parliament. NABARD, as a Development Bank, is mandated for providing
and regulating credit and other facilities for the promotion and development of agriculture,
small scale industries, cottage and village industries, handicrafts and other rural crafts and
other allied economic activities in rural areas with a view to promoting integrated rural
development and securing prosperity of rural areas, and for matters connected therewith or
incidental thereto.

Objectives

More than 50% of the rural credit is disbursed by the Co-operative Banks and Regional Rural
Banks. NABARD is responsible for regulating and supervising the functions of Co-operative
banks and RRBs. NABARD works towards providing a strong and efficient rural credit delivery
system, capable of taking care of the expanding and diverse credit needs of agriculture and
rural development.

Functions of NABARD

 Credit Functions: Framing policy and guidelines for rural financial institutions.
 Providing credit facilities to issuing organizations
 Monitoring the flow of ground level rural credit.
 Preparation of credit plans annually for all districts for identification of credit
potential.
 Development Functions:
 Help cooperative banks and Regional Rural Banks to prepare development actions
plans for themselves.
 Help Regional Rural Banks and the sponsor banks to enter into MoUs with state
governments and cooperative banks to improve the affairs of the Regional Rural
Banks.
 Monitor implementation of development action plans of banks.
 Provide financial support for the training institutes of cooperative banks, commercial
banks and Regional Rural Banks.
 Provide financial assistance to cooperative banks for building improved management
information system, computerisation of operations and development of human
resources.
 Supervisory Functions:

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  Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other
than urban/primary cooperative banks) under the provisions of Banking Regulation
Act, 1949.
 Undertakes inspection of State Cooperative Agriculture and Rural Development Banks
(SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
 Provides recommendations to Reserve Bank of India on issue of licenses to
Cooperative Banks, opening of new branches by State Cooperative Banks and Regional
Rural Banks (RRBs).
 Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks
and Regional Rural Banks (RRBs).

Types of Banking systems

Main Types
of Banking

Branch Unit Mixed Universal Investment

Banking Banking Banking Banking Banking

With development of banking institutions, various systems of banking have come into
existence. Generally most of the people refer banking system to the foundation of banking
institutions classified on the basis of functions namely, central bank, commercial banks, and
development finance institutions and so on.

Following is the structure of Banking System:

Banking system based of organizational characteristics:

 Branch banking
 Unit banking
 Chain banking
 Holding Company/group banking
Banking system based of techniques/functions:

 Deposit banking
 Investment banking
 Merchant banking
 Mixed banking

Whereas chain banking and group banking is associated with Unit Banking.
These modern banking systems had evolved through a historical process depending on socio
economic, political and geographical factors. Since historical experience varied from one
country to another. It is observed that Branch banking originated in the United Kingdom

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whereas the United States of America is the home of Unit banking. On the other hand, the
mixture of the two or hybrid system is found to be in operation in many countries of Asia and
Africa, more particularly in India and other countries of the Far East.

Banking system based of organizational characteristics:

1. Branch banking
Branch banking is a system where the banking business is carried on by single bank with a
network of branches throughout the length and breadth of the country. The bank will have a
head office in one town and branches in different parts of the country. The branch manager
in accordance with the regulations and policies of the head office directs the affairs of the
branch. Each bank is a single entity owned by a group of shareholders and controlled by a
group of directors.
A bank may decide to establish a branch banking organization, when regulation permit,
particularly if it serves a rapidly growing region and finds itself under pressure either to follow
its business and household customers as they move into new areas or lose them to more
conveniently located competitors.
In other words, we can say that it functions as an extension of the home location. It can be a
more cost-effective approach because not all the locations are required to offer the same
levels of services as the home location. This allows smaller offices to provide key services
while larger locations provide other additional services.
The advantage of branch banking is that it helps in better management, more inclusion and
risk diversification.

 Economics of Large Scale

 Spreading of Risk
 The economy in Cash Reserves
 Diversification of Deposits and Assets
 Decentralization of Risks
 Easy and Economical Transfer of Funds
 Cheap Remittance Facilities
 Uniform Interest Rates
 Proper Use of Capital
 Better Facilities to Customers – Better Banking Services
 Contacts with the Whole Country
 Uniform Rates of Interest
 Better Training Facilities for Employees
Disadvantages of the branch banking system are;
The disadvantage of branch banking is that it might encourage outside local influences.

 Difficulties of Management. Supervision and Control.

 Lack of Initiative.

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  Monopolistic Tendencies.
 Regional Imbalances.
 Continuance of Non-profitable Branches.
 Unnecessary Competition.
 Expensiveness.
 Losses by Some Branches Affect Others.

2.Unit Banking
In the Unit Banking System, the banking operations are carried through a single office and
confined to a particular area. The banks maintain no branches. Unit Banks, offer all their
services from one office, though a small number of services (such as taking deposits or casing
checks may be offered from limited service facilities, such as drive in windows, automated
teller machines, and retail store pint of sale terminals that are linked to the bank’s computer
system.
The major service of correspondent bank is clearing of cheques and movement of funds from
one place to another. Another valuable service rendered by the bank is strengthening the
financial resources of banks during tight money periods. It also acts as source of information
and helps in various banking operations.
Though a few branches are included, the actual size of the unit bank is small as compared to
branch banking.
Unit bank has an advantage due to the small size. The decision making is very fast as the
management enjoys more autonomy and discretionary powers at their disposal.
Also the risks are not diversified.
A customer having an account in a specified branch must undergo all banking activities
through that branch only.
Unit banking system is advantageous for the economy and local population.

 Local funds for local people.

 Intimate Knowledge of Customer.
 Efficient Management supervision and control.
 Discontinuance of inefficient branches.
 Better Service.
 Close Customer-banker Relations.
 No Effects Due to Strikes or Closure.
 No Monopolistic Practices.
 No Risks of Fraud.
 Closure of Inefficient Banks.
 Local Development.
 Promotes Regional Balance

Disadvantages of the Unit Banking System are

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  No Economies of Large Scale.
 Lack of Uniformity in Interest Rates.
 Lack of Control.
 Risks of Bank’s Failure.
 Limited Resources.
 Unhealthy Competition.
 Wastage of National Resources.
 No Banking Development in Backward Areas.
 Local Pressure.

3. Chain banking:
Chain banking refers to the system where one or few individuals control two or more banking
companies or by the same group of persons through purchase of shares of such banks.
4. Group Banking:
Group banking is a system where a group of banks are brought under the control of a holding
company. The holding company controls the affairs of all units in the group. But each bank in
the group maintains its separate identity. The purpose of group banking is to unify the
management of banks, to achieve economies of large-scale operation and to grab more
power.

Banking system based of techniques/functions:

1. Deposit banking
Receiving deposits and making advances for short period is called deposit banking. The underlying
principle of this system is that banks cannot lock up their deposits in long-term investment, as the
deposits are repayable on demand.

2. Investment Banking
During the second half of the 19th century the industrialization of Germany was made possible only by
the investment banks. When Germany wanted to industrialize the country, it did not have adequate
funds, secondly, moneyed people were unwilling to finance industries on their own. There was an
imperative need for an agency which would pool the resources and divert to the promotion and
development of industries. This necessitated the evolution of investment banking in Germany. The
banks did varied services like granting short and long term loans, subscribing to shares and
debentures, drawing and accepting bills etc.

The banks not only financed but also helped the promotion of new companies. The method of
promoting a company could be described as follows: whenever a proposal to start a company was put
forward, it was examined by experts of the bank. On its approval, a syndicate or Consortium was
formed, comprising a number be of joint stock banks and private men. Its members promised to
subscribe a portion of the capital of the proposed company. The bank which created consortium
became the agency to sell the shares. Subsequently the shares were brought before the public. The
consortium arranged for listing securities in the stock exchange also. The Consortium was generally
formed for a specific period after which it might be either dissolved or extended. On dissolution, the
profit or loss and unsold securities were shared between members in proportion to their participation.

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3.Mixed Banking
The banking system that combines deposit banking with investment banking is known as
Mixed Banking. Mixed Banking both commercial and investment banking activities are
undertaken together.
Mixed banking can be described as the dual functioning of investment banking and
commercial banking.
The mixed bank receives deposits from public and provides short term, medium term and
long term loan to industries. Mixed banking system refers to that banking system under which
the commercial banks make long term loans to industry.
In England, commercial banks are mainly concerned with supplying the short-term credit
requirements of trade and commerce. Generally, the commercial banks refrain from
supplying the long-term credit to the industry. In short, the British commercial banking system
keeps aloof from financing the long-term credit requirements of industries. Mixed Banking
promotes rapid industrialization.
Mixed Banking may however pose a grave threat to liquidity of a bank and lead to bad debts.
Alongside the task of providing capital to industries, mixed banks also perform the functions
of deposit banks.

Universal Banking:
Universal bank is the bank that provides all rages of financial services. It is the combination of
commercial banking and investment banking.
These common services include deposit taking, lending, financial leasing, payments services,
supplying guarantees and credit commitments, trading in money market instruments,
securities currencies, financial futures, options, and other interest bearing, or interest rate
hedging instruments, aiding issuers of new securities, advising on acquisition and mergers,
brokering funds, granting portfolio advice and management services, supplying safe keeping
services, and providing credit references.
Universal banking is a system of banking under which big banks undertake a variety of banking
services like commercial banking, insurance, investment banking, merchant banking, mutual
funds etc.
It involves providing all the above services to the customers under one roof by financial
experts who can handle multiple financial products.
This makes the banking operations economical and boosts investor confidence. However, if
these kinds of banks fail, it costs huge losses as well as causes a huge dip in consumer
confidence. The concept of Universal Banking was conceptualized by R.H. Khan in India.

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Retail banking
Retail banking is also known as the consumer banking. Retail banking is a type of banking
which is framed especially for individual consumers.
A retail bank which deals with individual customers by providing basic banking services like
savings and transactional accounts, mortgages, loans, card payments etc.
Retail banking involves banking transactions directly with the customers. Banks give all kinds
of personal banking services like savings accounts, current accounts, transactional accounts,
mortgages, personal loans, debit and credit cards etc. to the customers directly. Retail
banking is the type of banking that is visible to general public.
The main three important functions of retail banking is
Give Credit
Accept deposit
Money management
1.Give Credit
Banks offer credit to their clients for purchasing it also includes mortgages and loans. By
doing this banks will increase liquidity in the economy. this will lead to increase employment
and create more opportunities. .
2.Accept deposit
Banks are a secure place for those who want to deposit their savings. Banks will give a
higher rate of interest to savings accounts, certificates of deposits, and other financial
products.
3.Money management
The retail bank will help to manage money through accounts and cards. It will help to do
transactions online at any place.

Types of Retail Banks

1.Community Development Bank:
A community bank is a commercial bank which provides financial services to low to
moderate-income people.
2.Private Banks: -
Private Banks are who provides financial services to the high net worth clients with high
levels of income or assets. Private Banks will provide personal basis services.
3.Postal Saving Banks:
Postal saving banks provide services to those who don't have access to banks. Postal saving
banks are safe and convenient to save money. Postal saving banks are specially designed for
the poor section of society.

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Corporate banking
Corporate banking is a subset of business banking that involves a range of banking services
that are offered only to corporates. The services include the provision of credit, cash
management facilities, etc.
Corporate Banking Services
1. Credit
Loans and related credit products are offered to corporate customers. Credit facilities form
the largest share of profits for commercial banks . The interest rates imposed on the loans are
significantly high due to the amount of risk prevalent in lending to corporate customers.
2. Treasury services
Treasury services are used by companies to manage their working capital requirements. Such
services are extremely important for multinational companies as they facilitate currency
conversion.
3. Fixed asset requirement financing
Fixed asset requirement financing services are important for corporates involved in capital-
intensive industries such as transportation, information technology, and heavy machinery
manufacturing. Banks facilitate customized loans and lease agreements for the purchase of
equipment, machinery, etc.
4. Employer services
Commercial banks also provide services such as the selection of retirement plans and
healthcare plans, as well as payroll facilities, for employees.
5. Commercial services
Banks also provide services such as portfolio analysis, leverage analysis, debt and equity
restructuring, analyses of real assets, etc. Other services that are of importance to corporate
clients include asset management services and underwriters for initial public offering (IPOs),
etc.
The services are undertaken by the investment banking arm of the commercial bank.
Investment banking and corporate banking were separated under the provisions of the Glass-
Steagall Act.(The Glass-Steagall Act, also known as the Banking Act of 1933, is a piece of
legislation that separated investment and commercial banking).

Characteristics of Corporate Banking

1. Clientele
A bank’s business banking unit usually serves small to middle-sized businesses and large
conglomerates.

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2. Authority
A company’s corporate banking accounts can only be opened after obtaining consensus from
the board of directors of the company. It means that they must be authorized by an official
vote or a corporate resolution. The company’s treasurer usually opens corporate accounts.
3. Liability
Since companies are recognized as separate legal entities under the law, all contents of
corporate accounts are the property of the company and not of the individual board
members. It means that there is a certain degree of independence to corporate accounts. It
also indicates that the personal creditors of the board of directors are not entitled to the
contents of the corporate account of a company.
4. Credit rating
The conduct or functioning of the corporate account forms part of the credit history of the
company. It affects the valuation and share prices of the company, the interest rates
applicable to loans extended to the company, etc.
5.Bankers
Corporate banking requires a degree of expertise in the industry. Thus, corporate bankers are
extremely well paid. JP Morgan Chase, Bank of America Merrill Lynch, and Goldman Sachs are
some of the largest commercial banks in the world.

Private banking
Private banking involves providing banking, investment, tax management and other financial
services to high-net-worth individuals (HNWIs).
Private banking focuses on providing more personalized financial services to its clients,
through banking personnel specifically dedicated to providing such individual services.
HNWIs possess more wealth than the average person, and are, therefore, capable of
accessing a much larger variety of investments, such as hedge funds and real estate. Private
banking offers clients information and advice regarding what may be the most appropriate
investment options for them.
Most banks that offer private banking only accept clients with at least $5,000,000 in
investable assets. However, some banks allow individuals with $1,000,000+ in investable
assets to access some of the traditional personalized services offered through private
banking.
Features of Private Banking
1. Eligibility
Clients need to fulfill certain requirements to be eligible to benefit from private banking
services. It usually includes the maintenance of a minimum balance in the form of deposits,

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individual retirement accounts (IRAs), investments, or other types of assets. The minimum
amount deposited in the account may also include qualifying linked deposits and investments.
2. Dedicated Representation
Clients are allotted a dedicated relationship manager, or a team of people with a thorough
understanding of the asset ownership, risk aversion (or lack thereof), preferences, and long-
term financial goals of the client. The relationship manager facilitates check deposits, initiates
wire transfers, orders checks, etc.
3. Perks
Clients of private banking often receive benefits such as lower annual percentage rates
(APRSs) for mortgages, higher annual percentage yield (APY) on securities such as certificates
of deposits (CDs), free safe deposit boxes, etc. It is possible because charging even a small
amount of interest on a large loan generates substantial revenue for the bank.
4. High Management Fees
Clients need to pay large amounts of fees for the services rendered by private bankers.
5.Target Market
The affluent section of society is the major target market of private bankers. While executing
normal lending activities, they may access tax documents or other personal documents to
discover potential clients. However, the activities are also subject to considerations of
conflicts of interest.
Benefits of Private Banking
Banks target very affluent individuals because doing so earns them significant returns and
guarantees them regular income from clients. The clients of private banking benefit in the
following ways:
Privacy
Customer dealings/transactions and services offered to HNWIs typically remain anonymous.
Banks provide their private banking clients with proprietary products that they keep
confidential in order to prevent competitors from attempting to sell similar products to the
same clients.
High-net-worth individuals are attracted to the culture of privacy in private banking because
it offers them the ability to conceal personal information that, if publicly known, might give
their business rivals an undue advantage. They may also simply have a desire to keep their
personal financial dealings as private as possible. HNWIs are sometimes subjected to lawsuits
involving their investments. Keeping such information confidential gives them a greater sense
of security.
Discounted Services
A bank may offer discounted services to HNWIs as a reward for the large volume of business
that they bring to the bank. Services such as tax preparation, corporate checking, and estate
management are popular private banking services that may be offered at a discount.

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Clients involved in export and import businesses may receive attractive foreign exchange
rates. HNWIs involved in real estate benefit from the quick and timely processing of their
transactions through the lead advisors in charge of their accounts.

High Investment Returns

Banks often allocate their best-performing personnel to their private banking division to
manage the accounts of HNWIs. The practice typically translates to higher investment returns
for clients. The rate of return from private banking investments usually ranges between 7%
and 13%, and may sometimes go as high as 30%.
It is possible because, due to their extensive resources, wealthy clients can get exclusive
access to investment vehicles such as top-performing hedge funds, through their affiliation
with the bank. The client also gets professional advice from an experienced investment
professional on the best investment options offering a high rate of return.
Microcredit
Microcredit is an extremely small loan given to those who lack a steady source of income,
collateral or any credit history. It aims to support and kickstart entrepreneurs who are unable
to obtain the financial backing needed to start a small business or capitalize on an idea.
It is also more common in underdeveloped countries, as it is aimed to support people of a
lower socioeconomic background. Individuals who receive a microcredit loan may be
illiterate; thus, they are unable to apply for conventional loans due to the paperwork involved.
Microcredit is also part of microfinance, a line of finance that aims to help people of a lower
socioeconomic background through catered financial services, which include savings accounts
and loans.
Function of Microcredit
Microcredit was built on the concept that people with skills and more entrepreneurial
mindsets also came from impoverished countries that did not necessarily have access to
financial services that could suit them.
People who receive microcredit services typically live on a barter system, where goods or
services are exchanged for other goods or services, and currency is not used as a medium for
exchange.
The modern concept of microcredit is based on the Grameen Bank model. Micro credit loans
may not include any written contracts, and repayment starts immediately. As people pay off
microcredit loans, they gain credit and can take out more loans.
Microcredit loans may also charge interest, and some loans may include a covenant to set
aside a portion of income in a savings account as a form of collateral. If the loan is repaid, the
full amount in the savings account is available.

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Importance of Micro Credit
Micro Credit is important because it provides resources and access to capital to the
financially underserved, such as those who are unable to get checking accounts, lines of
credit, or loans from traditional banks.
Without microfinance, these groups may have to resort to using risky loans or payday
advances with extremely high interest rates or even borrow money from family and friends.
Microfinance helps them invest in their businesses and, as a result, invest in themselves.
Islamic Banking
Islamic Banking also known as non-interest Banking is a banking system purely based on the
principles of Islam (Sharia Law) and is guided by Islamic law.
Two fundamental principles of Islamic banking are the sharing of profit and loss and the
prohibition of the collection and payment of interest by lenders and investors. Islamic law
prohibits collecting interest.
The common practices of Islamic finance and banking came into existence along with the
foundation of Islam. However, the establishment of formal Islamic finance occurred only in
the 20th century. Nowadays, the Islamic finance sector grows at 15%-25% per year, while
Islamic financial institutions oversee over $2 trillion.
The main difference between conventional finance and Islamic finance is that some of the
practices and principles that are used in conventional finance are strictly prohibited under
Sharia Laws.
Principles of Islamic Finance
Islamic finance strictly complies with Sharia law. Contemporary Islamic finance is based on a
number of prohibitions that are not always illegal in the countries where Islamic financial
institutions are operating:
1. Paying or charging an interest
Islam considers lending with interest payments as an exploitative practice that favors the
lender at the expense of the borrower. According to Sharia law, interest is usury (riba), which
is strictly prohibited.
2. Investing in businesses involved in prohibited activities
Some activities, such as producing and selling alcohol or pork, are prohibited in Islam. The
activities are considered haram or forbidden. Therefore, investing in such activities is likewise
forbidden.
3. Speculation (maisir)
Sharia strictly prohibits any form of speculation or gambling, which is called maisir. Thus,
Islamic financial institutions cannot be involved in contracts where the ownership of goods
depends on an uncertain event in the future.
4. Uncertainty and risk (gharar)

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The rules of Islamic finance ban participation in contracts with excessive risk and/or
uncertainty. The term gharar measures the legitimacy of risk or uncertainty in
investments. Gharar is observed with derivative contracts and short-selling, which are
forbidden in Islamic finance.
In addition to the above prohibitions, Islamic finance is based on two other crucial principles:
Material finality of the transaction: Each transaction must be related to a real underlying
economic transaction.
Profit/loss sharing: Parties entering into the contracts in Islamic finance share profit/loss and
risks associated with the transaction. No one can benefit from the transaction more than the
other party.
Types of Financing Arrangements
Since Islamic finance is based on several restrictions and principles that do not exist in
conventional banking, special types of financing arrangements were developed to comply
with the following principles:
1. Profit-and-loss sharing partnership (mudarabah)
Mudarabah is a profit-and-loss sharing partnership agreement where one partner (financier
or rab-ul mal) provides the capital to another partner (labor provider or mudarib) who is
responsible for the management and investment of the capital. The profits are shared
between the parties according to a pre-agreed ratio.
2. Profit-and-loss sharing joint venture (musharakah)
Musharakah is a form of a joint venture all partners contribute capital and share the profit
and loss on a pro-rata basis. The major types of these joint ventures are:
Diminishing partnership: This type of venture is commonly used to acquire properties. The
bank and investor jointly purchase a property. Subsequently, the bank gradually transfers its
portion of equity in the property to the investor in exchange for payments.
Permanent musharkah: This type of joint venture does not have a specific end date and
continues operating as long as the participating parties agree to continue operations.
Generally, it is used to finance long-term projects.
3. Leasing (Ijarah)
In this type of financing arrangement, the lessor (who must own the property) leases the
property to the lessee in exchange for a stream of rental and purchase payments, ending with
the transfer of property ownership to the lessee.
Investment Vehicles
Due to the number of prohibitions set by Sharia, many conventional investment vehicles such
as bonds, options, and derivatives are forbidden in Islamic finance. The two major investment
vehicles in Islamic finance are:
1. Equities

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Sharia allows investment in company shares. However, the companies must not be involved
in the activities prohibited by Islamic laws, such as lending at interest, gambling, production
of alcohol or pork. Islamic finance also allows private equity investments.

2. Fixed-income instruments
Since lending with interest payments is forbidden by Sharia, there are no conventional bonds
in Islamic finance. However, there is an equivalent of bonds called sukuk or “Sharia-compliant
bonds.” The bonds represent partial ownership in an asset, not a debt obligation.

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