Types of Banks in India | Its Functions | Banking in India
Banks are a very important part of Financial Structure of any country because they provide financial services to both consumers and businesses. As financial services providers, they offer you a safe place to store your money. Banks provide credit to individuals and companies. As with any other business, the purpose of the bank is to make profit for its shareholders. Banks do this by charging higher interest rates on loans than paying on deposits. Using a simple example, a bank that pays 4% interest on savings accounts and then charges 10% interest on the loan gets a total profit of 6% for its stakeholders.
What is a Bank?
In simple words, A bank is an Financial Institution, Government or Private owned, that deals with money and provide services like debit and credit. It accepts deposits from the public, makes the funds available to those who need them, and helps in the remittance of money from one place to another.
Types of Banks in India
Functions of Banks
A Bank perform following functions.
- It deals with money; it accepts deposits and advances loans.
- It also deals with credit; it has the ability to create credit, i.e., the ability to expand its liabilities as a multiple of its reserves.
- It is commercial institution; it aims at earning profit.
- It is a unique financial institution that creates demand deposits which serve as a medium of exchange and, as a result, the banks manage the payment system of the country.
Types of Banks in India
Banks can be classified into various types on the basis of their functions, ownership, domicile, etc. The following are the various types of banks.
Central bank is the apex institution, which controls, regulates and supervises the monetary and credit system of the country. Important functions of the central bank are:
(a) It has the monopoly of note issue.
(b) It acts as the banker, agent and financial adviser to the state.
(c) It is the custodian of member banks reserves.
(d) It is the custodian of nation’s reserves of international currency.
(e) It serves as the lender of the last resort.
(f) It functions as the bank of central clearance, settlement and transfer.
(g) It acts as the controller of credit. Besides these functions, India’s central bank, i.e., the Reserve Bank of India, also performs many developmental functions to promote economic development in the country.
The main purpose of saving banks is to promote saving habits among the general public and mobilize their small savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates.
Commercial Banks perform all kinds of banking business and generally finance trade and commerce, are called commercial banks. Since their deposits are for a short period, these banks normally advance short-term loans to the businessmen and traders and avoid medium-term and long-term lending. Majority of the commercial banks are in the public sector. However, there are certain private sector banks operating as joint stock companies. Hence, the commercial banks are also called joint stock banks.
Industrial banks, also known as investment banks, mainly meet the medium-term and long-term financial needs of the industries.
The main functions of the industrial banks are:
- They accept long-term deposits.
- They grant long-term loans to the industrialists to enable them to purchase land, construct factory building, purchase heavy machinery, etc.
- They help selling or even underwrite the debentures and shares of industrial firms,
- They can also provide information regarding the general economic position of the economy. In India, industrial banks, like Industrial Development Bank of India, Industrial Finance Corporation of India, Slate Finance Corporations, are playing significant role in the industrial development of the country.
Agricultural credit needs are different from those of industry and trade. Industrial and commercial banks normally do not deal with agricultural finance. The agriculturists require:
- short-term credit to buy seeds, fertilizers and other inputs, and
- long-term credit to purchase land, to make permanent improvements on land, to purchase agricultural machinery and equipment, etc. In India, agricultural finance is generally provided by co-operative institutions.
Agricultural co-operatives provide short term loans and Land Development Banks provide the long-term credit to the agriculturists.
Exchange banks deal in foreign exchange and specialize in financing foreign trade. They facilitate international payments through the sale, purchase of bills of exchange, and thus play an important role in promoting foreign trade.
Types of Banks on the Basis of Ownership
Public Sector Banks
These are owned and controlled by the government. In India, the nationalized banks and the regional rural banks come under these categories.
Private Sector Banks
These banks are owned by the private individuals or corporations and not by the government or co-operative societies.
Co-operative banks are operated on the cooperative lines. In India, cooperative credit institutions are organized under the cooperative societies law and play an important role in meeting financial needs in the rural areas.
Types of Banks on the Basis of Domicile
Domestic Banks are registered and incorporated within the country.
Foreign Banks are foreign in origin and have their head offices in the country of origin.
Scheduled and Non-Scheduled Banks
In India, banks have been broadly classified into scheduled and non-scheduled banks. A Scheduled Bank is that which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 and fulfills the three conditions.
- It has paid-up capital and reserves of at least Rs. 5 lakhs.
- It ensures the Reserve Bank that its operations are not detrimental to the interest of the depositors.
- It is a corporation or a cooperative society and not a partnership or a single owner firm. The banks which are not included in the Second Schedule of the Reserve Bank of India Act are non-scheduled banks.
- A bank is a financial institution licensed to receive deposits and make loans.
- There are several types of banks including retail, commercial, and investment banks.
- In most countries, banks are regulated by the national government or central bank.