Today is the age of specialisation and we can find specialization in all fields including banking. The banks have specialised in a particular line of finance.
Various types of banks have developed to suit the economic development and requirements of the country. The principal banking institutions of a country may be classified into the following types:
(i) Central Banks
(ii) Commercial Banks
(iii) Industrial or Development Banks
(iv) Exchange Banks (Authorized dealers in foreign exchange)
(v) Co-operative Banks
(vi) Land Mortgage Banks
(vii) Indigenous Banks
(viii) Savings Banks
(ix) Supranational Bank
(x) International Banks
(i) Central Banks:
Central Bank is the bank of a country a nation. Its main function is to issue currency known as 'Bank Notes'. This bank acts as the leader of the banking system and money market of the country by regulating money and credit. These banks are the bankers to the government, they are bankers' banks and the ultimate custodian of a nations foreign exchange reserves.
The aim of the Central Bank is not to earn profit, but to maintain price stability and to strive for economic development with all-round growth of the country There is now hardly any country which does not have a Central Bank of its own. It acts as a great engine of growth of a State.
In India, the RBI was established in 1935 and this Bank has since been functioning as the Central Bank of the country (this is not to be confused with 'Central Bank of India', which is only a commercial bank).
The Central Bank of different countries is known by different names like Reserve Bank in India, Bank of England in U.K., Federal Reserve System in U.S.A., etc.
(ii) Commercial Banks:
A bank, which undertakes all kinds of ordinary banking business, is called a commercial bank. It is so called because it provides money and credit for commercial and trade activities. They receive short and medium term deposits from the public and grant short-term loans, and advances.
They supply working capital to industries and enable them to carry on production and manufacturing activities. They grant loans and advances on the stocks of agricultural commodities, industrial goods, etc.
They discount internal and foreign bills and thereby finance the International trade. They also perform certain agency services such as collection of cheques, dividends, interest on investments, issue of drafts, letter of credit, Travelers' Cheques, Investment Advisory Services, etc.
(iii) Industrial Banks or Financial Institutions:
An Industrial Bank is one which specialises by providing loans and fixed capital to industrial concerns by subscribing to share and debenture issued by public companies. They play an important role in the establishment and growth of industries.
The block capital required for the acquisition of fixed assets, etc., is supplied by investment banks. They provide long-term loans and credits for periods varying between 5 and 15 years for industries to acquire fixed assets.
They may serve as catalytic agents in mobilisation of capital in other forms of assistance such as, underwriting, guarantee, etc. These banks are nowadays grouped as 'Development Financial Institutions'.
These banks are very popular in Germany and Japan. In India, we have several Industrial Finance Corporations in addition to the "Industrial Development Bank of India".
Both, Development Financial Institutions and Commercial banks, nowadays, finance infrastructural development activities, which include construction of transport facilities, building of power-supply stations, etc.
(iv) Exchange Banks (Authorized Dealers in Foreign Exchange):
These types of banks are primarily engaged in transactions involving foreign exchange. They deal in foreign bills of exchange import and export of bullion and otherwise participate in the financing of foreign trade.
They do a number of incidental services such as opening of letters of credit, issue of Foreign Currency Drafts and Travellers' Cheques and supply of information about foreign customers. They provide credit and loans in foreign currency and also accept deposits in Foreign Currency.
They require huge capital and trained staff as it is a risky business. They maintain branches in foreign countries at important trade centres. In the past foreign banks operating in India would deal in foreign exchange and were known as exchange banks.
Nowadays, many Indian banks deal in foreign exchange with special authorisation from Reserve33ank of India and known as Authorised Dealers in Foreign Exchange. As per Foreign Exchange Regulation Act banks dealing in Foreign Exchange related activities require the permission of Reserve Bank of India. This is applicable to both Indian and Foreign Banks.
(v) Co-operative Banks:
They are organized on co-operative principles of mutual help and assistance. They grant short-term loans to the agriculturists for purchase of seeds, harvesting and for other cultivation expenses. They accept money on deposit from and make
(vi) Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks):
They are agriculture development banks. The Land-mortgage banks supply long-term loans for a period up to 15 years for development of land to improve agricultural yields. They grant loan for permanent improvements in agricultural lands.
They create negotiable bonds out of real estate like land, buildings, etc. They raise funds by floating debentures and by borrowing from the government. The Agriculture Finance Corporation was the first Indian Institution to set up finance for development of Agriculture.
The National Bank for Agriculture and Rural Development (NABARD) was constituted by the Government to promote rural development.
(vii) Indigenous Banks:
The Central Banking Enquiry Commission defined an indigenous banker as an individual or firm accepting deposits and dealing in indigenous lending of money to the needy.
They form unorganised part of the banking structure, i.e., these are unrecognised operators in receiving deposits and lending money. In India the Marwaris, the Multanis, the Jains, the Sowcars, the Nattukottai chettiars are some of the leading indigenous bankers who charge high rates of interest on their lendings. In rural areas, they still provide substantial finance to agriculturists and small traders.
(viii) Savings Banks:
These are institutions which collect the periodical savings of the general public. Their main object is to promote thrift and saving habits among the middle and lower income sections of the society. They have certain restrictions on number of withdrawals in a year to discourage spending.
In almost all countries, postal authorities also run savings bank accounts and their working is regulated by the government. The first savings bank was started in Hamburg in 1765. In India, we have postal savings accounts. These days separate savings banks as such are very rare.
In India, all commercial banks have savings accounts. The minimum balance which is required to be kept in the accounts differs from banks to banks.
The rate of interest payable on the accounts by banks is determined by RBI. Presently it is 4.5 per cent per annum. Co-operative banks are normally allowed to pay an additional 0.5 per cent interest per annum. Interest rate on savings accounts with post offices is determined by Government of India.
(ix) Supranational Banks:
Special Banks have been created to deal with certain international financial matters. World Bank is otherwise known as International Bank for Reconstruction and Development (IBRD) which gives long-term loans to developing countries for their economic and agricultural development.
Asian Development Bank (ADB) is another Supranational Bank which provides finance for the economic development of poor Asian countries. They generally provide finance at concessional interest rates and for long-term needs.
These institutions are the creations of World bodies promoted by various countries or central banks of different countries. The European Central Bank established in June 1998 by countries in the European Union is another example of Supranational Bank.
(x) International Banks:
International Banks are those which are operating in different countries. While, the registered office/head office is situated in one country, they operate through their branches in other countries.
They specialize in Banking business pertaining to foreign trade like opening of letters of credit, providing short-term finance in foreign currency, issue of performance guarantee, arranging foreign currency credits, etc. They are the main traders in International Currencies like US 'dollars', Japanese 'Yen', the new-born European Currency 'Euro', etc.
They also perform Currency Risk Management functions for clients. These banks are also known as Multinational Banks since, they operate from many countries.
These banks make possible the flow of money/credit from one country to from the above, it can be understood that the classification of banks cannot be rigid. We find that banks are providing finance in more than one field that is why, it is rightly said that they are "Departmental stores of Finance".