Notes on Pure Banking and Mixed Banking

On the basis of lending operations of the bank, banking is classified into:

(a) Pure Banking

(b) Mixed Banking

(a) Pure Banking:

Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialise in short-term finance only.

This type of banking is popular in U.K. In U.K., Special institutions like investment houses, finance corporations were established for providing long-term finance. Hence, it is argued that com­mercial banks should provide only short-term loans. It is stressed on the lines of safety and liquidity.

(b) Mixed Banking:

Mixed banking is that system of banking under which the commer­cial banks perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking.

Commercial banks usu­ally offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking where banks are permitted besides, lending activity, invest­ment functioning also.

In India, Banks are permitted to undertake limited investment acti­vity. In USA commercial or credit banks are not permitted to undertake investment activity. Banks in Switzerland, Denmark, Japan also provide long-term loans.

Advantages

Mixed Banking has the following advantages:

(i) Credit requirements are fully satisfied.

(ii) Banking resources are utilized for industrial development.

(iii) Industries can mobilize greater finance resources through these banks.

(iv) Investment guidance to general public.

(v) Expert guidance and advice to industries.

(vi) Direct contact with industries.

(vii) Promote rapid industrial development through investment banking.

Disadvantages

(i) Threat to stability of Banks- the stability of the bank may be affected if the prices of Securities in which banks have invested depreciate.

(ii) Liquidity of banks may be affected, if the securities are not traded in the market.

(iii) Possibility of engaging in speculative business

(iv) Scope for over lending.

After the Second World War, underdeveloped countries began to show much interest on mixed banking. In recent years, there has been a favourable trend towards mixed bank­ing in India because of the following reasons:

(a) Increase in the volume of deposits.

(b) Increase in time deposits than demand deposits.

(c) RBI initiative to strengthen the banking system.

(d) After nationalisation, the Government encouraged the public sector banks to grant long-term loans to small scale industries and entrepreneurs. It, is made on the grounds of rapid industrialisation in the country.

(e) A realisation that overall growth depends upon development of capital market also.