A bank engaged in multifarious activities like providing working capital, term loans, doing investment business, consumer loans, housing loans, agricultural loans, advisory services, etc., require maintaining group of knowledgeable persons and experts in each field of activity.
For lack of proper appraisal of loan documents, verification of important information due to inadequate knowledge, staff or expertise the bank may slip into losing business.
Similarly, having a large number of customers may also result into many defaults in payments and consequently of more bad debts.
In order to obviate such pitfalls, a bank may be concentrating only on collection of deposits and lend or invest the money within a particular region or certain chosen activity like investing the funds only in Government Securities. This type of restricted minimum banking activity is referred to ‘Narrow Banking’.