Types of Banking

Having a good functioning banking system is one of the main facets of a developing country like ours. In India, we have numerous banks and types of banks where we can easily do our needful money transactions. The varied types of banking in the spectrum help and satisfy the needs of each sector of the country. There are banks for different sectors, one bank funds the local entrepreneurs, while another bank capitalizes the bug venture capitalist, while there are other sets of banks that work for the benefit of the agricultural sector.

Thus, we see, there are different types of banking in India, but before we move on to determine the various types of banking, let us refresh our memories about some basic concepts.

What is Banking?

The concept of banking encompasses such an industry that covers credit, cash, and various other financial transactions.

Bank meaning relates to such a financial institution that works in extending credit to its customers as well as storing their deposits. These deposits are further used by banks to grant loans to customers. It offers multiple services including saving accounts, checking of balances, and providing certificates of deposits, among others.

First, we will learn about the types of ‘bank accounts being maintained.

Types of Bank Accounts 

The major types of bank accounts are –

• Savings Account 

The facilities of savings account are only for savings purposes, and a bank is liable to pay interest on the funds which are deposited in the account. In India, the rate of interest for savings accounts ranges from anywhere between 4% to 7%.

• Current Account 

The current account mainly contains liquid deposits that are utilized for business purposes and not for savings or investments. No interest is paid on such an amount, and there are no maturity periods as well due to the continuous nature of the account.

• Fixed Deposit Account 

A particular sum of money is deposited in a fixed deposit account for a given duration. If a deposit is taken out before the maturity date, penalties will be imposed. Fixed deposits enjoy higher interest rates. The interest rate is subjected to variation from bank to bank and also periodic revisions.

• Recurring Deposit Account 

In the case of a recurring deposit account, a deposit will have to be made by the account holder at regular intervals for a specified period. The bank will have to pay the relevant rate of interest when the amount is repaid after the fixed period.

Now that we have refreshed our memories let us start with the topic at hand.

Types of Banking 

The types of banks in India can be divided into the following categories –

1. Central Bank 

The central bank in this country is the Reserve Bank of India (RBI) which acts as the apex body for regulating and monitoring all other banks in the country. It also acts as a banker to the government in certain situations. RBI is instrumental in laying down the repo rate, reverse repo rate, cash reserve ratio, and statutory liquidity ratio.

2. Commercial Bank 

Commercial banks perform the function for the public in terms of accepting profits or extending loans. These loans act as investments of the commercial banks intending to earn profit. Examples of commercial banks in India are the State Bank of India, United Bank of India, ICICI Bank, HDFC Bank, etc.

3. Specialized Bank 

Specialized banks are formed with the specific goals of catering to a particular industry or sector. It may focus on export and import or provide financial services to some specific industries. An example of a specialized bank in India is Export-Import Bank.

4. Cooperative Bank 

Cooperative banks in India are established under the State Cooperative Societies Act, providing easy credit to the members of the cooperative banks. One of the core functions of cooperative banks is to provide financial resources to the rural population at large. Examples of cooperative banks in India are – New India Cooperative Bank Limited, Ahmedabad Mercantile Co-operative Bank Ltd.

What are the Types of Commercial Banks?

There are four types of commercial banks in India. Those are –

1. Public Sector Banks 

Commercial banks in India where the government holds majority stakes in the bank (that is more than 50%) fall under the category of public sector banks.

Examples of public sector banks in India are – Bank of Baroda, Canara Bank, Punjab National Bank, etc.

2. Private Sector Banks 

Commercial banks in India in which higher equity stakes are held by individual shareholders as opposed to the government fall under the category of private sector banks.

Apart from the shareholding structure, both public sector and private sector banks offer the same set of services. The aspects on which those are different involve charges that are imposed as well as the duration and description of the services that are provided.

Examples of such financial institutions in India are – HDFC Bank, Axis Bank, IndusInd Bank, ICICI Bank, etc.

3. Small Finance Banks 

The objective of Small Finance Banks in India is to provide financial inclusion to less privileged sections of the economy, which ordinarily fails to gain access to financial institutions. Small Finance banks cover small and micro business units, marginal and small farmers, and various entities in the unorganized sector.

Examples of Small Finance Banks in India are – Janalakshmi Small Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank, etc. 

4. Regional Rural Banks 

Regional Rural Banks in India have very specific mandates such as granting loans to marginal and small farmers cooperative societies, agricultural labourers along small entrepreneurs and artisans among others.

These banks were established according to the recommendations of the Narsimha Committee on Rural Credit. Examples of Regional Rural Banks in India – Kerala Gramin Bank, Pragathi Krishna Gramin Bank, etc.

Commercial Banks and Its Functions

The major functions of commercial banks include the following –

• Deposits

One of the primary functions of commercial banks is to accept deposits from their customers, which can be both individuals or business entities. The deposits may be in the form of time deposits, savings deposits, and current deposits.

• Lending 

The deposits that are taken by the commercial banks are further invested by way of granting loans to their customers. Banks derive profits in this manner. However, the lending of funds may take different forms such as cash credit, advances, discounting bills, overdraft, etc.

• Remitting Funds 

Fund remittance, or money transfer in general vernacular, is also done by these commercial banks. Funds can be transferred in various modes such as IMPS, NEFT, RTGS, draft pay orders, etc., for specified commissions.

• Cheque Facilities 

Cheque facilities provided by commercial banks also help in drawing funds. Money can be withdrawn both by the owner and the payee. The bearer cheques can be cashed immediately, but the crossed cheques can only be deposited in the account of the payee.

• Services of General Utilities 

Banks provide general utility services too. For instance, traveller cheques are issued, locker facilities provide for safe custody, and facilities of credit and debit card services.

• Services as Agent 

Commercial banks may also serve the role of agents to their customers by way of various services. Services may include a collection of cheques, drafts, and bills, insurance premium payment, trustee or executor or customers’ estate, etc.

What is e-Banking?

Electronic banking or e-banking engages electronic mediums enabling customers to access their funds. It does away with the need of the customer to visit the bank premises for a transaction.

With greater penetration of the internet, it has become easier for customers to avail the facilities of e-banking. E-banking has become convenient for both bankers and customers. Banks have to bear reduced transaction costs and also significantly less margin for human error. The fixed costs also lessen considerably.

Customers enjoy greater access round the clock and do not have to visit bank premises. It helps to save both time and money for the customer. It also removes geographical distance in the case of certain banking transactions.

Types of e-Banking

• Internet Banking 

Both financial and non-financial transactions can take place over the internet. Customers can engage in various transactions such as remitting funds, checking balance and account statements, and also paying utility bills, among others.

• ATM 

Automated Teller Machine (ATM) is a computerized electronic device that allows customers to withdraw funds, change Personal Identification Numbers, and (in some cases) also deposit funds. It does away with the need for any human interface.

• Mobile Banking 

Mobile banking app is an online portal of a bank, similar to internet banking. The app may be downloaded on iOS or Android and can be accessed to avail of the banking services. Apart from usual services, it can also be used to locate the ATM nearest to the customer.

• Debit Card 

Debit cards allow customers to access funds directly from the bank account. In such a case, the transaction amount is directly deducted from the account. One can use a debit card for shopping online, paying at POS outlets, and also withdrawing cash from ATMs.

The banking landscape in India is undergoing major changes lately, which is bound to have far-reaching effects on the sector. To test your knowledge, find out answers to the following questions.

Bonus Round – Multiple Choice Questions

1. Which of the following Banks have the Largest number of branches right after the State Bank of India?

1. Canara Bank 

2. Punjab National Bank 

3. Bank of Baroda 

4. Indian Bank

2. Which of the Following Entities Decides the Bank Rate?

1. Government of India 

2. Reserve Bank of India 

3. Securities and Exchange Board of India 

4. State Bank of India

3. Where is the Reserve Bank of India head Office Located?

1. Kolkata 

2. Dehradun 

3. New Delhi

4. Mumbai

4. Which Nodal Institution Solely Focuses on the Aspect of Refinancing for Agriculture and Rural Development in India?

1. NABARD 

2. SIDBI

3. RBI 

4. SEBI

5. Which of the Following Commercial Banks has Merged with the Bank of Baroda?

1. Indian Bank and Dena Bank 

2. Andhra Bank and UCO Bank 

3. Dena Bank and Vijaya Bank

4. Vijaya Bank and Corporation Bank

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