Unit III

CLASSIFICATION AND TYPES OF BANK

CLASSIFICATION OF BANKS BASED ON OWNERSHIP:
Based on the ownership the banks can be classified in to the following types:
1. Public sector banks:
This refers to a type of bank in which the major stake is held by the government and these banks will operate under
the guidelines framed by the Reserve Bank of India (RBI). Generally these banks are nationalized by the government
in India. State Bank of India (SBI), Bank of Baroda can be the examples of public sector banks in India.
2. Private sector banks:
This refers to a type of bank in which major stake is held by private businessmen and individuals. ICICI and HDFC
banks can be the examples of private sector banks in India.
3. Foreign banks:
This refers to a type of bank which is operating branches in different countries but the main headquarters of that
particular bank is situated in a foreign country.
CLASSIFICATION OF BANKS BASED ON STRUCTURE:
Based on the structure the banks can be classified in to the following types:
1. Unit bank:
This is a type of bank under which the banking operations are carried out by a single branch with a single office.
Generally the operations of the bank are classified are confined to a limited area.
Advantages:
a) Effective management and control
b) Attends to local interest
c) Close contact with the customers
d) Prevents monopoly formation
e) Quick decision making
Disadvantages:
a) Limited resources
b) Cannot provide complex banking services
c) Could not follow strict economic policies in granting loans
2. Branch bank:
In this branch banking system every bank as a single legal entity which is having one board of directors and a group
of shareholders and that bank operates through a network of branches throughout the country.
Advantages:
a) Larger mobilization of deposits
b) Risk spreading and bearing
c) Uniform interest rate
d) Remittance of funds
Disadvantages:
a) Ineffective remote control
b) Delay in decision making
c) Close contact with customers is not possible
d) Concentration of enormous funds in few hands.
3. Group bank:
Group banking is a type of banking in which there is a holding company, controlling the subsidiary companies which
are doing banking service. That holding company will have control over the subordinate banking companies.
4. Chain bank:
When different banks are under a common control through common shareholders or by the inter-locking of directors,
such banks are known as chain banks.
5. Correspondent bank:
When two banks of different structure and size are linked by another bank. The bank which links the banks of
different structures is known as a correspondent bank.
Classification of banks based on their functions
Based on the functions performed the banks can be classified into the following types:
1. Commercial banks:
Generally the main function of the commercial bank has been to attract deposits from the general public for shorter
periods and lend them to traders, industrials and other sectors of the people.
2. Industrial banks:
These banks stimulate the promotion of new industries and assist in the expansion and modernisation of existing
industries, furnishing technical and managerial aid to increase production by granting long-term and medium-term
loans etc.
3. Cooperative banks:
these banks were started to provide economically weaker sections i.e. agriculturists, landless labourers, artisans etc.
bank finance at lower interest rates.
4. Agricultural development banks:
These banks provide long-term loans to agriculturists for the purposes of purchase of agricultural machinery,
purchase of new land, soil conservation etc.
Statutory definition of Banking and Banking business:
Section 5(b) of the Banking Regulation Act, 1949 defines banking. This section defines the term banking as
“banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”
Section 5 (c) of the Banking Regulation Act 1949 defines banking company and banking business. The
section states that “banking company” means any company which transacts the business of banking in India.
Explanation — Any company which is engaged in the manufacture of goods or carries on any trade and
which accepts deposits of money from the public merely for the purpose of financing its business as such
manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause.
Modern Banking:
Modern Banking Systems also known as E-banking systems is a Windows access, full point-and-click, on-
premise provider offering Core Data Processing Solutions, Item Capture, Imaging Solutions, and Management
Information Systems[5]. All of these programs are an integral part of the core solution. Modern banking includes:
Internet Banking, Telephone/PC Banking, Network Systems and more! Customer gets his bank account ID and
password and he/she can check his account, pay his bill and print his/her receipt through his/her home personal
computer which is connected with Internet. E-banking is development of today’s banking system. In other words, e-
banking is electronic banking whose facility, can be taken through your regular broadband Internet connects. It is
available 24 hours a day. 7 days a week. So customer can do their jobs whenever they are free. They don’t have to be
bothered on their office time to pay for bills or withdraw cash etc on their work time. Superior software, flexibility,
ease of operations, quick access to critical management information, reliability and cost effectiveness are the keys to
the many system features.[6] Electronic banking systems consist of a service that allows you to conduct transactions
without physically being in a bank branch.
Wholesale Banking
Wholesale banking refers to banking services sold to large clients, such as other banks, other financial
institutions, government agencies, large corporations, and real estate developers. It is the opposite of retail banking,
which focuses on individual clients and small businesses. Wholesale banking services include currency conversion,
working capital financing, large trade transactions, mergers and acquisitions, consultancy, and underwriting, among
other services.

Definition:
Wholesale banking refers to the complete banking solution provided by the merchant banks to the large scale
business organizations and the government agencies or institutions. To avail the facility of wholesale banking, the
companies need to possess a strong financial statement and operate on a large scale. Usually, multinational
companies are the clients of wholesale banking.
KEY TAKEAWAYS
 Wholesale banking refers to banking services sold to large clients, such as corporations, other banks, and
government agencies.
 Typical services sold are mergers and acquisitions, consulting, currency conversion, and underwriting.
 Wholesale banking is the opposite of retail banking, which services individuals and small businesses.
 Most standard banks offer wholesale banking services in addition to traditional retail banking services.
 Wholesale banking also refers to the borrowing and lending between institutional banks.
Understanding Wholesale Banking

In its essence, wholesale banking is the financial practice of lending and borrowing between two large
institutions. The types of services are provided by investment banks that often also offer retail banking. This means
that an individual looking for wholesale banking wouldn't have to go to a special institution and could instead
engage the same bank in which he conducts his personal retail banking. The services that are considered
"wholesale" are reserved only for government agencies, pension funds, corporations with strong financials, and
other institutional customers of a similar nature. It is for entities that require more service than an individual or a
small business, and one that needs it on a large scale. Because of the large scale, the prices offered for these services
are typically lower than what is offered to an individual.

Features of Wholesale Banking

Features of Wholesale Banking
Large Scale Operations:
Wholesale banking majorly meets the enormous financial requirements of the large scale companies and the
government.
Low Operational Cost:
The cost of carrying out transactions and other banking operations is quite low due to a limited customer base and
few numbers of transactions.
High Risk Involved:
The risk level involved in wholesale banking is very high. T the failure of the borrower company can lead to the
collapse of all the parties associated with it.
Control Over Financial Transaction Monitoring and Recovery:
Due to limited customers, it becomes convenient for the banks to monitor the financial transactions and recover the
loans and advances.
Huge Impact on Non-Performing Asset:
If there is delay or default in the repayment of loans and advances provided under wholesale banking, the non-
performing assets of the bank increases.
High Cost of Deposit:
The interest rates paid by the banks on the deposits made by the substantial business entities is high.
Functions of Wholesale Banking
Wholesale banking is an entirely different concept and does not serve the purpose of small businesses or individual
clients.

Primary Functions
Some of the major services performed by wholesale banks are as follows:
Making Advances:
The principal purpose of wholesale banks is to provide loans and advances of high value to the large scale business
entities.
Accepting Deposits:
These banks also receive deposits from the big companies and provides high interest on the deposited funds.
Credit Creation:
The wholesale banks increase the flow of funds in the economy by initiating loans and deposits by the government
and large scale companies.
Secondary Functions
The banks have some additional responsibilities which hare mentioned below:
Underwriting:
The wholesale bank raises capital for the projects of large business organizations by issuing debt or equity shares to
the investors on behalf of the respective companies.
Mergers and Acquisitions:
Through operations like currency conversion, these banks facilitate the merger of two or more companies across the
globe and also the acquisition of one business unit by the other is organization.
Trust and Consultancy Services:
The merchant banks provide various other services like investment advice and trust-building to the client companies.
Fund Management:
The merchant banks continuously function towards managing and handling of the funds deposited by the clients
wisely.
Advantages of Wholesale Banking
We can now say that wholesale banking is a suitable option for the companies which need substantial financial
assistance from time to time and also for the ones looking forward to availing the opportunities for growth and
development.
The following are other benefits of wholesale banking:
Provides Extra Safety to Depositors:
In wholesale banking, the banks treat the deposited funds with a high level of safety and put the amount in
comparatively secured investment opportunities.
Low Transaction Fees:
The banks charge the transaction fees at a discounted rate for the customers of wholesale banking.
Facilitates Large Trade Transactions:
It supports the high-value transactions of the companies operating on a large scale.
Fulfils Huge Working Capital Requirements:
Large business associations require a considerable amount of funds to carry out day to day operations. Thus,
wholesale banking accomplishes this need by providing funds for working capital.
Lending to Government:
These banks even lend funds to the government of the country for carrying out various long-term projects.
Provides Cash Management Solution:
Wholesale banking also facilitates effective cash management, i.e. acquisition and investment of cash into the right
opportunity.
Drawbacks of Wholesale Banking
The transactions of wholesale banking involve a high amount of funds which makes it a complicated affair.
Let us now go through some of the limitations of wholesale banking:
High Risk:
As we know that the lumpsum transactions take place in wholesale banking, there is a high level of risk involved.
Expensive Business Accounts:
Maintaining accounts and records is a costly affair in wholesale banking when compared to traditional bank
accounts.
High-Interest Rates and Processing Fees:
The borrower company is liable to pay off high interest and processing fees on loans and advances to the banks.
Relies on Stability of Location:
When the company deposits a large amount at a single location, i.e. the wholesale bank, there is a risk of loss if the
bank faces a situation of downfall.
Payment for Unused Services:
In wholesale banking, there is always a complaint that the client companies have to pay even for those services
which are not used by them.
May Lead to Client’s Exploitation:
When the borrowed sum is of high value, there are chances that the borrower company may be exploited by the bank.
Retail banking refers to the provision of financial services by a bank to individual customers (private
individuals), rather than corporations, local and central governments and other banks.
The term ‘retail,’ in this context, means that the ‘consumer’ acquires or buys a product for personal use. In
this case, the consumer is the bank customer and the products are banking services.
Retail banking is different from investment banking, which deals just with companies, the trading of
securities, initial public offerings, M&As, etc., and wholesale banking, which is the provision of services to other
banks, mortgage brokers, large companies, and other financial institutions.
Services provided in retail banking include checking accounts , savings accounts, overdrafts, personal loans,
mortgages, credit/debit cards, safe deposit boxes, travelers’ checks (UK: cheques) and certificates of deposit.
Retail banks are commonly called high street banks in the UK and Ireland. In the US, they may be referred to
as commercial banks when differentiating from investment banks.
The upmarket end of retail banking, which is aimed at very rich people, is private banking. It is similar to
retail banking, but focuses on individuals with a minimum approx. $500,000 of investable money, and is tailor-made
for the preferences and requirements of each customer.
According to Cambridge Dictionaries Online, a retail bank is:
“A bank that provides services to the public and to small businesses rather than to large companies or
organizations.”
Types of Retail Banks

Retail Banks can be categorised into the following types:

1. Large Banks: These are the banks whose names you must be hearing at homes and the ones you’re familiar
with. Large banks have branches across the city.
2. Community Banks: Also known as small banks, these banks have a smaller share than large banks. They
operate at multiple locations and grant loans easily.
3. Online Banks: As the name says, these banks don’t have physical branches. However, the goal is to
minimize fees.
4. Regional Rural Banks: These banks are the ones established in rural areas to cater for the demands of the
low-income groups. These banks provide retail banking services and loans to such groups.
5. Private Banks: These are usually the banks that operate in urban areas and cater to the demands of the high-
level income groups
6. Post Offices: There are regions where people do not have access to regular banks. In such regions, the
National Postal System offers basic banking services like account opening, savings, recurring deposits, and
more.
Services Provided by Retail Banks

Retail banks provide various services to customers. These include –

1. Savings Bank Accounts: This banking service provides customers with the option to deposit money and
obtain interest on it.
2. Current Account: This service essentially includes a checking account, transaction account, and demand
deposit account.
3. Debit Card: This service is used to withdraw cash or make payments instead of cash from one’s saving
accounts.
4. Credit Card: Credit Cards are used just like debit cards to make payments. But here the payment goes from
the bank and the one withdrawing the money has to pay back the amount with certain additional charges as
levied by the bank.
5. Loans: One of the most widely availed services under Retail Banking includes loan services. This includes
home loans, auto loans for new/used vehicles, consumer loans, education loans, crop loans to farmers,
business loans for small scale businesses.
Advantages of Retail Banking

After having read about retail banking and the services offered by them, you might wish to know about the
advantages of this type of banking. Listed below are the popular advantages of retail banking that make it so widely
used
1. It provides an alternative for banks as well as individual customers.
2. The importance of retail banking lies in the advantages of the various services offered by banks.
3. Retail banking focuses on small units and individuals for earnings.
4. It has significantly increased earnings and businesses for banks.
5. In addition, it has also reduced operational costs and thus helped banks in creating a strong brand image in
the market among the general public.
6. It has enabled banks to develop customer relationships with their clients which has strengthened the
customer base.
7. The retail sector contributes to the revenue earned by banks as well as economic development.
8. It also reduces the risk for banks if they depend on loans for their incomes.
9. Most importantly, it provides a safe way to keep one’s savings and capital secure.

Introduction to Merchant Banking

Merchant banking is a professional service provided by the merchant banks to their customers considering
their financial needs, for adequate consideration in the form of fee. Merchant banks are banks that conduct
fundraising, financial advising and loan services to large corporations.

These banks are experts in international trade, which makes them experts in dealing with large corporations
and industries. Merchant banking provides funds to the multinational businesses and large business entities in the
country which helps to boost the country’s economic strength.

Merchant banks do not provide services to the general public; their services are limited to business entities
and large business corporations.

Merchant banker is a person who provides assistance for the subscription of securities. The merchant banker
plays an important role and carries a lot of responsibilities like, private placement of securities, managing
public issue of securities, stock broking, international financial advisory services, etc.

Functions of Merchant Banking

The functions of merchant banking in India are governed by Securities and Exchange Board of India (SEBI)
regulations, 1992.
Portfolio Management
Merchant banking provides investment advice to the investors to make the investment decisions. The merchant bank
provides portfolio managing assistance to the investors by trading securities on their behalf.
Raising funds for clients
Merchant banks assist clients in raising funds from the domestic and international market by buying securities.
Promotional activities
The merchant bank also helps in the promotion of the business institute in its initial stages. It helps the organisation
to work on their business idea and to get the approval from the government.
Loan Syndication
This is the service provided by merchant banks to its clients for raising credit from banks and financial institutions.
Leasing Services
Merchant banks also provide leasing services to their customers.
Merchant banking provides a lot of support and opportunities for new businesses. This in turn also has a positive
effect on the country’s economic growth.
Universal Banking
Universal banking is a system in which banks provide a wide variety of comprehensive financial services,
including those tailored to retail, commercial, and investment services. Universal banking is common in some
European countries, including Switzerland.
Under this type of banking a bank will deal with working capital requirement as well as term loans for development
activities. They will be dealing with individual customer as well as big corporate customers. They will have
expanded lines of business activities combining the functions of traditional deposit taking, modern financial services
,selling long -term saving products, insurance cover , investment banking etc.
Advantages of Universal Banking
Economics of scale :
Universal banking result in greater economics efficiency in the form of low cost,higher output and better products. In
India , RBI is in favour of universal banking because it result in economics of scale.
Profitable Diversions:
The banks can utilize its existing skill in single type of financial services in offering other kinds by diversifying the
activities. Therefore, it involves lower cost in performing all types of financial functions by one unit instead of other
institution.
Resources Utilization:
A bank possesses all types of information about the existing customers which can be utilized to perform other
financial activities with the same customer.
Easy Marketing :
A bank with established brand name can easily use its existing branches and staff to sell the other financial products
like insurance policies, mutual fund plans without spending much effort on marketing.
One-stop Shopping:
One-stop shopping is beneficial for the bank and its customers as it saves lot of transaction costs by increasing the
speed of economic activities.
Under one roof:
Universal banking offers all financial products and services under one roof. It save transaction cost and time.It also
increase the speed of work.Hence it is beneficial to bank as well as customer.
Investors trust:
Universal banks hold equity shares of many companies .These companies can easily get investors from public to
invest in their business . This is due to other investor have full confidence and faith in the universal banks.
Disadvantages of Universal Banking
No Expertise in Long Term Lending:
These are different types of long term loans like project finance and infrastructure finance, having long gestation
projects cannot properly handle by the single bank.
Non-Performing Assets problem:
One of the most serious problems faced by universal banking is Non-performing Assets.
Risk of Failure:
The larger the banks, the greater the effects of their failure on the system. The failure of a larger institution could
have serious for the entire banking system. If one universal bank were to collapse, it could lead to a systemic
financial crisis.
Concentration of Monopoly Power in the Hands of Few Banker:
 Universal banking sometimes creates monopoly power in the hands of few large bankers. Such a monopoly power in
the hands of a few big bankers is a source of danger to the community whose goal is a socialistic pattern of society.
Bureaucratic and Inflexible:
Universal banks tend to be bureaucratic and inflexible. They tend to work primarily with large established customers
and ignore or discourage smaller and newly established businesses.
Different Rules and regulations:
In offers all financial product and services under one roof.However ,all these products and services have to follow
different rules and regulation of RBI, SEBI, IRDA. This create many problems because same bank has to follow
different rules and regulation for different products.
Conflict of interest :
Combining commercial and investment banking can result in conflict of interest .some banks may give more
importance to one types of banking and less importance to another one.

Virtual Bankin/Cyber Banking/E-Banking/Online Banking

Internet Banking, also known as net-banking or online banking, is an electronic payment system that
enables the customer of a bank or a financial institution to make financial or non-financial transactions online via the
internet. This service gives online access to almost every banking service, traditionally available through a local
branch including fund transfers, deposits, and online bill payments to the customers.

Internet banking can be accessed by any individual who has registered for online banking at the bank, having
an active bank account or any financial institution. After registering for online banking facilities, a customer need not
visit the bank every time he/she wants to avail a banking service. It is not just convenient but also a secure method of
banking. Net banking portals are secured by unique User/Customer IDs and passwords.
Special Features of Virtual Bankin/Cyber Banking/E-Banking/Online Banking
Here are some of the best features of internet banking:

 Provides access to financial as well as non-financial banking services

 Facility to check bank balance any time
 Make bill payments and fund transfer to other accounts
 Keep a check on mortgages, loans, savings a/c linked to the bank account
 Safe and secure mode of banking
 Protected with unique ID and password
 Customers can apply for the issuance of a chequebook
 Buy general insurance
 Set-up or cancel automatic recurring payments and standing orders
 Keep a check on investments linked to the bank account

Services Available through the Virtual Bankin/Cyber Banking/E-Banking/Online Banking

Once a customer is registered for online banking, he/she can log-in to the respective online banking portal of his/her
bank using the issued User-ID and password.
 Services Available on the Virtual Bankin/Cyber Banking/E-Banking/Online Banking

Account Balance Check View Bank Statements NEFT & RTGS Fund Transfer

IMPS Fund Transfer Utility Bill Payment Start a Deposit

Open/Close a Fixed Deposit Make Merchant Payments Issuance of Cheque Book

Start Investments Buy General Insurance Recharge Prepaid Mobile/DTH

Check Mortgages, Loans Set-up/Cancel Automatic Payments Manage/Change Account Details

Book Online Tickets Buy/Sell on E-Commerce Platforms Invest and Conduct Trade

Advantages of Virtual Bankin/Cyber Banking/E-Banking/Online Banking

Given below are some advantages/benefits of Internet Banking available for all the users-

 24×7 Availability: Internet banking, unlike usual banking hours, is not time-bound. It is available 24×7
throughout the year. Most of the services available online are not time-restricted. Users can check their bank
balance, account statements and make fund transfers anytime instantly.
 Convenience of initiating financial transactions: Internet banking is largely preferred because of the
convenience that it provides while fund transfer and bill payments. Registered users can use almost all the
banking services without having to visit the bank and standing in queues. Financial transactions such as
paying bills and transferring funds between accounts can easily be performed anytime as per the convenience
of the user.

 Proper Track of Transactions: Acknowledgement slips are provided by the bank after transactions which
have a high possibility of getting misplaced. However, with internet banking, it becomes very easy to track
the history of all the transactions initiated by the user. Transactions and fund transfers made online are
organised in the ‘Transaction History’ section along with other details such as payee’s name, bank account
number, the amount paid, the date and time of payment, and remarks.

 Quick and Secure: Net banking users can transfer funds between accounts instantly, especially if the two
accounts are held at the same bank. Funds can be transferred via NEFT, RTGS or IMPS as per the user’s
convenience. One can also make bill payments, EMI payments, loan and tax payments easily. Moreover, the
transactions, as well as the account, are secured with a password and unique User-ID.
 Non-financial Transactions: Besides fund transfer, internet banking allows the users to avail non-financial
services such as balance check, account statement check, application for issuance of cheque book, etc.