Bank and Banking System

The banking sector is the lifeline of any modern economy. It is one of the important financial pillars of the financial system, which plays a vital role in the success / failure of an economy¹.

A bank is a profit-seeking business firm, dealing in money and credit². It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety. So also, it deals in credit.

According to Sayers “bank is an institution whose debts (bank deposits) are widely accepted in settlement of other people’s debt to each other”.

According to Crowther “the banker’s business is, to take debts of other people, to offer his own in exchange and thereby to create money”.

According to Banking Companies Act 1949, “a banking company in India is one “which transacts the business of banking which means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise”.

There are two distinct features of banking institution,

1. Accepting deposits
2. Lending them to others

Even though Post-office saving banks are also accepting deposits (Some of them also introduced the cheque system) from people, they are not regarded as banks in the true sense of the term, since they do not lend money. Similarly, there are some other financial institutions like UTI, LIC, IFCI, IDBI, etc., end money to others but not accept chequable demand deposits. Therefore there are not regarded as banks. They are called as non-banking financial institutions.

Types of Banks

Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, the following different types of banks have been instituted to cater to the varying needs of the communities³.

1. Commercial Banks
2. Co-operative Banks
3. Specialised Banks
4. Central Banks

Commercial Banks: A commercial bank may be defined as a financial institution that accepts demand deposits from the public which are chequable and also uses the money with it for lending. They usually give short-term loans and advances. The commercial banks in India are governed by Indian Banking Regulation Act-1948.

Co-operative Banks: Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative Societies Act of the states. These banks are essentially Co-operative credit societies organized by the members to meet their shortterm and medium-term financial requirements. They are based on the principles of selfreliance and mutual co-operation and provides cheap credit to their members.

Co-operative banking system in India has a three-tier structure, constituted by Primary Credit Societies, Central Co-operative Banks and State Co-operative Banks.

Specialised Banks: The following are the specialized forms of banks catering to some special needs with their unique nature of activities.

1. Foreign Exchange Banks
2. Industrial Banks
3. Land Development Banks
4. The Export-Import Banks of India (EXIM Bank).
5. Agricultural Refinance and Development Corporation (ARDC) etc.,

Central Banks: A Central Bank is the apex financial institution in the banking and financial system of a country. It is regarded as the highest monetary authority in the country. It is a financial institution primarily concerned with the ordering, supervising, regulating, and development of the banking system in the country. In India, Reserve Bank of India (RBI) is the Central Bank, which was established in 1935.

Banking System

According to differences in organisational structures, different types of banking systems have been developed and are in operation in different parts of the world. Some of the important banking systems and practices currently in operation are Branch Banking, Unit Banking, Correspondent Banking, Group Banking, Chain Banking, Deposit Banking, Investment Banking, and Mixed Banking.

• In Branch Banking System, each commercial bank is a very large institution, having a large number of branches scattered all over the country and even outside. Thus, branch banking is another name for delocalised banking, which carries on business through a number of offices. The best example of branch banking is perhaps British banking but now it has become popular in all other countries of the world.
• In the Unit Banking System, the bank’s operations are generally confined to a single office only. In this system, independent isolated units perform banking business. The American banking system still represents a typical example of unit banking which is predominantly a localized one. In the USA, unit banks are generally linked together, by the correspondent banking system.
• Corresponding Banking System refers to an arrangement with which small banks open account with the banks in the neighbouring cities and these banks in turn have accounts with giant banks in large cities. These banks also open deposit accounts in city banks and city banks in turn in smaller banks.
• Group Banking is a system where a group of banks are brought under the control of a holding company. The holding company controls the affairs of the units in the group. But each bank in the group maintains its separate identity. The purpose of group banking is to unify the management of banks, to achieve economic of large-scale operation and to grab more power.
• Chain Banking refers to the system where two or more banking companies are controlled by one or few individuals or by the same group of persons through purchase of share of such banks. Control can be exercised through common membership of Board of Directors also.
• Banks in Deposit Banking System are confined only to accepting deposits and lending for short periods to industries and trade. The underlying principle of this system is that, banks cannot lock-up their deposits in long-term investments, as the deposits are repayable on demand.
• Investment Banking refers to a system where banks provide long-term finance to meet the fixed capital requirements of the industries. Hence it is also called industrial banking.
• Mixed Banking System combines deposit banking with investment banking. The mixed banking receives deposits from public and provide short-term, medium-term and long-term loans to the industries.

For citing this article use:

• Challa, K. (2015). Equity share price determinants an empirical analysis.

Reference:

1. Bharathi.V.Pathak, Indian Financial System, Pearson Education.
2. Mithani & Gordon, Banking & Financial System, Himalaya Publishing House.
3. Mithani & Gordon, Banking & Financial System, Himalaya Publishing House.