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Banking and Its Types
What is a Bank?
A bank is a commercial institution that is authorized to accept checking and savings deposits and make loans. Banks also deal in services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.
Banks use the money deposited by their customers to extend loans. The interest earned from these loans is the source of earnings for the banks. Individuals and businesses can avail of loans from banks for personal or commercial purposes. They have to pay interest to banks for availing of the loans.
Types of Banks
There are various types of banks depending on their structure, such as retail banks, commercial banks, central banks, and cooperative banks.
The Reserve Bank of India (RBI) is the central bank of India. It is the regulatory authority and the bank for the government in India. It oversees almost all economic and financial policies related to banking and offers banking services to the government. RBI is instrumental in laying down the repo rate, the reverse repo rate, the cash reserve ratio, and the statutory liquidity ratio to control and manage the economy.
There are many commercial banks and their responsibility is to serve the citizens and others directly. In other words, commercial banks are the institutions that provide banking services to the public in the country. Their operations include accepting profits and extending loans to the public. The interests earned on loans act as the profit of the banks.
Examples − Some examples of commercial banks are the State Bank of India, Punjab National Bank, ICICI Bank, HDFC Bank, etc.
Specialized banks are created keeping special needs in mind. They cater to special sectors or industries and provide financial services to specific industries.
For example, the Export-Import Bank of India is a specialized bank.
Cooperative banks are created under the State Cooperative Societies Act and they serve the members of these banks. Cooperative Banks are usually meant for the rural population and these provide easy credit services to the members of these banks. Cooperative banks consider the account holders as their owners, and every account holder can avail of the benefits meant for investors in the bank.
Various Types of Commercial Banks
There are mainly four types of commercial banks. They are the following −
Public Sector Banks
In public sector banks, the government holds the majority stakes. In other words, the government owns more than 50% stakes in public sector banks. The decisions and rules made by the government are reflected in the public sector banks.
Public sector banks have a better organizational structure and greater penetration into the customer base due to their spread in geographical locations far and wide in the country. Moreover, the work culture and environment of private sector banks. As a result, professionals in public sector banks often do not try to meet targets and be the best performer in a team.
There is typically greater stress in public sector banks on providing necessary training to their personnel. That is done to help update the professionals’ knowledge and skills to be better performers in the long run. Job security is much higher in public sector banks than in private sector banks, and for some, this is the prime attraction for building a long-term career.
Private Sector Banks
In Private sector banks, the majority of the stake is held by private shareholders, not the government. As the private sector banks are run for maximum profit motive, the banks try to be more professional in functions and activity in comparison to public sector banks.
Although the largest commercial bank in India the State Bank of India is a public sector bank, the next few ranks are held by private sector banks. The private sector banks provide stiff competition to public sector banks because the management of private sector banks is considered more efficient.
Moreover, professionals in private sector banks have to meet stiff targets and play well in a team to earn more accolades. Therefore, private sector banks are superior in terms of work culture and talents to public sector banks.
Disadvantages of private sector banks include higher fees charged for services and their locations being mainly located in the cities. However, private sector banks are more efficient technologically which means services are more error-free and quicker in them. Private sector banks also provide additional services to attract customers from various backgrounds and persuade them to invest. Therefore, private banks also play a key role in the economic growth of a country.
Small Finance Banks
This is a specific segment of banking created by RBI under the guidance of the Government of India with an objective of expanding financial inclusion by primarily covering basic banking activities for un-served and underserved sections. The population served by small finance banks includes small and marginal farmers, small business units, micro, and small industries and unorganized entities. Like other commercial banks, these banks can get involved in activities, such as lending and taking deposits.
After announcing the Union Budget for the year 2014–15, RBI issued the guidelines for Small Finance Bank in November 2014. About 72 entities from across the segments applied while only 10 of these were provided with the license on 24th November 2014.
Regional Rural Banks
Regional Rural Banks in India have a very focused outlook, such as offering loans to marginal and small farmers' cooperative societies, agricultural laborers along small entrepreneurs, and artisans among others.
Regional rural banks were established following the recommendations of the Narsimha Committee on Rural Credit.
Examples of regional rural banks include Pragathi Krishna Gramin Bank, Kerala Gramin Bank, etc.
Banking is an indispensable part of the modern economy and through its services, banks help entrepreneurs build organizations. Therefore, banks are the backbone of the economy of the nation. Banks also offer the service of deposits through which account holders can save their incomes and earn incomes on their deposits to grow their money.
Banks also help businesses to grow by providing loans. By accessing loans from banks, businesses can grow and run smoothly. Banks also help by offering i8mport and export loans to increase the exports and imports which is a major thrust for the economic growth of a country.
Therefore, the importance of banking cannot be ignored in a growing economy and banking must flourish in a growing economy to provide the impetus to grow. That is why the Indian government has taken various steps to strengthen banking in India for creating a clear and transparent banking environment in the country.
Qns 1. Which bank is considered the banker of the government?
Ans. The Reserve Bank of India or RBI is the banker of the government in certain situations.
Qns 2. Which type of banking system is considered the banker of the general public?
Ans. Commercial banks are the banking system that serves the general public.
Qns 3. Give two examples of private sector banks.
Ans. HDFC Bank and ICICI Bank are private sector banks.
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