Banking Awareness 02: Types of Banking

Banks are Classified according to their basis, banks are the financial institutions which licensed to deal with the money and its substitutes by accepting the time and demand deposits, which making loans and investing in securities. the Bank generates profits from the difference in the interest rates charged and paid. Banks may also provide financial services, such as wealth management, currency exchange, and safe deposit boxes.

There were various Types of banking are as follows:-

Branch Banking:-

Branch banking involves the business of banking via branches. The branches are set up under Section 23 of Banking Regulations Act, 1949. A branch should cater to all banking services and include a specialized branch,  a satellite office, an extension counter, an ATM, administrative office, service branch, and a credit card center for the purpose of branch authorization policy. The advantage of branch banking is that it helps in better management, more inclusion, and risk diversification.  The disadvantage of branch banking is that it might encourage outside local influences.

Unit Banking:- 

Unit banking is a system of banking which originated in the US. It is a limited way of banking where banks operate only from a single branch taking care of the local community. In comparison to branch banking, the size of unit banks is very small. Due to the small size and due to unit structure; the decision making in unit banks is very fast. The management in unit banks enjoys more autonomy and more discretionary powers. However, due to single units, the risk is not distributed or diversified.

Mixed Banking:- 

Mixed Banking is the system in which banks undertake activities of commercial and investment banking together.  These banks give short-term and long-term loans to industrial concerns.  The banks appoint experts which give valuable advice on various financial issues and also help gauge the financial health of companies. Industries don’t have to run to different places for differential financial needs. They thus promote rapid industrialization. They may, however, pose a grave threat to the liquidity of a bank and lead to bad debts.

Chain Banking:- 

Chain banking system refers to the type of banking when a group of persons come together to own and control three or more independently chartered banks. Each of these banks could maintain their independent existence despite common control and ownership. The banks in the chains were assigned specific functions so there was no loss of profits and overlapping of interests.

Retail Banking:- 

Retail banking means banking where transactions are held directly with customers and there are no transactions with other banks or corporations. The banks provide all kinds of personal banking services to customers like saving accounts, transactional accounts, mortgages, personal loans, debt, and credit cards, etc.

It has provided immense benefits to customers who ultimately become loyal customers due to benefits like wide interest spreads, diversified credit risk, and stability. However, due to the increasing use of new technology, the operational costs for banks have gone up considerably.

Wholesale banking:- 

Wholesale banking involves banking services for high net-worth clients like corporate, commercial banks, mid-size companies, etc. India has a suitable investment climate and is seen as a favored investment destination so it has a huge potential for the growth of this vertical of banking. It provides an ease of access to the complete financial portfolio of a client who can easily browse through the same and make suitable allocations, transfers, etc. It can be equally risky for a firm if all the funds are parked in one place only and there is no diversification of risks.

Relationship Banking:- 

It is a Banking system in which the banks make deliberate efforts to understand the customer needs and offer them the products accordingly.

• It helps banks to gather critical soft information about the borrowers, which helps them to determine the creditworthiness of such clients.
• Clients too often become responsible and avoid moral hazard behavior.
• However, the banks may discourage borrowers to invest in high-risk projects.
• Clients can often renegotiate their loan terms and hence result in inefficient investments for banks.

Correspondent Banking:- 

It Prevalent in over 200 Countries which is a profitable way of doing business by banks in foreign countries in which they don't have a physical presence or limited operational permissions. Correspondent banks thus act as a banking agent for a home bank and provide various banking services to customers where otherwise the home bank does not operate.

• It helps customers to perform banking operations at ease even in places where their banks don't have a physical presence.
• Customers stay loyal to such banks as they get excellent customer services even in foreign lands.

Universal Banking:- 

It is a system of banking under which big banks undertake a variety of banking services like commercial banking, investment banking, mutual funds, merchant banking, insurance, etc. It involves providing all these services under one roof by financial experts who can handle multiple financial Products easily.

This helps to boost investor confidence and also makes the operations more cost-effective. However, different policy regulations for different financial products make the operations cumbersome and are a big drawback for banks.

Social Banking:- 

It is a concept where banking services are oriented towards mass welfare and financial inclusion of the poor and vulnerable segments of society. RBI has taken some of the commendable initiatives to make financial inclusion a reality for the remotest segments of the Indian population. Some of these are:

• Availability of OCT Based Business Correspondent Model for delivery of banking services at the doorstep of every household in the remote villages.
• To cover all villages with a population of over 2000 has been successfully completed by 2012.
• It is mandatory for banks to open 25% of new branches in rural areas which don't0 have to access to formal bankings.
• Basic Savings Bank Deposit Account has been introduced for all.
• KYC documentations have been considerably relaxed and simplified for small accounts.

Virtual Banking:- 

It is performing all banking operations online. this has Served as a great revolution in the banking market as banks have to continuously struggle for perfection to live up for the competition and stay ahead of it. As banks don’t have physical offices, they find the options very cost-effective. The banks thus they pass these benefits to all the customers in the form of waving of account fee (or) higher rates of interest.

Narrow Banking:- 

It is very much an antonym to the universal Banking. Narrow Banking means Narrow in the sense of engagement of funds and not in activity. So, Simply, Narrow Banking involves mobilizing the large part of the deposited in Risk-free assets such as Government Securities.

Islamic Banking:-

It is a banking or banking activity that is consistent with the principles of sharia and its practical application through the development of Islamic Economics.

Shadow Banking:- 

Shadow banking refers to all the non-bank financial intermediaries which provide services similar to those of traditional commercial banks. They generally carry out traditional banking functions but do so outside the traditional system of regulated depository institutions.