Author Name : Vandna Chouhan , BBA LLB 5th Year, S.N.D.T Women’s University, Mumbai
Synopsis : The article broadly deals with types of banks and their functions. There are various grounds on the basis of which banks are categorised. In India they are supervised by the Reserve Bank of India and established under Banking Regulation Act, 1949. Majorly banks in India perform functions such as accepting deposits, lending money etc.. The broad categories include cooperative banks, commercial banks, private sector banks, public sector banks, foreign banks and many more. We will discuss all these in detail and the basic functions which the banks perform in order to maintain stability in the market.
Banks in India are governed under Banking Regulation Act, 1949, Reserve Bank of India Act (RBI), 1934 and Foreign Exchange Management Act,1999 in India. Supervisory function for banks all over India is performed by the Department of Banking Supervision (DBS). A bank is a kind of Financial Institution.
In layman’s language a bank is a financial institution that performs important monetary functions such as collecting, lending, keeping or issuing of money from and to the people who are in a normal scenario a customer, another organisation or banks itself.
The definition of banks are given under Section 5 (b) banking regulation act, 1949.
In general “Banking” refers to the act of obtaining public deposits of money with the ability to be withdrawn by cheque, draught, order or other means and used for lending or investment purposes.
Banks are also a kind of company which are registered under banking regulation act, 1949. According to Section 5 (c) of the banking regulation act, 1949
“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;
Financial Institutions are Broadly classified into 2 Categories:
We are used to going to our regular banks for transactions of money but the functions of banks are not just limited to that. There are banks whose sole purpose is just lending money and collecting it back. Some banks are only for investing purposes and also provide services like Savings, Insurance, long term planning, EMI sanctions etc. Banks are classified based on their functions into various categories. Let us see the kinds of banks in detail below:
Banks in India are classified into various categories based on their structure & functioning. They are well regulated and each of the banks are well defined and are in a systematic manner. The banking system in India is of two types:
In an indigenous banking system, private businesses or individuals perform the role of banks by providing services like loans and deposits. These financial services are provided by so-called Indigenous Bankers. These local bankers often get mixed up with moneylenders, although they distinguish themselves clearly. Indigenous bankers who operate outside the jurisdiction of the government make up the indigenous banking system.
The Modern Banking System as the name suggests is the system that has evolved over time with the development of the country. It includes our regular banks and banks with E-banking, Online Transaction Facility etc. Let us see the further kinds of bank in India:
Central Bank as the name suggests is the apex body in the banking sector in every country. The Reserve Bank of India is the Central Bank of India. It was established under the Reserve Bank of India Act,1934 on the date April 1, 1935. The most common phrase used for the Central Bank is ‘Banker’s Bank’ as they deal with commercial banks on a regular basis rather than the general public.
Some of the main functions of Central Bank include:
In order to ensure monetary stability in India and generally to run the country’s currency and credit system to its advantage, The RBI oversees the issuance of bank notes and the maintaining of reserves. Additionally, it now has the authority to pursue an appropriate credit policy. The commercial banks’ cash reserves are under its management. Additionally, the Reserve Bank now has the authority to grant countrywide banking businesses licences.
Commercial banks are mandatorily incorporated under Banking Companies (Amendment) Act, 1956. They are mainly for profit purposes. They take public funds as deposits or lend money and perform other banking services and earn profits. These are the most common types of banks. Example: Axis Bank, City union bank, federal bank etc.
They are broadly categorised into Scheduled bank & Non-Scheduled bank :
2.1 Scheduled banks: These are defined under Section 2(e) of the RBI Act, 1934. Schedule bank is simply the banks which are included in Schedule 2 of the RBI Act,1934. The bank’s paid-up capital and raised funds must total at least Rs. 5 lakh for it to be regarded as a scheduled bank. They work with RBI to maintain a Cash Reserve Ratio (CRR). Scheduled banks are allowed to join clearinghouses and borrow money from the RBI at bank rates.
2.2 Non – Scheduled banks: Due to their failure to meet the minimal standards for allocation of resources, joint stock banks that are not listed in the second schedule of the RBI Act of 1934 are referred to as non-scheduled commercial banks. Less than Rs. 5 lakh worth of reserve capital is held by these banks. The bank cannot be a sole proprietorship or partnership; it must be a corporation.
Commercial Banks are also categorised in other categories that include:
2.3 Public sector Banks: These are banks where the majority shares and risks are owned by either central government, state government or central bank of India. Example : State Bank of India (SBI), Bank of Baroda etc.
2.4 Private sector Banks: These are banks where the majority shares and risks are owned by either private organisation, group of people or a person. Example: HDFC Bank Ltd, Kotak Mahindra Bank Ltd etc.
2.5 Foreign Banks: These are the banks owned by foreign individuals or organisations but their branches are present in India. There are more than 40 foreign banks in India. Example: CITI bank, Bank of Ceylon.
2.6 Regional Rural Banks (RRB) : According to the Government of India Scheme launched in August 1996, Local Area Banks were established. The government wanted to establish new neighbourhood banks that would have jurisdiction over two or three adjacent regions. The purpose of establishing local area banks was to make it possible for local institutions to mobilise rural funds and make them available for investments in the neighbourhood. Therefore, the main goal was to close the credit availability gaps in rural and semi-urban areas, improving the institutional credit system in those areas. Although the Local Area Banks can conduct all regular banking operations, their primary role has been to fund agricultural and related enterprises, small-scale industries, agro-industries, and trading / non-farm activities in rural and semi-urban areas.
2.7 Local Area Banks (LAB) : The Local Area Banks (LABs) are small private banks that were designed to operate in three adjacent districts, particularly in rural and semi-urban areas. They are low cost institutions that would offer efficient and competitive financial intermediation services. LABs were established to make it possible for local institutions to mobilise rural savings while also making them accessible for investments in the neighbourhood.
2.8 Small Finance Banks : Small Finance Banks in India were established with the purpose of bringing financial inclusion to less privileged segments of the economy, which typically do not have access to financial institutions. Marginal and small farmers, small business units, various unorganised sector companies, and small finance banks are all covered. Example : Equitas Small Finance Bank Ltd, Suryoday Small Finance Bank Ltd etc.
They are also governed by Section 56 in the Banking Regulation Act,1949. It is an entity founded on a cooperative basis to handle standard banking operations. In order to start a cooperative bank, money is raised through the sale of shares, along with deposits and loans. They are registered under the Multi-State Cooperative Societies Act of 2002 or the Cooperative Societies Act of the relevant State. Cooperative banks’ primary duty is to offer financial support to the entire rural community.
They are organised in 3 tier structure namely:
Tier 1 – State Level
Tier 2 – District Level
Tier 3 – Village Level
These are banks for specific purposes only. India has a large number of specialised banks that concentrate on the needs of business owners and provide all-encompassing assistance for the development of companies in particular industries, like manufacturing. As a result, they are referred to as “specialised banks” because they have a particular area of expertise. They don’t rely on individual deposits as a source of funding for your demands. Examples for Specialised are The Small Industries Development Bank of India (SIDBI), The Export-Import Bank of India (EXIM Bank).
The main objective of Exchange banks is to finance global trade. Money transfers between countries, the devaluation of foreign currencies, support for export and import activities, etc. are among an exchange bank’s main responsibilities. They also collect the revenues of bills drawn on Indian importers for products they have acquired. They buy and discount bills of exchange drawn by Indian exporters.
Bank of Tokyo and The Mercantile Bank are a couple of examples of exchange banks that operate in India.
A payments bank functions similarly to other banks but on a smaller scale and without taking on any credit risk. In plain English, it can perform the majority of banking tasks but not advance loans or issue credit cards. Demand deposits up to Rs 1 lakh can be accepted, along with remittance services, mobile payments/transfers/purchases, and other banking options like ATM/debit cards, net banking, and third-party cash transfers. Payments banks offer options for online banking, mobile banking, the issuance of ATM and debit card.
Functions & working vary according to numerous kinds of banks. But generally speaking, every bank serves two important purposes.
Primary Functions: First and foremost, banks operate to take our deposits, release them upon request, and issue loans to the general public. These are further divided into:
The primary function of banks is mobilisation of public funds and this is possible through public deposits. Here the role of a bank is that of a debtor and customer is a creditor. Bank safely keeps the money of the creditor and gives back when in need. Different type of Deposits include:
Apart from these there are also other categories but these are the main types of deposit accounts in India.
Banks use the public deposits they take to provide loans to businesses and individuals so they can weather financial turbulence. Banks pay greater interest rates on deposits than it does on loans and advances. Bank profit is the distinction between the lending interest rate and the interest rate for deposits.
Different kinds of Granting Loans include :
Secondary Functions: Apart from primary functions, banks also perform their own agency functions. For instance, they collect checks, transfer money, take care of assets, issue checks or credits, or conduct their own recurring collections.
The secondary functions may be sub-categorised into following :
Bank of Chittor v. Narsimbulu, AIR 1966
In this case, an individual pledged a movie projector with the bank; nonetheless, the bank permitted him to keep the projector so that the movie theatre may continue to operate. Given that something was done to alter the projector’s lawful possession in this case, the court determined that there had been a constructive delivery. Despite the fact that the person had the possession physically, the bank had the possession legally.
There are several kinds of banks in India that operate on a regular basis. Commercial banks are the ones we come across all the time. Banks perform very crucial functions. Banks serve as safe deposit boxes. They provide a comparatively safe location to keep money and assets safe while earning interest on these deposits, Interest on deposits is paid by commercial banks, and the amount is based on the kind of account.
For banks, money lending is an important source of revenue. Deposits are used by banks to make loans to qualified people and companies for investments or business growth.
Controlling the money supply via generating credit. Banks also handle currency exchange.
Additionally, banks offer a variety of services such as overdraft services, locker services, and ATM facilities. All the banks are regulated by Banking Regulation Act, 1949 and are under control of Reserve Bank of India.
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