Types of Banking Posted on : 26-02-2019
Posted by : Admin
There are several different types of Banking. All these types of banking serve various of needs of the customers. So come let us study each of these,
Branch banking involves banking activities like accepting deposits or extending loans at facilities or locations much away from a bank's home office or headquarter.
Branch banking allows a financial institution to expand its services to an area outside home location. In other words, we can say that it functions as an extension of the home location. It can be a more cost-effective approach because not all the locations are required to offer the same levels of services as the home location. This allows smaller offices to provide key services while larger locations provide other additional services.
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.
As the name indicates, all the operations of the bank are performed from a single branch in unit banking.
As it operates only from a single branch, it is a limited way of banking.
Some time a few branches may be included in unit banking to take care of the local population of that area.
Though a few branches are included, the actual size of the unit bank is small as compared to branch banking.
Unit bank has an advantage due to the small size. The decision making is very fast as the management enjoys more autonomy and discretionary powers at their disposal.
Also the risks are not diversified.
A customer having an account in a specified branch must undergo all banking activities through that branch only.
Mixed Banking both commercial and investment banking activities are undertaken together.
Mixed banking can be described as the dual functioning of investment banking and commercial banking.
These banks give short-term and long-term loans to industries. Industries don’t have to run to different places for different financial needs.
So in a way we can say that, Mixed Banking promotes rapid industrialization.
Mixed Banking may however pose a grave threat to liquidity of a bank and lead to bad debts.
Wholesale banking provides banking services for high net-worth clients like corporates, commercial banks, mid-size companies etc.
It is provided by banks to organisations like Corporate Clients, Institutional Customers (for pension funds & government agencies), International Trade Finance Businesses, Medium Scale Companies, Mortgage Brokers, Real Estate Developers, Investors and services offered to other banks or financial institutions.
Retail banking involves banking transactions directly with the customers.
Banks give all kinds of personal banking services like savings accounts, current accounts, transactional accounts, mortgages, personal loans, debit and credit cards etc. to the customers directly.
Retail banking is the type of banking that is visible to general public.
Universal banking is a system of banking under which big banks undertake a variety of banking services like commercial banking, insurance, investment banking, merchant banking, mutual funds etc.
It involves providing all the above services to the customers under one roof by financial experts who can handle multiple financial products.
This makes the banking operations economical and boosts investorconfidence. However, if these kinds of banks fail, it costs huge losses as well as causes a huge dip in consumer confidence.
The concept of Universal Banking was conceptualized by R.H. Khan in India.
In Relationship Banking, the customer needs are understood by the banks and then appropriate banking services are offered to the customers according to their needs.
This type of Banking helps banks to gather important information about the borrowers which in turn helps them to determine the creditworthiness of the customers.
Virtual Banking refers to a banking system wherein the Banking operations are performed online.
One of the biggest advantages of Virtual Banking is that Banking operations become very cost effective as banks don’t need to have physical offices.
Low Banking operations costs are passed on to the customers by the Banks in the form of waiver of fee or offering higher rate of interests on accounts.
The Indian markets still have fears instilled in them with respect to virtual banking and they consider branch banking more suitable as they can visit the branch and be assured of their transactions.
Chain banking system refers to the type of banking wherein a group of persons come together to own and control three or more independently chartered banks.
Despite of common control and ownership, each of the banks can maintain their individual existence and operations.
The banks in the chain are assigned different functions so that there is no overlapping of interests and no loss in profits of the respective banks.
Correspondent Banking is considered the most profitable way of doing business as the Banks do not have any physical presence or any limited permissions in respect to Banking operations.
Correspondent banks thus act as banking agent for a home bank and provides various banking services to customers where otherwise the home bank does not operate.
It helps Banks’ customers perform banking operations and transactions at any place with ease without the physical presence of their Bank branches there.
Social Banking refers to the system of Banking wherein Banking Services are oriented towards the public welfare and financial inclusion of the unbanked population, poor and vulnerable section of the society.
The Central Bank of India on the directions of the Government of India has taken some commendable initiatives for the financial inclusion of the unbanked populace living in the remotest areas of the country.
The system of narrow banking involves mobilizing the funds towards risk-free investments mostly government securities.
It can be considered the opposite of Universal Banking.
Islamic Banking also known as non-interest Banking is a banking system purely based on the principles of Islam (Sharia Law) and is guided by Islamic law.
Two fundamental principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest.
Shadow Banking is a system of Banking wherein Non-Banking Financial Entities provide banking services like those of commercial Banks.
These Banking Institutions carry out regular banking functions but do so outside the traditional system of regulated depository institutions.
In this system of Banking, Banks perform banking activities different from the regular banking activities (deposit and withdrawal of money).
Banks under Para-Banking can take up activities by setting up subsidiaries.
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