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Types of Banking

GKToday's Bankers Junction

Last Updated: April 17, 2016
Published by: GKTODAY.IN
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 Types of Banking

Contents
......................... _ ....... . .... ...... ............................................................
What is Branch Banking? ................................................................................................................... 3
What is Unit Banking? ........................................................................................................................ 3
What is Mixed Banking? .................................................................................................................... 3
What is Chain Banking? ..................................................................................................................... 3
What is retail banking? ....................................................................................................................... 3
What is wholesale banking? .............................................................................................................. 4
What is relationship banking? ........................................................................................................... 4
What is Correspondent Banking? .................................................................................................... 4
What is universal Banking? ............................................................................................................... 4
What is Social Banking? ..................................................................................................................... 5
What is Virtual Banking? .................................................................................................................... 5
What is Narrow Banking? ................................................................................................................. 5
What is Islamic Banking? ................................................................................................................... 5
What is Shadow Banking? ................................................................................................................. 5

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 Types of Banking

What is Branch Banking?

Branch banking involves 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 centre 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.
What is Unit Banking?
Unit banking is a system of banking which originated in US. It is a limited way of banking where
banks operate only from a single branch (or a few branches in the same area) taking care of local
community. In comparison to branch banking, the size of unit banks is very small. Due to small size
and due to unit structure; the decision making in unit banks is very fast. The management in unit
banks enjoy more autonomy and more discretionary powers. However, due to single units, the risk is
not distributed or diversified.
What is Mixed Banking?
Mixed Banking is the system in which banks undertake activities of commercial and investment
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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 liquidity
of a bank and lead to bad debts.
What is 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.
What is 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, debit
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 risks and stability. However, due to increasing
use of new technology, the operational costs for banks have gone up considerably.

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 Types of Banking

What is 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 favoured
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.
What is relationship banking?
Relationship banking is a banking system in which banks make deliberate efforts to understand
customer needs and offer him products accordingly.
It helps banks to gather critical soft information about the borrowers, which helps them to
determine 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
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banks.
What is Correspondent Banking?
Correspondent banking prevalent in over 200 countries is a profitable way of doing business by
banks in foreign countries in which they don’t have physical presence or limited operational
permissions. 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 customers to perform banking operations at ease even in places where their banks
don’t have physical presence.
Customers stay loyal to such banks as they get excellent customer service even in foreign
lands.
What is universal Banking?
Universal banking 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 makes the operations cumbersome and
are a big drawback for banks. Also, if such banks fail, it will lead to a big dip in customer confidence.
JRLVY
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 Types of Banking

What is Social Banking?

Social banking 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 commendable
initiatives to make financial inclusion a reality for the remotest segments of Indian population. Some
of these are:
Availability of ICT based Business Correspondent Model for delivery of banking services at
the doorstep of every household in remote villages.
3 year Financial Inclusion Plans for banks. This has been implemented since 2010.
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’t have access
to formal banking.
Basic Savings Bank Deposit Account has been introduced for all.
KYC documentations have been considerably relaxed and simplified for small accounts.
Indian government has thus made the Financial Inclusion as one its topmost priority and has taken
many policies and schemes to achieve the same. It has to work on implementation line to make the
policies a great success. abhijeetcool | abhijeet.tamse@gmail.com | www.gktoday.in/module/bankers-junction

What is Virtual Banking?

Virtual banking is performing all banking operations online. This has served as a great revolution in
banking market as banks have to continuously struggle for perfection to live up to competition and
stay ahead of it. As banks don’t have physical offices, they find the options very cost-effective. The
banks thus pass these benefits to customers in form of waiving of account fee or higher rates of
interest. The trend is catching in Indian markets but some typical fears still grip an average Indian
who still places more trust in bank staff with whom they can personally go and talk, rather than
relying on machines.
What is Narrow Banking?
The Narrow Banking 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 deposits in Risk Free assets such as Government Securities.
What is Islamic Banking?
Islamic banking is banking or banking activity that is consistent with the principles of sharia and its
practical application through the development of Islamic economics.
What is Shadow Banking?
Shadow banking refers to all the non-bank financial intermediaries that provide services similar to
those of traditional commercial banks. They generally carry out traditional banking functions, but do

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 Types of Banking

so outside the traditional system of regulated depository institutions. Some of these activities include:
Credit intermediation – Any kind of lending activity including at least one intermediary
between the saver and the borrower
Liquidity transformation – Usage of short-term debts like deposits or cash-like liabilities to
finance long-term investments like loans.
Maturity transformation – Using short-term liabilities to fund investment in long-term assets
In the Indian financial arena, shadow banks term can be used for Non-Banking Finance Companies
(NBFCs). However, NBFCs in India have been regulated by the RBI (Reserve Bank of India) since
1963. Other examples are investment bankers, Money market mutual funds, mortgage companies
etc.

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 Types of Banking

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