Types of Banking

Various Types of Banking are as follows:

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.

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.

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 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, 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.

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.

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 banks.

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.

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.

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.

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.

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.

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.

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 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.