Types of Banks along with their objectives
Types of Banks
The banks are generally classified on the basis of the functions performed by them. Following are the various types of banks:
(1) Commercial Banks
The word ‘bank’ is used in the sense of a commercial bank. A commercial bank performs all kinds of banking functions such as accepting deposits, advancing loans, credit creation and agency functions. They are also called joint stock banks as they are organised in the same manner as joint stock companies. They generally advance short-term loans to their customers, though in some cases they may advance medium-term loans also. The commercial banks in India are state-owned as well as private banks organised as joint-stock companies.
(2) Industrial Banks
The industrial bank extend long-term loans to industries. In fact, long-term finance is their specialty. In addition, they also help industrial firms to sell their debentures and shares. Sometimes, they even underwrite the debentures and shares of big industrial concerns.
The industrial banks specialize in giving long-term loans to industries. As is well known, the commercial banks in view of their short-term deposits, are not in a position to extend long-term loans to industries. Ordinarily, the industrial banks perform three main functions
(i) Acceptance of long-term deposits. Since the industrial banks give long-term loans, They cannot accept short-term deposits from the public.
(ii) Meeting the credit requirements of industries. The credit requirements of industries are of two types. Firstly, the industries require capital to purchase land to erect buildings and purchase heavy machinery. To meet these requirements, the industries need long-term loans. Secondly, the industries require short-term loans to buy raw materials and to make payment of wages to the workers. The short term loan can be given to industries even by the commercial banks, but for long-term loans the industries depend upon the industrial banks alone.
(iii) Other functions. The industrial banks tender advice to big industrial firms regarding the sale and purchase of shares and debentures.
The industrial banks hold a position of great importance in the developed countries of the West. For example, most of the banks in America and Germany are industrial banks, but the industrial banks are conspicuous by their absence in India. The Government of India have set up Industrial development and finance institutions to provide long-term loans to industries. This had to be done because there were no industrial banks in the country to meet the requirement of industries.
(3) Agricultural Banks
The commercial and the industrial banks are not in a position to meet the credit requirements of agriculture. Hence, there arise the need for setting up special types of banks to finance agriculture. The credit requirements of the farmers are of two types. Firstly, the farmers require short-term loans to buy seeds, fertilizers, ploughs and other inputs. Secondly, the farmers require long-terms loans to purchase land, to effect permanent improvements on the land to buy equipment and to provide for irrigation works. There are two types of agricultural banks:
(i) Agricultural Cooperative Banks, and
(ii) Land Mortgage Banks, (Known as Land Development Banks in India) The former provide short-term credit, while the latter extend long-term loans to the farmers.
Both the types of banks have been set up as cooperative banks in India. Different segments of the cooperative banking sector address specific credit needs of diverse sections of the population, both in terms of location as well as tenor.
(4) Foreign Exchange Banks
These are special types of banks which specialize in financing foreign trade. Their main function is to make international payments through the purchase and sale of exchange bills. As is well known, The exporters of a country prefer to receive the payment for exports in their own currency. Hence, there arises the problem of converting the currency of one country into the currency of another. The foreign exchange banks try to solve this problem. In other words, they convert home currency into foreign currency and vice versa. It is on this account that these banks have to keep with themselves stock of the currencies of various countries. Along with that, they have to open branches in foreign countries to carry on their business.
Under British Rule, the foreign banks operating in India had a complete monopoly of financing our foreign trade, but after the achievement of independence this monopoly has now been ended. Now some commercial banks in India also deal in foreign exchange business.
But despite this the foreign exchange Banks still dominate our foreign trade.
(5) Indigenous Banks
According to Indian Banking Enquiry Committee, “Indigenous banker is a person or a firm which accepts deposits, transacts business in hundies and advances loans etc. They are known as mahajan, sahukar or saraf in India.
(6) Central Bank
Every country in the world has a central bank which occupies a pivotal position in the monetary and banking structure of the country. It is the indisputed leader of the money market.
