Commercial Banking in India [AHSEC Class 11 Finance notes 2024 Exam]

1. Write a brief note on growth and evolution of banking/public sector banking in India.2015, 2017, 2018

Ans: The word Bank has been originated from many words. There is no single word or answer to this origin of the word ‘Bank’. According to some economists, the word ‘Bank’ has been originated from the German word ‘Banck’ which means heap or mound or joint stock fund. From this, the Italian word ‘Ban co’ has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word ‘Banque’ which mean a ‘bench’. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business. Thus the origin of the word ‘Bank’ can be traced as follows.

Bank → Banco → Banque → Bank

Banking industry in India has a long history. It has travelled a long path to assume its present form. The banking industry in Indian started with small money lenders and has now large joint stock world class banks in its fold. The growth of banks in India is discussed below over two eras: A) Pre-Independence Period and B) Post-Independence Period

A) Pre-Independence Period: Banking in its crude from is as old as authentic history. All throughout the period of India history, indigenous bankers and money lenders are recorded to have existed and carried on the business of banking and money lending on a large scale. From the early Vedic period right through the Moghul period as well as that of the East India Company’s rule until the middle of the 19^th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.

Agency House: The indigenous bankers lost their importance to a certain extent with the advent of the English traders in India. The starting of modern banking in India can be traced to the beginning of the East India Company’s trade relation with our country. The bank of Hindustan was the earliest bank started under European direction in India. The banking business of Agency House could not continue for long. Most of these Houses failed because of their complete disregard towards the principle of banking business. The Bank of Hindustan could not withstand the failure of its parent from and was closed down in 1832.

Presidency Banks (2012, 2017, 2022): The banking business of Agency House which survived and continued to carry on trade and banking together was progressively taken over by the Presidency Banks. The three Presidency Banks   viz.:

a) The Bank of Bengal (1809);

b) The Bank of Mumbai (1840); and

c) The Bank of Chennai (1843)

were established under the Charter of the East India Company. These Banks acted as banker to the East India Company at Kolkata, Mumbai and Chennai and performed Central Banking functions for their respective areas.

Principle of Limited Liability: A land-mark development took place in the year 1860. It was in this year the principle of “limited liability” was first applied to the joint stock banks. The introduction of the principle of limited liability promoted the growth of banks in India. By 1895, there were 15 joint stock banks with limited liability in India.

The Swadeshi Movement: Swadeshi movement prompted Indians to start many new institutions. The number of joint stock banks increased remarkably during 1906-1913. The peoples Bank of India Limited, the Bank of India Limited, the Central Bank of India Limited, Indian Bank Limited and the Bank of Baroda Limited were setup during that period.

Imperial Bank of India: The three Presidency Banks were amalgamated into the Imperial Bank of India which was brought into existence on 27^th January, 1921, by the Imperial Bank of India Act, 1920. The liability of shareholders of the Imperial Bank was limited like that of shareholders of other banks registered under the Company Act.

Post-Independence: The government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized the Imperial Bank of India (the State Bank of India Act) with extensive banking facilities on a large scale, especially in rural and semi-urban areas as the first phase of nationalization. It formed the State Bank of India (SBI) to as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the Country.

In 1969, seven subsidiary banks of the State Bank of India were nationalized as a major process of nationalization due to the effort of then Prime Minister Mrs. Indira Gandhi, later in 1969, 14 Major Private Commercial Banks in the country were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.

PHASE III: The third phase of development of Indian banking introduced many more products and facilities in the banking sector in its reform measures. In 1991, under the chairmanship of M. Narasimham, a committee was set up under his name, which worked for the liberalization of banking practices.

2. Write short note on foundation and management of Imperial banks in India. 2013, 2018

Ans: According to the provision of the Imperial Bank of India Act, 1920, the Imperial Bank was established by the amalgamation of the three presidency bank i.e. the Bank of Bengal (1809), Bank of Bombay (1840), the Bank of Madras (1843). It came into existence on January 27^th, 1921. Most of the capital of this bank was external and its management was also in the hands of British. After independence, the imperial bank was nationalised in the year 1955 and is renamed as State Bank of India with a view to provide credit facilities in rural areas.

Under the Imperial Bank of India Act, 1920, the banks were managed by a Central Board of Directors. There were three local boards at the three presidency towns. The local boards had fairly wide powers to manage the local business. They were under the control of the Central Board.

The Imperial Bank performed both Central and commercial banking business. The major central banking functions discharged by the bank before the establishment of the RBI were as follows:

a)       It acted as the sole ‘banker to the Government and as the custodian of public funds and Government cash balances.

b)      It acted as a banker’s bank.

c)       It acted as an exchange bank and performed foreign trade.

In addition to these central banking functions the Imperial Bank performed ordinary commercial banking business such as:

a)       Accepting deposits.

b)      Making loans and advances etc.

c)       Remitting funds from one place to another.

d)      Providing safe custody of valuables etc.

3. Write a short note on SBI including its objectives, functions and role. 2012, 2014, 2015, 2016, 2017, 2019, 2022

Ans: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. It came into existence on 1^st July 1955. Though Imperial Bank was important banking institution in 16^th April 1955, SBI bill was passed on 8^th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.

SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI

The objectives of establishment of SBI are as follows:

a)       To extend banking facilities on a large scale, particularly in the rural urban and semi-urban areas.

b)      To promote agricultural finance and remove the defects in the system of agricultural finance.

c)       To helps the RBI in implementing its credit policies.

d)      To help the Government to pursue its broad economic policies.

e)      To held the RBI in regulating other commercial banks

f)        To act as a clearing agent of banks

Functions of State Bank of India:

As an agent of RBI, the SBI performs certain Central Banking functions such as:

1.       Bankers to Government: As an agent of the RBI, SBI acts as banker to the Central and State Government as a banker as an adviser as an agent into their capacities:

a)       As a banker.

b)      As an agent.

c)       As an advisor.

As a Government banker the SBI performs the following functions:

a)       It maintains and operates deposit account of the central and state governments.

b)      It receives and collects payment on behalf of the Central and state governments.

c)       It makes payments on behalf of the central and state governments.

d)      It provides short term advances to government for which are called ways and means advances etc.

As a Government agent the SBI perform the followings functions:

1)      Collect tax and other payments on behalf of the government.

2)      Raise loan from the public and thus manages public debts.

3)      Transfer funds and provide remittances facilities to the government etc.

2.       Banker’s Bank: As an agent of the RBI, SBI acts as a banker to all the other banks.

a)       Custodian of cash reserve of the bank: As an agent of the RBI, SBI acts as the custodian of cash reserve of the banks.

b)      Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers.

Other functions of the SBI as General Banks act

A) Primary functions:

a)       Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

c)       Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts

1)      Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

a)       Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Dealings in Gold/Silver: The buying and selling of gold and silver.

f)        Underwriting: The underwriting of the issues of any stocks, shares, debentures etc.

g)       Agents of Co-operative Banks: Commercial banks including SBI also acts as an agent of any registered co-operative bank.

2)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:  

1.       Locker facility: Banks provides locker facility to their customers where they can their valuables.

2.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

3.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

4.       Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

5.       Foreign Exchange Business: Banks also deal in the business of foreign currencies.

4. Write short note on Lead Bank Scheme. Mention its objectives, functions and benefits.           2013, 2015, 2020

Ans: The lead bank scheme provides a new strategy of banking and area development in the branch expansion programme of banks in the post-nationalisation phase of banking growth in the country. Under the lead banking Scheme, a particular bank was made responsible for a particular district to develop banking and credit in that district. This scheme was framed for surveying and developing the banking potential of all the districts in the country. This scheme was introduced by the RBI on 12 Dec, 1969. The concept of a lead bank was formulated in order to involve commercial banks in rural development.

Objectives and Functions of Lead banking scheme

a)       To ascertain the scope of development of banking in the allotted district.

b)      To ascertain unbanked areas within district for mobilization of savings.

c)       To ascertain the credit needs of business and industrial units in the allotted district and extend credit facilities to them.

d)      To provide financial assistance to other institutions in the allotted district.

e)      To make provisions for training of small farmers so as to ensure proper utilization of funds.

f)        To make provisions for storage, repairing and services of agricultural equipments.

g)       Co-ordination of the activities of commercial banks, co-operative banks and other financial institutions in the allotted district.

Benefits/Effects of Lead bank

a)       Branch expansion: There was found more effectiveness in branch expansion, supervision and guidance after introducing the Lead Bank Scheme.

b)      Co-operation: There was found more co-operation among commercial bank, Co-operative bank, other financial institution and government authorities after introducing the Lead Bank Scheme.

c)       Identification: Identification of unbanked area within district was possible through Lead Bank Scheme.

d)      Credit facilities: Extending credit facilities in allotted district.

e)      Facilities to farmers: Provisions for training of small farmers so as to ensure proper utilization of funds and to make provisions for storage, repairing and services of agricultural equipments.

5. Explain briefly unit banking and branch banking.         2012, 2016, 2018, 2020

Ans: The different forms of banking system are as follows:

a) Unit Banking (2013): It is a system of banking where an independent bank undertakes banking function in a particular area. The operation of a unit bank is limited to a particular area and hence this system is also known as “localized banking. A unit bank has just one office with no branches. This banking system was originated and developed in the USA.         

Advantages of Unit Banking (2012): Unit banking system has the following advantages:

1. Easy Management: The management and control of unit banks is much easier and effective due to the small size and operations of the banks.  There are fewer chances of fraud and irregularities in the financial management of the unit banks.

2. Localised Banking: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. Since the bank officers of a unit bank are fully acquainted with the local needs, they cannot neglect the requirements of local development.

3. Quick Decision: A great advantage of unit banking is that there is no delay of any kind in taking decisions on important problems concerning the unit bank.

4. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system.

5. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance.

6. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help.

Disadvantages of Unit Banking: The following are the disadvantages of unit banking system:

1. Limited Scope: The scope of unit banking is limited. They do not get the benefits of large scale operations.

2. No. Distribution of Risks: Under unit banking, the bank operations are highly localised. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.

3. Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.

4. Operates only in urban areas and big towns: Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these areas remain unbanked.

5. Difference in Interest Rates: Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.

6. Local Pressures: Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.

b) Branch Banking: Branch Bank is a type of banking system under which the banking operations are carried with the help of branch network and the branches are controlled by the Head Office of the bank through their zonal or regional offices. Each branch of a bank will be managed by a responsible person called branch manager who will be assisted by the officers, clerks and sub-staff. In England and India, this type of branch banking system is in practice. In India, State Bank of India (SBI) is the biggest public sector bank with a very wide network of 16000 branches.

Merits of Branch Banking                            2016

1.       Benefits of large Scale Production: Due to large scale production, the cost per unit of operation is very low in case of this system.

2.       Distribution of Risks: There is a distribution of risks because the losses incurred by one branch are made up by the profits earned by other branches.

3.       Effective Central Bank control: Due to presence of few big banks in the banking system, the RBI can effectively and easily regulate the activities of banks.

4.       Public Confidence: Branch banking system gains greater public confidence because of its large scale operations and huge financial resources.

5.       Easy transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.

Demerit of branch banking

1.       Problems of Management: The effective management and control of bank under branch banking system is difficult due to large network of branches.

2.       Delay in Decision Making: Decision making is delayed because the branch manager has to consult with the head office before taking decision.

3.       Ignorance of local heads: Branches follows the policies framed by the head office. The head office and the branch may not be aware of the local conditions.

4.       Monopolistic tendencies: Branch banking encourages monopolistic tendencies. A few big banks can dominate and control the whole banking system.

5.       Regional imbalances: Under branch banking system the financial resources collected in smaller and backward regions are transferred to the bigger industrial centre. This encourages regional imbalances in the country. 

6. Write the difference between Bank and Unit Banking.              2014

Ans: Difference between Branch Banking and Unit Banking

Basic	Branch Banking	Unit Banking
1.Operational freedom	Less operational freedom because branches are controlled by Head Office.	More operational freedom because of its single unit.
2. Decision Making	Delay is decision making because branches are dependent on Head Office.	Decision making is quick because External consultation is not required.
3. Rate of Interest	Rate of Interest is uniform.	Rate of interest depending on demand and supply of fund.
4. Cost of Supervision	Cost of Supervision is very high.	Cost of Supervision is less as compared to branch banking.
5. Funds	Funds are transferred from one branch to another.	Funds are localized in one unit.
6. Monopoly	Branch Banking encourages monopolistic tendencies in the banking system.	There is no possibility of monopoly because of its small size.
7. Concentration of power	There is concentration of power in the hands of few people.	There is no concentration of power in the hands of few people.
8. Loans and advances	Loans and advances are based on merit irrespective of status.	Loans and advances can be influenced by status.

7. Define Public and Private sector banks. Also distinguish between them.            2020

Ans: Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”. Public sector banks are classified into three categories (27 Banks):

a)       State Bank group: It consists of the SBI and its 6 associate banks.

b)      Nationalized Banks: It present there are 19 nationalized banks such as UBI, PNB (founded in 1894 in Pakistan), and BOI etc.

c)       Regional Rural Banks (RRBs): These banks are established with the object of proceeding credit and other facilities in rural areas.

Private Sector Banks: Private Sector banks are those which are owned by private individuals or business corporations. Private sector banks may be classified into two categories:

a)       Indian Banks: these banks are incorporated under the Indian Companies Act. At present there are 21 Indian Private Bank. E.g. ICICI Bank Ltd, HDFC Bank Ltd, Federal Bank Ltd, Yes Bank Ltd.

b)      Foreign Banks: These banks are originated outside India but have a place of business in India. At present there are 45 Foreign Banks. E.g. City Bank, Standard Chartered Bank, HSBC Bank, Bank of Tokyo.

Difference between Public Sector Banks and Private Sector Banks

Basic	Public Sector	Private Sector
1.Ownership	Public Sector banks are owned by the Govt. either directly or through the RBI.	Private Sector banks are owned by private individuals or business corporations.
2. Setup	These banks are setup under the special act of Parliament.	These banks are setup under the Companies Act.
3. Aim	These banks aim at saving the Society.	These banks are driven by profit motive.
4. Foreign Bank	Public Sector banks does not include foreign bank.	Private Sector banks may be Indian Banks as well as foreign banks.
5. Area of operation	These banks operated in rural, Semi-urban and Urban areas.	Private Sector banks mainly operated in Semi-urban and Urban areas.
6. Capital	In public sector banks more that 50% of capital or full capital is supplied by the Government.	But, in private sector banks, all total capital is supplied by the shareholders of the bank.

8. Write a short note on Scheduled Bank?

Ans: Scheduled bank refer to those banking institutions whose names are include in the Second schedule of the RBI Act, 1934. Under Sec. 42 (b) (a) are called scheduled bank. On the following conditions these banks are included in Second Schedule and these banks must have to fulfill these conditions:

a)       The bank should have Rs. 5 lakhs as paid up capital and reserve fund.

b)      It should be a corporation but must not be a partnership firm or a single owner firm.

c)       The bank must have to submit its weekly return to the RBI.

d)      Direct control is made providing the following advantages on the scheduled banks and RBI: - (i) Giving direct loans, (ii) Providing transfer facilities, (iii) Clearing house facility.

9 Write a brief note on primary and secondary functions of banks/public sector banks. 2013

Ans: Functions of Bank: Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks are given below:

A) Primary functions:

a)       Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

c)       Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts:

1)      Agency functions (2013, 2015, and 2017): These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

a)       Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.

f)        Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.

3)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:           (2012, 2014, 2016, 2019)

6.       Locker facility: Banks provides locker facility to their customers where they can their valuables.

7.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

8.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

9.       Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

10.   Foreign Exchange Business: Banks also deal in the business of foreign currencies.

10. What is Nationalisation? What are its objectives and achievements?    2015

Ans: Nationalization: Nationalization of Banks refers to transfer of ownership and management of banks from private individuals and shareholders to the public authorities. In 1969, 14 banks were nationalized. Again in 1980, 6 more banks were nationalized. In 1993, New bank is merged will Punjab National Bank. So, there are 19 nationalized banks in our country at present.

Objectives of Nationalization:                   2013, 2017, 2020

a)       Preventing concentration of economic powers in the hands of few.

b)      Provide banking facilities in rural areas.

c)       Mobilization of savings of rural areas.

d)      Help to the agriculture industry.

e)      Balanced regional development of the country

f)        Provide adequate financial assistance to the public and private sector industry whether big or small.

g)       Greater stability and control in banking sector by reserve bank of India.

Achievements of nationalization:                            2019

a)       Expansion of Bank branches: There has been a rapid increase of bank branches after nationalization. Till the end of March, 2014 number of bank branches increases to 97,010.

b)      Growth of deposit: After nationalization the deposit occupied by banks was increased due to various branches in Rural, Semi-urban and urban areas.

c)       Advances to priority sectors: Priority sector includes Agriculture, small business, small scale industry etc. There has been greater emphasis on those sectors now.

d)      Correction of regional imbalances: After nationalization, steps have been taken to improve banking services in less developed states.

e)      Advance to Agriculture: The nationalized banks have given particular importance in providing credit to agriculturists.

f)        Investment in Govt. Securities: The nationalized bank has become a major source of finance for the Govt. These banks are required to invest a part of their funds in Govt. securities.

g)       Developmental role of banks: Nationalized banks focuses on not only making profit, but also works for the welfare and prosperity of the society.

11. Give some arguments in favour or against nationalisation of banks.

Ans: Arguments in favour of nationalisation

1)      It would remove the concentration of economic power in the hands of a few industrialists.

2)      It would help in stabilizing the price levels by eliminating artificial scarcity of essential goods.

3)      Eliminates wasteful competition and raises the efficiency of the working of banks

4)      Enables the Reserve Bank to implement its monetary policy more effectively.

5)      It would replace the profit motive with service motive.

Arguments against nationalisation (Criticism)

1)      Nationalisation is done for Political purpose rather than for Productive purpose.

2)      Nationalisation leads to the Beginning of state capitalism not socialism in India.

3)      Nationalisation of banks will degenerate to the level of agricultural co-operatives, which are known for their inefficiency and corrupt practices.

4)      Inefficiency, indeci­sion, corruption, and lack of responsibility are the evils with which the government under­takings are suffering. A government bank may not care to attach importance to the cus­tomer service.

5)      In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer's accounts.

12. Write a brief note on Group banking and Chain banking.

Ans: Group Bank: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business. An example in India is SBI which has many subsidiary banks such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other operations such as leasing, merchant banking and so on.

Merits of Group Banking: Following are the advantages of Group Banking:

a)       Efficient Management: The holding company stimulates efficiency of the group banks. The group banks are efficiently managed being under the overall control of Holding Company.

b)      Adequate Liquidity: there is high degree of liquidity of the concerned group being the whole group of banks is controlled and managed by one parent company. The member banks have to maintain the requisite degree of liquidity.

c)       Economical: It is an economical system of banking, because many expenses such as advertisement and publicity are done collectively be the group as whole under the direct control of the holding company.

d)      Specialization: In Group banking, different subsidiary companies tend to specialize in different aspects of banking. This promotes the overall efficiency of the group system.

Disadvantage of Group Banking: Main demerits of Group Banking are as under:

a)       Right Control: There is rigid control in Group Banking due to lack of flexibility which often leads to corruption.

b)      Less Mobility of Funds: Funds are less mobile in Group Banking than Branch banking system.

c)       Few Branches: Group Banking has relatively very few branches as compared to Branch Banking system.

2) Chain Bank: Chain Bank is a system under which different banks come under a common control through common shareholders or by the inter-locking of directors. An example in India is KarurVysya Bank and Lakshmi Vilas Bank having their head offices located in the same place, viz., Karur and sharing common directors by which they may have common management policy.

Merits of Chain Banking: Following are the advantages of Chain Banking system:

a)       This system of banking is found most suitable to meet the local needs of credit and finance;

b)      The system facilitates appropriate use of the limited resources.

c)       The chain banking system exhibits efficient system of management;

d)      This system is not prone to risk-taking;

e)      It is the cheap system of banking and not too much expensive.

Demerits of Chain Banking: Chain Banking system has certain demerits:

a)       Profitability remains limited due to limited risk-taking.

b)      The chain banks generally do not conduct the programmes of social welfare and development;

c)       This system of banking promotes the tendency of bossism in management.

13. Write short notes on various types of banks.                               2018

Ans: There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. The banking institution may be divided into following types:

A)      Based on the Structure or Organizational Setup: Banks can be of five types based on the structure or organizational setup, viz., unit bank, branch bank, group bank, chain bank and correspondent bank.

1) Unit Bank: Refer above

2) Branch Bank: Refer above

3) Group Bank: Refer above.

4) Chain Bank: Refer above

5) Correspondent Bank: Correspondent Bank is a bank which link two banks of different stature or size. Many Indian banks act as correspondent banks for many foreign banks.

6) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type of banking is popular in U.K.

7) Mixed Banking: Mixed banking is that system of banking under which the commercial banks perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking. Commercial banks usually offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking.

8) Regional banking: In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks. As they are permitted to operate in particular region, it may help develop the regional economy.

B) Based on the Ownership: Banks can be of four types based on the ownership. They are public sector banks, private sector banks, foreign banks and cooperative banks.

1) Public Sector Banks: Refer above

2) Private Sector Banks: Refer above

3) Foreign Banks: Foreign Banks are those banks which belong to foreign countries and have their incorporated head office in foreign countries and branch offices in other countries. The share capital of the foreign banks will be fully contributed by the foreign investors. Some examples of foreign banks in Indian include ABM Amro bank, Standard Chartered Bank, JP Morgan Chase Bank and so on.

4) Cooperative Banks: Cooperative Banks are those banks which are run by following cooperative principles of service motive. Their main motive is not profit making but to help the weaker sections of the society. Some examples of cooperative banks in India include Central Cooperative Banks, State Cooperative Banks.

C) Based on the Functions: Banks can be of various types based on the functions they perform. They include savings banks, commercial banks, industrial banks, agricultural development banks, land mortgage/development banks, cooperative banks, exchange banks, indigenous banks, consumer banks, central banks.

a)      Central Bank: Central Bank is known as guardian bank which bank working in the country. Now a day, in every country there is one central bank and is controlled by the govt. The central Bank manages and controls the whole monetary system and also prepares monetary policy and other policies of the govt.

b)      Commercial Bank: The commercial bank generally extent short terms loans to the business man and traders. They collect deposits from the public and advance loans to the businessman and producer commercial banks are normally owned by shareholders. In India most of the joint stock banks are commercial banks.

c)       Co-operative Bank: Co-operatives banks are those banks which established in co-operative sectors. Co-operative banks offer short term and medium term loans to the agricultural sector. Farmers get various kinds of loan for purchasing various agriculture inputs from co-operative banks.

d)      Foreign exchange Banks: These are special types of banks which specialize in financing foreign trade. Their main is to make international payments through the purchase and sale of exchange bills.

e)      Industrial banks: Industrial banks are those banks which advance long term loans to industries. For the development of industries various types of industrial banks are established. In India, various institution like Industrial and finance co-operation of India (IFCI), Industrial development bank of India, can be termed as Industrial Banks.

f)        Savings Banks: Savings banks are those banks which offer opportunities for saving to the small savers and also try to develop saving habits among the people.

g)      Development Banks: Development banks are specialized financial institutions which provide medium and long term finance to private entrepreneurs and help in economic development of the country.

h)      Agricultural/Land Development Banks: Agricultural/Land Development Banks are those banks which are known as Land Mortgage or Agricultural Banks as they provide finance to agricultural sector. They provide long term loan for agriculture for the purposes of purchase of new land, purchase of heavy agricultural machinery such as tractor, repayment of old debt, conservation of soil and reclamation of loans.

i)        Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.

j)        Export - Import Bank: These banks have been established for the purpose of financing foreign trade. They concentrate their working on medium and long-term financing. The Export-Import Bank of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central government.

k)      Indigenous Bankers: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages.

l)        Rural Banking: A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. The policies of financing of these banks have been designed in such a way so that these institutions can play catalyst role in the process of rural development.