The term Banking may define as accepting of deposit of money from the public for the purpose of lending or investing investment of that money which are repayable on demand or otherwise and with draw by cheque, draft or order.
Banking can be of various types and they are described below.
1. Group Banking
A plan offered by banks designed to be used by groups rather than individuals. A common example is a company plan offered to employees.
Usually the bank will offer incentives such as discounts, lower fees and interest rates, as well as other benefits not available to individual customers.
Group banking members may have access to lower interest rates, lower fees, discounts and other perks not available to regular account holders.
Group banking can also provide a more personalized banking relationship for the members if the bank designates one representative, who is generally more knowledgeable about the group’s needs, as the point of contact for all the members of the group.
2. Chain Banking
Conceptually, chain banking refers to a form of bank governance that occurs when a small group of people control at least three banks that are independently chartered.
Usually, the controlling parties are majority shareholders or the heads of interlocking directorates. Chain banking as an entity has declined with the surge in interstate banking.
Chain banking is a situation in which three or more banks that are independently chartered are controlled by a small group of people.
The concept of chain banking is different from group banking, in that the entities involved in the chain bank arrangement remain autonomous and are not owned by a single holding company.
By contrast, the group banking model requires a holding company to own all the banks involved, effectively creating an umbrella under which all the banks operate.
Chain banking is also different from branch banking, a situation where all local branches of a bank are owned by a single banking institution.
A bank holding company is a company that controls one or more banks, but does not necessarily engage in banking itself.
3. Mixed Banking
Mixed banking is a system of banking where a bank combines both deposit banking as well as investment banking. In other words, the bank will provide short-term loans for commerce and trade and long-term finance for industrial units.
While this type of banking promotes rapid industrialization, the mixed banking system reduces the liquidity of funds of commercial banks.
Stated differently, it difficult to pay back the borrowed funds of customers whenever they make a demand of their money. This is because funds get blocked when the bank gives long term loans to industries.
4. Unit Banking
Banking systems encourage either small, independent banks or banks that are theoretically independent but are in fact owned by a bank holding company.
Advantages of Unit Banking
- Local funds for local people: The unit banking of a particular locality utilizes its resources for the development of its own locality only and does not transfer them to other localities like branch banking.
- Intimate Knowledge of Customer: The Managers of the local unit bank can easily acquire the personal knowledge of customers as well as the specialized knowledge of the local industries and occupations. Therefore he is in a better position to serve the need of the local borrowers; lie has greater chances in cultivating friendly and personal relationship with the individual entrepreneurs of his locality.
- Continent management supervision and control.
- Discontinuance of inefficient branches.
5. Branch Banking
Branch banking refers to a single bank which operates through various branches in a city or in different locations or out of the cities. It offers a wide array of face to face service to its customers.
Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals etc..
Advantages of Branch Banking
Rapid growth and wide popularity of branch banking system in the 20th century are due to various advantages as discussed below.
- Economics of Large Scale
Operations under the branch banking system, the bank with a number of branches possesses huge financial resources and enjoys the benefits of large-scale operations,
- Highly trained and experienced staff is appointed which increases the efficiency of management.
- Division of labor is introduced in the banking operations which ensures greater economy in the working of the bank. Right persons are appointed at the right place and specialization increases,
- Large financial resources and wider geographical coverage increases public confidence in the banking system.
- Spreading of Risk
Another advantage of the branch banking system is the lesser risk and greater capacity to meet risks
- Since there is geographical spreading and diversification of risks, the possibility of the failure of the of the bank is remote.
- The losses incurred by some branches may be offset by the profits earned by other branches.
- Large resources of branch banks increase their ability to face any crisis.
- Economy in Cash Reserves
Under the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In time of the need, resources can be transferred from one branch to another.
- Diversification on Deposits and Assets
There is greater diversification of both deposits and assets under branch banking system because of wider geographical coverage. Deposits are received from the areas where savings are in plenty, Loans are extended in those areas where funds are scarce and interest rates are high. The choice of securities and investments is larger in this system which increases the. Safety and liquidity of funds.
- Cheap Remittance Facilities
Since bank branches are spread over the whole country, it is easier and cheaper to transfer funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-bank indebtedness.
- Uniform Interest Rates
Under branch banking system, mobility of capital increases, which in turn, brings about equality in interest rates. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money.As a result, the uniform rate of interest prevails in the whole area; it is prevented from rising in the excessive demand area and from falling in the deficit demand area.
- Proper Use of Capital
There is proper use of capital under the branch banking system. If a branch has excess reserves, but no opportunities for investment, it can transfer the resources to other branches which can make most profitable use of these resources.
- Hotter Facilities to Customers
The customers get better and greater facilities under the branch banking system. It is because of the small number of customers per branch and the increased efficiency achieved through large scale operations.