BANKING AWAREESS: Different Types of Bank

Dear Readers,
We were getting huge number of queries about the "types of bank" by our readers. So, keeping in
view our readers demand, we are presenting today the brief of "Different types of Banks".
Hope the post proves to be fruitful for you all. Happy Reading :)

Banks can be classified into various types on the basis of their functions, ownership, domicile,
etc. The following are the various types of banks:

1. Commercial Banks:
The banks, which perform all kinds of banking business and generally finance trade and
commerce, are called commercial banks. Since their deposits are for a short period, these banks
normally advance short-term loans to the businessmen and traders and avoid medium-term and
long-term lending.

However, recently, the commercial banks have also extended their areas of operation to medium-
term and long-term finance. Majority of the commercial banks are in the public sector. However,
there are certain private sector banks operating as joint stock companies. Hence, the commercial
banks are also called joint stock banks.

2. Industrial Banks:
Industrial banks, also known as investment banks, mainly meet the medium-term and long-term
financial needs of the industries. Such long-term needs cannot be met by the commercial banks,
which generally deal with short-term lending.

The main functions of the industrial banks are:

(a) They accept long-term deposits.
(b) They grant long-term loans to the industrialists to enable them to purchase land, construct
factory building, purchase heavy machinery, etc.
(c) They help selling or even underwrite the debentures and shares of industrial firms,
(d) They can also provide information regarding the general economic position of the economy.

3. Agricultural Banks:
Agricultural credit needs are different from those of industry and trade. Industrial and
commercial banks normally do not deal with agricultural finance. The agriculturists require:
(a) short-term credit to buy seeds, fertilizers and other inputs, and
(b) long-term credit to purchase land, to make permanent improvements on land, to purchase
agricultural machinery and equipment, etc. In India, agricultural finance is generally provided by
co-operative institutions. Agricultural co-operatives provide short-term loans and Land
Development Banks provide the long-term credit to the agriculturists.

4. Exchange Banks:
Exchange banks deal in foreign exchange and specialise in financing foreign trade. They
facilitate international payments through the sale, purchase of bills of exchange, and thus play an
important role in promoting foreign trade.

5. Saving Banks:
The main purpose of saving banks is to promote saving habits among the general public and
mobilise their small savings. In India, postal saving banks do this job. They open accounts and
issue postal cash certificates.

6. Central Bank:
Central bank is the apex institution, which controls, regulates and supervises the monetary and
credit system of the country. Important functions of the central bank are:
(a) It has the monopoly of note issue;
(b) It acts as the banker, agent and financial adviser to the state;
(c) It is the custodian of member banks reserves;
(d) It is the custodian of nation's reserves of international currency;
(e) It serves as the lender of the last resort;
(f) It functions as the bank of central clearance, settlement and transfer; and
(g) It acts as the controller of credit. Besides these functions, India's central bank, i.e., the
Reserve Bank of India, also performs many developmental functions to promote economic
development in the country.

7. Classification on the Basis of Ownership:

On the basis of ownership, banks can be classified into three categories:
(a) Public Sector Banks: These arc owned and controlled by the government. In India, the
nationalized banks and the regional rural banks come under these categories,
(b) Private Sector Banks: These banks are owned by the private individuals or corporations and
not by the government or co-operative societies,
(c) Cooperative Banks: Cooperative banks are operated on the cooperative lines. In India,
coopera¬tive credit institutions are organised under the cooperative societies law and play an
important role in meeting financial needs in the rural areas.

8. Classification on the Basis of Domicile:

On the basis of domicile, the banks are divided into two categories:
(a) Domestic Banks: These are registered and incorporated within the country,
(b) Foreign Banks: These are foreign in origin and have their head offices in the country of
origin.

9. Scheduled and Non-Scheduled Banks:

In India, banks have been broadly classified into scheduled and non-scheduled banks. A
Scheduled Bank is that which has been included in the Second Schedule of the Reserve Bank of
India Act, 1934 and fulfills the two conditions:
(a) it has paid-up capital and reserves of at least Rs. 5 lakhs. It ensures the Reserve Bank that its
operations are not detrimental to the interest of the depositors;
(b it is a corporation or a cooperative society and not a partnership or a single owner firm.

The banks which are not included in the Second Schedule of the Reserve Bank of India Act are
non-scheduled banks.
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bank.html#ixzz2xNdo73V4

OMBUDSMAN

In view of the ongoing Probationary Clerk Interview, we present to a brief about Banking
Ombudsmen.

BANKING OMBUDSMAN

The Banking Ombudsman Scheme enables fast and inexpensive

forum to bank customers for resolution of complaints relating to certain services provided by
banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking
Regulation Act, 1949 by RBI with effect from 1995.

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress
customer complaints against deficiency in certain banking services. As on date, fifteen Banking
Ombudsmen have been appointed with their offices located mostly in state capitals. The
addresses and contact details of the Banking Ombudsman offices has been provided by the
banks.

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative
Banks are covered under the Scheme.

PROCEDURE
One can file a complaint with the Banking Ombudsman simply by writing on a plain paper. One
can also file it online or by sending an email to the Banking Ombudsman. There is a form along
with details of the scheme in our website.However, it is not necessary to use this format.

The complaint should have the name and address of the complainant, the name and address of
the branch or office of the bank against which the complaint is made, facts giving rise to the
complaint supported by documents.

The Banking Ombudsman may award compensation not exceeding Rs 1 lakh to the complainant
only in the case of complaints relating to credit card operations for mental agony and harassment.
The Banking Ombudsman will take into account the loss of the complainants time, expenses
incurred by the complainant, harassment and mental anguish suffered by the complainant while
passing such award.

BANKING OMBUDSMAN SCHEME 2006

It was re-introduced in the year 2006 to receive and deal with the public complaints against the
banks of deficiencies in specified types of services.

Under this scheme, the customer can give his complaint to the Branch Manager and it should be
responded by the Branch Manager within 30 days, if not the customer can file the complaint with
the Banking Ombudsman.

AMENDMENTS:
In the year May 2007, the RBI has amended the Banking Ombudsman Scheme to enable the
customers to appeal against the Banking Ombudsman’s decision. Before the scheme was
amended, the bank customers could appeal only against the awards given by the Banking
Ombudsman. The appellate authority for the Banking Ombudsman scheme is the Deputy
Governor of RBI.

The RBI has amended the scheme again on 3rd February 2009, to include deficiencies arising
out of Internet Banking. According to this new amended scheme, a customer would also be able
to lodge a complaint against the bank for its non-adherence to the provisions of the fair practices
code for lenders or the Code of Bank’s Commitment to Customer issued by the Banking Codes
and Standard Board of India (BCSBI).

On 4TH January 2013, RBI has set up a working group to evaluate and make improvements in
this scheme.

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ombudsman.html#ixzz2xNe7Gw00

ING AWARENESS: Branch Banking Sytem

In our previous article, we provided to you the brief about Unit Banking. Today, we are
presenting to you the other type of banking, Branch Banking. Hope you like the post!!!

BRANCH BANKING SYSTEM: Branch banking center or financial center refers to a single
bank which operates through various branches in a city or in different locations or out of the
cities. This kind of banking system is common in India, e.g. State Bank of India. It offers a wide
array of face to face service to its customers.

Historically, branches were housed in imposing buildings, often in a neoclassical architecture

style. Today, branches may also take the form of smaller offices within a larger complex, such as
a shopping mall. 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,
insurance sales, 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.
1. Economies 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,
(a) Highly trained and experienced staff is appointed which increases the efficiency of
management,
(b) Division of labour 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 specialisation
increases,
(c) Funds are made available liberally and at cheaper rates,
(d) Foreign exchange business is done economically,
(e) Large financial resources and wider geographical coverage increases public confidence in the
banking system.

2. Spreading of Risk: Another advantage of the branch banking system is the lesser risk and
greater capacity to meet risks,
(a) Since there is geographical spreading and diversification of risks, the possibility of the failure
of the of the bank is remote,
(b) The losses incurred by some branches may be offset by the profits earned by other branches,
(c) Large resources of branch banks increase their ability to face any crisis.

3. 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.

4. Diversification on Deposits and Assets: There is greater diversification of both deposits and
assets under branch banking system because of wider geographical coverage,
(a) Deposits are received from the areas where savings are in plenty,
(b) 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.

5. 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.
6. 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.

7. 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.

8. Better 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.

9. Banking Facilities in Backward Areas: Under the branch banking system, the banking
facilities are not restricted to big cities. They can be extended to small towns and rural as well as
underdeveloped areas,. Thus, this system helps in the development of backward regions of the
country.

10. Effective Control: Under the branch banking system, The Central bank than have a more
efficient control over the banks because it has to deal only with few big banks and nor with each
individual branch. This ensures better implementation of monetary policy.

DISADVANTAGES OF BRANCH BANKING SYSTEM:

Following are the main disadvantages and limitations of branch banking system:
1. Problem of Management: Under the branch banking system a number of difficulties as
regards management, supervision and control arise:
(a) since the management of the bank gets concentrated at the head office, the managers can
afford to be lax and indulgent in their duties and are often involved in serious irregularities while
using the funds.
(b) Since the branch manager has to seek permission from the head office on each and every
matter, this results in unnecessary delay and red- tapism in the banking business.

2. Lack of Initiative: Branch managers generally lack initiative on all-important matters; they
cannot take independent decisions and have to wait for. The clearance signal from the head
office.

3. Monopolistic Tendencies: Branch banking encourages monopolistic tendencies in the

banking system. A few big banks dominate and control the whole banking system of the country
through their branches. This can lead to the concentration of resources into a few hands.

4. Regional Imbalances:
Under branch banking system, the financial resources collected in the smaller and backward
regions are transferred to the bigger industrial centres. This encourages regional imbalances in
the country.
5. Adverse Linkage Effect: Under branch banking system, the losses and weaknesses of some
branches also have their effect on other branches of the bank.

6. Inefficient Branches: In this system, the weak and unprofitable branches continue to operate
under the protection cover of the large and more profitable branches.

7. Other Defects: Other defects of branch banking system arc as follows:

(a) Preferential treatment is given to the branches near the head office,
(b) Higher interest rates are charged in the developed area to compensate for the lower rates
charged in the backward areas,
(c) There is concentration and unhealthy competition among the branches of different banks in
big cities,
(d) Many difficulties are faced when a bank opens branches, especially in foreign countries.

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sytem.html#ixzz2xNeOO0Wf
The Unit Banking System is that system of banking under which an individual bank carries on
banking business either through a single office or through a few offices operating with a limited
area. In this system, independent, isolated units perform banking business. The size of operation
of Unit Banking are much smaller when compared to branch banking. Unit banking system
originated in the USA.

MERITS OF UNIT BANKING

1. Local Development: 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. The funds of the locality are utilised for the local development and
are not transferred to other areas.

2. 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.

3. Easy Management: The management and supervision of a unit bank is much easier and more
effective than that under branch banking system. There are fewer chances of fraud and
irregularities in the financial management of the unit banks.

4. 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.

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

6. No Inefficient Branches: Under unit banking system, weak and inefficient branches are
automatically eliminated. No protection is provided to such banks.
7. No dis-economies of Large Scale Operations: Unit banking is free from the dis-economies
and problems of large-scale operations which are generally experienced by the branch banks.

8. No delay in taking decisions: In unit banking system, every bank is an independent unit.
Hence, there will be no delay in decisions taking.

9. Personal Contact with the customers: Unit Banking System being a small scale independent
unit can maintain good personal contacts with the customers for efficient management of the
bank. It is said that in case of unit banking system the manager can maintain good personal
contact with the customers and businessmen.

10. Low overhead cost: In case of Unit Banking, the overhead cost will be low than in case of
branch banking system.

11. More operational freedom: The managers of the Unit Banking system are given more
discretionary powers so that they can study the problems of local customers and provide better
services to them on merit.

DISADVANTAGES OF UNIT BANKING

The following are the disadvantages of unit banking system:
1. 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.

2. 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.

3. No Banking Development in Backward Areas: 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.

4. Lack of Specialization: Unit banks, because of their small size, are not able to introduce, and
get advantages of, division of labour and specialization. Such banks cannot afford to employ
highly trained and specialized staff.

5. Costly Remittance of Funds: A unit bank has no branches at other place. As a result, it has to
depend upon the correspondent banks for transfer of funds which is very expensive.

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

7. Local Pressures: Since unit banks are highly localised in their business, local pressures and
interferences generally disrupt their normal functioning.
8. Undesirable Competition: Unit banks are independently run by different managements. This
results in undesirable competition among different unit banks.

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banking.html#ixzz2xNebtG2N
In continuation to our Banking Awareness series, today we are providing you a brief
about CASA.

Casa Ratio: Casa is basically the current and savings account deposits. The CASA
ratio shows how much deposit a bank has in the form of current and saving account
deposits in the total deposit.

If the CASA ratio is higher than it means that a higher portion of the deposits have come
from current and savings deposit.

This means that the bank is getting money at low cost, since no interest is paid on the
current accounts and the interest paid on savings account is usually low.

Current and Saving Accounts are demand deposits and therefore pay lower interest
rates compared to term deposits where the rates are higher.

In India, interest rates paid on current and savings account deposits is administered by
banking regulator - the Reserve Bank of India.

Why are banks keen on gained a higher share of CASA?

Interest rate paid on Casa is much lower compared to other deposits like term deposits
or recurring deposits. While banks do not pay any interest on current account, interest
paid on savings account deposit is 4%.

Banks therefore make maximum effort to increase the share of Casa on their books to
reduce their overall cost of deposits. HDFC Bank has the highest share of Casa to total
deposits at 52%, followed by the State Bank of India at 48% and ICICI Bank at 45%.

What does Casa mean for customers?

Recently interest paid on savings account deposits is 4%. Banks pay interest on
savings deposits on a daily basis rather than paying on the minimum balance
maintained by them in six months.
As a result, savings account customers earn better returns compared to what they
earned a year ago.

Further, interest earned on savings account deposits does not attract TDS (tax
deduction at source). Interest income above 10,000 a year attracts TDS of 10% in case
of term deposits. However, there is no major benefit for current account deposits, which
is mainly maintained by corporates and traders.
What are the disadvantages of high CASA?

These deposits can move out of banks' books anytime, leading to asset-liability
mismatches. While in case of term deposits, banks are almost certain that the depositor
may not withdraw money before the maturity of the deposit and may also renew the
deposit on maturity.

Further, to finance long-term projects, banks need to have long-term liabilities on their
books to avoid mismatches. Banks cannot rely on Casa deposits to fund long-term
loans.

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casa.html#ixzz2xNekK0s0
Dear readers, in continuation of our Banking Awareness Series, here we are presenting
another brief article on "Finance Commission".

The government has constituted the 14th Finance Commission under the
chairmanship of former RBI Governor YV Reddy. The commission will submit its
report by October 31, 2014.

Finance Commission of India:

A finance commission is set up every five years by the President under Article 280 of
the Constitution. Finance Commission of India came into existence in 1951.

It was formed to define the financial relations between the centre and the state. These
recommendations cover a period of five years.

The commission also lays down rules by which the centre should provide grants-in-aid
to states out of the Consolidated Fund of India. It is also required to suggest measures
to augment the resources of states and ways to supplement the resources of
panchayats and municipalities.

Composition of the Fourteenth Finance Commission:

The Fourteenth Finance Commission has been set up under the Chairmanship of Dr.
Y.V.Reddy [Former Governor Reserve Bank of India].

Other Members of the Commission are:

i. Ms. Sushma Nath [ Former Union Finance Secretary ],
ii. Dr. M.Govinda Rao [ Director, National Institute for Public Finance and Policy, New
Delhi ),
iii. Dr. Sudipto Mundle, Former Acting Chairman, National Statistical Commission.
iv. Prof Abhijit Sen (Member, Planning Commission) is the part-time Member of the
Fourteenth Finance
v. Commission. Shri Shri Ajay Narayan Jha is the Secretary, Fourteenth Finance
Commission.

Qualifications of the members: The Chairman of the Finance Commission is selected

among people who have had the experience of public affairs. The other four other
members are selected from people who:

1. Are, or have been, or are qualified, as judges of High Court, or

2. Have knowledge of Government finances or accounts, or
3. Have had experience in administration and financial expertise; or
4. Have special knowledge of economics

Procedure and Powers of the Commission: The Commission has the power
determine their own procedure and:

1. Has all powers of the civil court as per the Court of Civil Procedure, 1908.
2. Can summon and enforce the attendance of any witness or ask any person to deliver
information or produce a document, which it deems relevant.
3. Can ask for the production of any public record or document from any court or office.
4. Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code
of Criminal Procedure, 1898

Tenure of the 14th Finance Commission: The Finance Commission is required to

give its report by 31st October, 2014. Its recommendations will cover the five year
period commencing from 1st April, 2015.

Note: The First Finance Commission was constituted vide Presidential Order dated
22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952.

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commission.html#ixzz2xNevoxTM

BANKING AWARENESS: MARGINAL STANDING FACILITY

In view of the ongoing Clerical Interview, we are presenting to you a brief about Marginal
Standing Facility. Hope you like the post.

MARGINAL STANDING FACILITY

MSF rate is the rate at which banks borrow funds overnight from the Reserve Bank of India
(RBI) against approved government securities.
This came into effect in may 2011. Under the Marginal Standing Facility (MSF), currently banks
avail funds from the RBI on overnight basis against their excess statutory liquidity ratio (SLR)
holdings.
 Under the facility, the eligible entities can avail overnight,
up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at
the end of the second preceding fortnight.

Rate of Interest: The rate of interest on amount availed under this facility will be 100 basis
points above the LAF repo rate, or as decided by the Reserve Bank from time to time.
Timing: The Facility will be available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.

Minimum request size: Requests will be received for a minimum amount of Rs. One crore and
in multiples of Rs. One crore thereafter.

Current MSF rate: In the mid-quarter review of the monetary policy , the Reserve Bank of
India (RBI) increased the Marginal Standing Facility (MSF) rate by 25 basis points to 9.00% and
increased the Repo rate by 25 basis points to 8.00% with immediate effect.

Requirement: It is required because Commercial banks borrow money from RBI at MSF rate
when there is an acute cash shortage or acute asset-liability mismatch.

Current Rates are as Follows:

1. Repo Rate – 8%
2. Reverse Repo Rate – 7%
3. CRR – 4%
4. MSF – 9 %
5. Bank Rate - 9%
6. SLR – 23%

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standing.html#ixzz2xNlT3Ler