Banking And Types Of Banking Accounts

Published: 2021-04-13
Views: 625
Author: Editorial
Published in: Banking

Initially, the word "bank" applied to a person or an entity.

Who or what is converting one currency into another? However, nowadays, a bank is a financial institution where people store their cash in the form of deposits.

Based on this, a bank is a financial institution that deals with money and credit.

What is a bank?

A bank is a form of the financial institution that is permitted to accept deposits and make loans.

Financial services such as money management, currency exchange, and safe deposit boxes can be offered by banks.

Retail banks, commercial or corporate banks, and investment banks are among the various types of banks.

Banks become governed by the national government or central bank in most countries.

Categories of banking institutions

On the basis of their roles, banking institutions can be grouped into the following categories.

Commercial Banks: Commercial banks are financial institutions that accept deposits from the general public and provide short-term loans and advances to their customers.

Industrial Banks: Industrial banks fund industries by either issuing long-term loans or subscribing to stock.

Exchange banks are financial institutions that fund international trade and deal in foreign currencies.

Land Mortgage Banks: These institutions have long-term loans secured by agricultural and urban real estate.

Cooperative Banks: Cooperative banks are specifically designed to assist farmers by offering low-interest loans with simple terms.

Central Banks: A country's central bank is a government-run agency that oversees the financial system and the money market. In close collaboration with the government, it controls money and credit.

The basic structure of different types of banks

The structure of different banks varies from countries to countries but the most common to them all are:

Branch Banking

The branch banking system is a banking system that manages and operates a large number of branches both throughout the country and abroad. Branches are nothing more than agents for a specific bank.

The unit banking system refers to a single-office bank that serves a particular local population.

Investment Banking

An investment bank is a bank that makes money by investing money in different institutions.

Grammeen bank

Grammeen bank is a village-based bank that provides loans to villagers without requiring them to put up any collateral. It assists the citizens of the village by providing short-term loans.

Microcredit is promoted by this organization in Bangladesh and around the world.

Definition of Commercial bank

A commercial bank is a financial institution that accepts deposits from the general public and provides loans for investment with the aim of making a profit.

In reality, commercial banks, as their name implies, target profit-seeking organizations, i.e., they do banking to make money.

They typically use short-term loans to fund trade and commerce.

They charge borrowers a high rate of interest, but pay their depositors a much lower rate, resulting in the gap between the two rates of interest being the banks' primary source of profit.

Features of Commercial banks

Borrowing and lending, or accepting deposits and lending money to ventures in order to gain interest, are the two most distinguishing characteristics of a commercial bank (profit).

In other words, banks borrow in order to lend. The borrowing rate is the interest rate provided by banks to depositors, while the lending rate is the rate at which banks lend money.

Shapes and sizes of Commercial banks

Commercial banks come in a variety of shapes and sizes. It would be useful to make a passing reference to other forms of commercial banks.

Industrial banks

These banks, fund industrial issues by subscribing (buying) company shares and debentures, as well as providing long-term loans for the acquisition of equipment, plants, and other assets.

Foreign Exchange banks

Commercial banks that are subsidiaries of foreign banks that facilitate international financial transactions by buying and selling foreign bills are known as foreign exchange banks.

Agricultural banks

They offer long-term loans for the purchase of tractors and the installation of tube wells.

Savings banks, such as the Post Office Savings Bank, mobilize people's limited savings in savings accounts.

Cooperative Banks are formed by citizens for the good of all of them. They provide loans to their members at a reasonable interest rate.

Importance of Commercial Banks

Commercial banks are so vital to a country's economic growth that it is impossible to imagine a modern industrial economy without them. They are the country's nerve center for demand, trade, and industry. 

The importance of commercial banks is highlighted by the following points:

(i) They encourage people to save and increase the rate of capital formation.

(ii) They provide trade and industry with financing and credit.

(iii) By establishing branches in underdeveloped areas, they foster balanced regional growth.

(iv) Bank credit encourages entrepreneurs to innovate and invest, speeding up the economic growth process.

(v) They aid in the promotion of large-scale development and the expansion of priority industries like agriculture, small-scale manufacturing, retail trade, and export.

(vi) They generate credit by allowing them to give out more loans and advances than the depositors' cash situation allows.

(vii) They assist commerce and industry in expanding their market.

(viii) As a result, they allow for the most efficient use of resources.