During the last three centuries different types of banks have developed.
Each type usually specializes in a particular kind of business.
We can, therefore, distinguish the different banks according to the functions they perform.
Types of Banks: They are given below:
1. Commercial Banks:
These banks play the most important role in modern economic organisation. Their business mainly consists of receiving deposits, giving loans and financing the trade of a country. They provide short-term credit, i.e., lend money for short periods. This is their special feature.
2. Exchange Banks:
Exchange banks finance mostly the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They also buy and sell foreign currencies and help businessmen to convert their money into any foreign money they need. Their share in the internal trade of a country is usually small. In addition, they carry on ordinary banking business too.
3. Industrial Banks:
There are a few industrial banks in India. But in some other countries, notably Germany and Japan, these banks perform the function of advancing loans to industrial undertakings. Industries require capital for a long period for buying machinery and equipment. Industrial banks provide this type of Mock capital. Industrial banks have a large capital of their own. They also receive deposits for longer periods. They are thus in a position to advance long-term loans.
In India, the Central Government set up an Industrial Finance Corporation of India (IFC1) in 1948. Its activities have since then been greatly enlarged. Further the States have also set up State Financial Corporations. The Central Government has also established the Industrial Credit and Investment Corporation of India (ICICI) and the National Industrial Development Corporation for the financing and promotion of industrial enterprises. In 1964 the Industrial Development Bank of India (1DBI) was established as the apex or top term-lending institution. These new institutions fill important gaps in our system of industrial finance.
4. Agricultural or Co-operative Banks:
The main business of agricultural banks is to provide funds to farmers. They are worked on the co-operative principle. Long-term capital is provided by land mortgage banks, nowadays called land-development banks, while short-term loans are given by co-operative societies and co-operative banks. Long-term loans are needed by the farmers for purchasing land or for permanent improvements on land, while short-period loans help them in purchasing implements, fertilizers and seeds. Such banks and societies are doing useful work in India.
5. Savings Banks:
These banks (perform the useful service of collecting small savings. Commercial banks too run “savings departments” to mobilise the savings of men of small means. The idea is to encourage thrift and discourage hoarding. Post Office Saving Banks in India are doing this useful work.
6. Central Banks:
Over and above the various types of banks mentioned above, there exists in almost all countries today a Central Bank. It is usually controlled and quite often owned by the government of the country.
7. Utility of Banks:
An efficient banking system is absolutely necessary for a country, if it is to progress economically. The services that an efficient banking system can render a country are indeed very valuable. Undeveloped banking system is not only an index of economic backwardness of a country, it is also an important cause of it. The banking system can be useful in the following ways, in addition to what has been mentioned in the functions of banks.
(i) The banks create instruments of credit which are very convenient substitutes for money. This means a great saving Actual movement of money is avoided and expenses saved.
(ii) The banks increase the mobility of capital. They bring the borrowers and the lenders together. They collect money from those who cannot use it, and give it to those who can. Thus, they help the movement of funds from place to place, and from person to person, in a very convenient and inexpensive manner.
(iii) They encourage the habit of habit by providing safe channels of investment. In the absence of banking facilities, people would just squander their funds.
(iv) By encouraging savings, the banks bring about accumulation of large amount of capital in the country from small individual savings. In this way, they make the resources of the country more productive, and thus contribute to the general prosperity and welfare, of the country.