Banking System in India

The banking system in India refers to the procedure of undertaking banking business by a bank.

The banking system differs from country to country depending upon the economic condition, political system and financial systems of the country concerned.

The system of banking followed by a bank is determined on the basis of the volume of operation, business pattern, and area of operation of the bank.

Types of the Banking system in India :

The most common banking system in India is stated below :

  1. Branch banking System
  2. Unit Banking System
  3. Chain Banking System
  4. Group Banking System
  5. Correspondent banking system
  6. Pure Banking System
  7. Mixed Banking System
  8. Investment Banking system
  9. Universal Banking System
  10. Retail Banking System
  11. Whole Sale Banking System

Branch Banking System :

Branch Banking is a system of banking where a relatively big commercial bank undertakes banking activities with a network of branches.

A bank under this system may open branches both within and outside the country of its origin.

Thus branch banking is a de-localized banking system where banking has its presence throughout the country and even outside the country.

The main features of Branch Banking :

A) There is a separation of ownership and management of the banks –ownership lies with the shareholders and the management lies with the single board of directors.

B) The bank under this system has a head office and the Head Office controls the activities of all the branches.

C) There is a branch manager for each of the branches of the bank who is responsible for managing the affairs of the branches.

D) In the matter of preparation of financial statements, the assets and liabilities of the head office and the branches are arranged.

The branch banking system originated in England and over the years it has become the most popular and prevalent banking system in the world. Since, since the introduction of organized banking institutions, the branch banking system is being followed.

Unit Banking System :

Unit banking is a system where an independent isolated bank undertakes banking functions in a particular area.

The operation of a bank in this system is confined to a particular area and hence this system is also known as Localised Banking. A bank under this system has just one office with virtually no branches.

It provides collection and remittance facilities to its customers by taking the help of other banks.

The unit banking system originated and developed in the USA under the patronage of the government.

Advantage of Unit Banking System :

The unit banks being independent and one office banks possess certain advantages stated below :

A) Easy management and control: The management and control of unit banks are much easier and effective due to the small size and operations of the banks.

B) Quick Decision: In this system, there is an on the spot decision making by the bank management because there is no necessity of any consultation and approvals from external authority.

C) Prevention Of Monopoly: Monopolistic tendencies are absent in the unit banking system. The banking resources are distributed between a large number of small bank’s and hence there is no danger of concentration of economic power.

D) Satisfaction of Local needs: Unit banking being localized banking can serve to fulfill local needs. The banks are aware of the local problems and needs and thus are in a better position to satisfy the local expectations.

E) Personalised Services: A unit bank has personal knowledge of each of his customers and thus can provide personalized services.

D) Local Utilisation of deposits: In the unit banking system, there is no possibility of the transfer of resources by banks. The deposits mobilized by a unit bank in a particular are is utilized for the development of the same area. So, there is no chance for regional imbalances under this system.

E) No inefficient branches: In this system, inefficient loss-making banks are automatically eliminated, and only the profit earning banks survive. There is no system of providing protection or compensate for the losses of inefficient banks.

Group Banking System :

Group banking is that system of banking in which two or more banks are directly or indirectly controlled by an association, trust or business corporation.

The banks function as a subsidiary of the holding or parent company. The holding company may be a banking or nonbanking company.

The individual banks may be unit banks, or banks operating with branches or a combination of the two. Through the holding company controls and manages the banks in the group, each bank continues to have its own separate identity.

Participating banks have their own Board of Directors which is responsible to the holding company and depositors for the proper management of the banks.

Group banking developed in the USA and was very popular between 1925 to 1929. However, during the Great Depression of 1929, most of these banking groups failed and thereafter the popularity and importance of group banking as a system declined.

Advantages Of Group Banking :

The group banking system has the following advantages :

A) Economics of large scale operations: The participating banks can avail of the benefits of large scale operation. E.g. Economy in the advertisement, purchasing stationeries.

B) Broader Market: It offers a broader market to the member banks. This helps the member bank’s to improve their earning capacity and network.

C) Diversification of Risks: There is the possibility of diversifying and distributing risks of business under this system.

D) Lower cash reserves: A bank can operate with lower cash reserves and thus reduce it’s idle cash reserves in a group banking system. It is because, in case of a shortage of cash, it can be easily transferred from one member bank to another.

E) Enhanced operational efficiency: In this system there operational efficiency of participating bankers is enhanced through shared knowledge and experience. The holding company also provides specialized services and advice to the participant’s banks.

F) No Wasteful competition: Since all the banks operate in a group under one holding company, there is no wasteful competition among the banks.

Chain Banking System :

Chain banking is a system of banking in which two or more banks are controlled by an individual or a group of individuals or members of a family.

In this system, a number of separately incorporated banks are controlled by holding a majority of shares in each bank or inter-locking of directorship.

However, each bank retains it’s Separate identify and carries out its operations without the intervention of any central organization.

Chain banking developed in the USA towards the middle of the 19th century. But like group banking, most of the chain banks failed during the Heart Depression of 1929 and subsequently, thus system lost its popularity.

Frequently Questions And Answers :

1. Which banking system followed in India?

Ans: Branch banking system followed in India.

2. How many banking are there in the Indian banking system?

Ans: There are a total 105 Banking in India.

3. Which is the oldest banking in India?

Ans: Bank of Hindustan was the oldest banking in India.

4. Types of the Banking system in India?

Ans: Unit Banking, Branch Banking, Group Banking, Chain banking.

5. Who is the father of banking?

Ans: Alexander Hamilton.

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