According to Section 131A of the Negotiable Instrument Act-1881, the Drafts are at par with the cheques in case of crossing. It means that Draft is similar to a cheque for the purposes of crossing. Despite that, the following are the differences between the two.

1. A Draft is always payable to the 'order' while a cheque may be payable to the bearer.
2. The payment of Draft cannot be stopped (countermanded) except in cases where the draft is reported lost.
3. In case of a cheque, the drawer can get payment of a cheque stopped, if he so likes.
4. The banker has a direct liability to pay a Draft because purchaser of the Draft has already paid the money to the drawer bank and there is a clear direction from drawer branch to the drawee branch for payment of the money to the payee named therein or crediting to his order.
5. The banker has indirect liability in case of a cheque while the primary liability lies with the drawer of the cheque. The banker will make payment of the cheque only when it has sufficient funds of the drawer with it for payment and the cheque is otherwise in order.

Section 85 A of the Negotiable Instrument Act- 1881 defines a Draft as: "an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand". If the definition is carefully analyzed, the following will emerge as the essential features of a Bank Draft:

1. It is drawn by one office of a bank upon another office of the same bank;
2. It is payable on demand; and
3. Its payment has to be made to the person whose name is mentioned therein or according to his order.

It may be mentioned here that Drafts are not payable to bearer. Once these are issued by banks, the remitter or in other words, the purchaser of the draft/ceases to be any party to the instrument. Instead there remains three parties to the instrument.These are: (a) Drawer branch (b) Drawee branch and (c) Payee.

According to Section-13 of the Negotiable Instruments Act-1881, negotiable instruments include only three instruments namely, (a) Promissory Note, (b) Bill of Exchange and (c) Cheque. Since Bank Draft is not included in this list, controversy arose as to whether Drafts are negotiable instruments or not despite the fact that Drafts are equivalent to Bill of Exchange. 

Various court decisions or judgements made it clear that the Drafts are Bill of Exchange. For example, mention may be made about the Allahabad High Court case (S.N. Shukla Vs The Punjab National Bank Limited) and Calcutta High Court case (State Bank of India and another Vs Jyoti Ranjan Mazumder). Both these courts held that the Drafts are Bill of Exchange. If Drafts are Bill of Exchange, as per court judgement, it needs no mention that they are also negotiable instruments.

Not only the court judgements, Negotiable Instruments Act-1881 itself clarified the position by two subsequent amendments - one in 1930 and another in 1947. The amendment made in 1930 by Section 85A states that where any drat, that is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharges by payment in due course.

On the other hand, amendment made in 1947 by Section - 131 A states that the special provisions relating to cheque that is provisions relating to crossing of cheques shall also apply to any drafts, as defined in section-85 A, as if the draft were a cheques. Based on these two amendments, it is argued by all authors including M.L. Tannan that Drafts are negotiable instruments since protection to the paying and collecting banker in case of crossed cheques is also applicable to the Drafts.

In case of day to day transactions everybody prefers payment in cash. Usually clients use cheques to withdraw money from bank. But there are some limitations in payment using cheques. It may be countermanded (stopping payment) by the drawer or dishonored by the banks. Under this circumstances, Bank Drafts - also called Demand Draft - are the best alternative to cash because these are equivalent to cash. Payment in Drafts are free from any ambiguity. Once the Drafts are issued, the purchaser no longer remains any party to the instrumens. Neither the payment of Drafts can be countermanded (stopped) by the purchaser nor the banks can refuse the payment. Because of these advantages, Demand Drafts are widely used by the business and no-business people to simultaneously avoid ambiguity in payment and hazards of cash remittance. 

 

Business, industry and the members of public are in frequent need of remitting fund from one place to another for various purposes. Banks serve as the best medium for such remittance since they have their branches throughout the country and even abroad. Such facility is available to the customers of a bank as well as non-customers. In fact his is the third major the first two being deposit and advances - area of operation of a bank.

Remittance of funds through banks eliminates the hazards in trasportation of cash from one place to another for settling trade and private dues. On deposit of requisite funds and payment of the reqired charges, a bank undertake to make the remitted amount available to a particular person or his order in a particular branch of the same bank or on other banks with which it may have agency arrangement.

It is needless to say that bank's remittance facility is a powerful alternative to the money order facilities provided by the postal department of our country.

Methods of Remittance

Various methods have been evolved by the banks for remittance of funds from one place to another. Generally such remittance is effected by  the banks in three ways, namely: (a) Banker's Draft or Demand Draft (DD) (b) Mail Transfer (MT) and (c) Telegraphic Transfer (TT).

How does Clearing House operate?

Mechanism of operation of the clearing house is by now an well developed one. Generally the mechanism is as under:

1. Every member bank of the clearing house prepares a bank-wise list of cheques and drafts received from its customers and drawn on different banks.
2. Representative of each bank visits the clearing house with the cheques and their list in the morning and delivers the cheques and drafts to the representatives of the respective banks. Similarly, he also receives the cheques drawn on his bank from the representatives of the other banks.
3. The representatives return to their respective banks to meet again in the afternoon to return the dishonored instruments, if any, to the representatives of the respective banks.
4. The representative of each bank cmputes the final balance payable by his bank from other banks after taking into account the various amounts of receipts and payments.
5. The final settlement is effected by the supervisor of the clearing house by debiting or crediting , as the case may be, the accounts of the respective banks as maintained with clearing house.

Clearing house is an arrangement for the banks to mutually settle their claims over each other arising out of deposit transfer from one bank to another by their respective customers. This arrangement is a recent development in banking without which no bank can imagine to function in today's market comprising millions of customers banking with dozens of banks.

It is a common knowledge that every day thousands of cheques and drafts are drawn by the customers. These cheques and drafts are payable at a particular branch of a particular bank. To get payment of such cheques and drafts they can go personally to those branches. But problem arises when people in possession of cheques and drafts drawn on the other banks stay far away. It becomes inconvenient for them to go there. Moreover, it is also time consuming not to speak of cost. 

Under the circumstances, what a customer can do is to just deposit the cheques and drafts drawn on other banks with his own bank. The bank will then collect the proceeds of those instruments on behalf of the customers and credit the customers account with the proceeds. 

For the purpose of collection of cheques and drafts banks have devised a system called 'Clearing House' where all the banks have their accounts. They mutually settle their claims by simple 'debit and credit' to that account without physically transferring any funds. This is a convenient system in the sense that it does neither involve traveling nor cash handling by the customers. Branches of other banks where cheques and drafts are drawn are not to be visited by the customers. Simply by depositing those into their accounts, the customers get those collected by their bankers.

It may, therefore, be said that clearing House is an organization of the banks which settles inter-bank liabilities due to transfer of deposits by the customers from one bank to another.

Now a days this collection service is a very common service rendered by all the banks. Bank may or may not charge any service charge for this service. 

Bank regulation is the regular analysis and audit of banking activities to protect the interest of the depositors through the proper utilization and implementation of laws and rules. The main focus is to stablize the financial system against systematic risks brought on by the individual bank.

The primary aim of bank regulation and supervision is to patronize those activities through which protection of depositor's interest and strength of the whole banking system is increased.

Objectives of Bank Regulation

1. To develop proper and efficient banking system.
2. To stablize and maintain the banking system.
3. To ensure highest safety of depositors.
4.  To ensure the investment in socially preferential sectors.
5. To minimize the problems in banking service.
6. To ensure the proper and efficient competition in banking system.
7. To avoid possible obstacle in banking system.
8. To maintain credit system and flow under control.
9. To maintain the balance in the assets, liabilities in the bank.
10. To ensure public confidence on quality services offered by banks. 

A customer has the following obligations to perform for the bankers-

1. Draw cheques within the balance available in the account.
2. Keep the cheque books carefully so that third parties may not have easy access to that.
3. Pay responsible charges to a bank for service rendered.
4. Inform the banker about any problems attempt of every actions.
5. Draw cheques in such a manner that reduces the chances of problem alterations.

There is a relationship and responsibilities between Bankers and Customers and which is familiar with the term Banker Customer Relationship. A banker has the following obligations or duties to a customer-

1. A banker has to receive customer's money.
2. It is the duty of a banker to honor the customer's cheque.
3. The banker shall have to maintain the sequence of its affairs. There are some authorities who can call for the information. The authorities are income tax authorities and Central Bank. In such cases, bank can disclose the affairs of the accounts of the customers.
4. The banker shall have to serve responsible notices before closing a customer's account if necessary.
5. Bank shall have to provide the customer with cheque books and bank statement.
6. Bank will have to provide the customer all types of banking facilities available in the bank.

Central Bank	Commercial Bank
It is the principle banking institution of the country entrusted with special responsibility of maintaining economic stability.	It accepts deposit from public and finance for the needs of industry.
Profit making is not the objective of central bank but makes profit.	The principle aim of commercial bank is to make profit.
It is the non-competing unique institution.	Commercial banks are in constant competition with others.
There is only one central bank in a country.	There are many commercial banks in a country.
Central bank is the only agency of the country entrusted with the power of note issue.	Commercial banks don’t have the power of issuing notes.
Central bank can not have branches.	They have branches.
It is not generally permitted to take interest.	Commercial banks are permitted to take interest.
Act as a banker of the government.	Act as a banker of general public.
Doesn’t directly deal with public.	Directly deals with public.

The functions of modern commercial banks are as diverse as the functions of a government. As the government has presence everywhere, so is the case with commercial banks. They are also distinct by their presence in all the spheres of life-economic, social and financial. It is well known that the earliest banks started by safe custody, remittance, currency exchange and lending and/or investment.

As the days went by, banks assumed the names of commercial banks and multiplied their functional areas. Lending activity was at one time followed by deposit taking activity. Subsequently, bill collection, bill discounting, foreign exchange business, guarantee business, making payment on behalf of customers, acting as banker to the issue and undertaking public issue of shares, providing specialized services to the customers and so on were added to as their functions. 

Later part of the twentieth century, however, witnessed unprecedented improvement/changes in the banking industry. Introduction of new technology, namely, fax, telex, computer, e-mail and other equipment based on information technology (IT) etc. changed the whole scenario of banking around the world. Dozens of IT related products were added to the list of functions of commercial banks. As a result, it is observed that the commercial banks' services today cover practically all the segments of the economy and society. 

Most of the large and powerful modern banks in the world are popularly known as "Commercial Banks". The very term seems to attract all and sundry and everybody seems to be impressed by their strength, trustworthiness, picturesque facade, attractive location and ever smiling staff. But a very few is sure as to why they are called commercial banks or when from the term was being used. 

Considering the ever changing functional diversity and characteristics, importance and role in the economy and society, modern banks could have been termed otherwise long back. But clearly it was not done so. Large and strong banks around the world are sill called commercial banks though they are engaged in multifarious activities. Why?

The answer to the question probably lies in the fact that the commercial banks have been historically focusing on trade and commerce. It is true that they mobilized or take deposits from everybody. But while lending they certainly prefer financing trade and commerce. This is not, however, without reasons. The funds comprising mainly deposits of commercial banks are of short-term maturity repayable on demand. Therefore, these are to deployed in the sectors requiring funds for short-term deposits (liabilities) may result in mismatch between the assets and liabilities landing the banks into liquidity crisis. 

In order to avoid mismatch between assets and liabilities, the commercial banks prefer financing trade and commerce which require short-term fund. Though the modern commercial banks now a days finance long-term needs, but such portfolio is kept within limits. It is, therefore, quite appropriate that they are called commercial banks. However, they are also currently called deposit money banks in some countries. 

    

Commercial banking and Investment banking combined together is generally referred to as Mixed banking. Such banking of combining together the completely two different types of operations is a new development in many countries. Before this development, commercial banks were engaged in short-term financing while investment banks were engaged in long-term financing. 

The rationale of division of work was simple. Deposits of Commercial banks are of short duration and payable on demand or at short notice. Hence these banks are banks are required to keep their assets as liquid as possible so that assets always match liabilities in terms of liquidity. Any mismatch was avoided to prevent the banks from landing into liquidity troubles. On the other hand, investment bankers lent money for meeting the long-term need of the business and industry. They procured fund of longer duration to avoid any liquidity crisis. 

Separation of business between the two types of banks did not last long. At one stage, investment banks got involved into commercial banking primarily for augmenting their resources by way of mobilizing deposits to meet the growing need of industry. On the other hand, sensing market potential and being emboldened by greater resources commercial banks also did enter into the area of investment and long-term financing.

The result of mixing commercial banking with investment banking has been mixed, to say the least. Commercial banks in many countries landed into troubles and in the long run some even faced closure because of mismatch between short-term liabilities and long-term assets. In view of this new development, the desirability of mixed banking has been subjected to serious debate. Though professional bankers are found to be divided on the issue, yet majority is now found not to favor mixed banking. 

In fact, idea of mixed banking is gradually losing ground specially in view of development of different types of financial institutions to finance long term needs of the industry. Generally commercial banks now do not involve too much into term lending. Whenever they do, a limit is always drawn. As a result, the task of financing the industry is gradually shifting to investment, leasing and specialized institutions. However, recognizing the incompatibility of mixing investment banking with commercial banking, countries around the world have enacted legislation accepting the principle of bifurcation of these two systems of banking.

     

Qualities of Merchant Banker

A merchant banker must have certain qualities necessary to perform his designated functions. The essential qualities of a merchant banker are generally as follows: (a) He must have expertise, (b) He must have integrity and (c) He must be capable of building up the requisite banker-customer relationship.

Functions of Merchant Banker

A merchant banker performs many functions. Some of the important functions undertaken by a merchant banker are as follows:

• Underwriting of initial public offering of shares and debentures, 
• Appraising, promoting and financing domestic or overseas projects by raising resources in the form of equity, debenture and long-term loans;
• Extending assistance for and participating in international consortia to raise foreign currency loans;
• Taking deposits and participating in money market operations including foreign exchange dealings;
• Assisting in raising of Capital by means of private finance, right issues, public offer for sale or issue of loan capital;
• Providing advice or consultancy to the corporate sector in the areas of finance, investment, capital and management structure etc;
• Offering advisory services and managing the investment portfolios of individuals, socities, trusts etc. for promotion of investment and 
• Maintaining relations with the government, semi-government, public and private agencies. 

Merchant bank is a very old banking institution. As the very name suggests, they in the past dealt both in goods and in bill of exchange. In addition, they also provided remittance facilities and acceptance credit for financing foreign trade. That is why they are simultaneously referred to as banks, merchants and financial houses. It implied that he was both a merchant and a banker. But the fact remains that a bank is a bank and never a merchant. Similarly, a merchant is a merchant, not a banker. On the other hand, financial houses are neither banks nor merchants.

In view of the separation of role as above between banker and merchants in the recent past, the merchant banker no more deals in merchandise. They are now found to be engaged in financing domestic trade and advising on amalgamations, mergers and takeovers etc. Other activities now-a-days they cover include: investment management, hire-purchase and leasing finance etc.

An examination of their services suggests that they offer a complete package of financial and advisory services in the areas like: (a) Promotion of new companies and (b) Finance syndication for industrial projects. They also offer services for balancing, modernization, replacement and expansion (BMRE) and for diversification of the existing companies. The merchant banking institutions, in addition to these functions, are also engaged in management of investment portfolio of the companies and corporations. 

What is Investment Banking?

Investment banks are the specialized institutions engaged in providing assistance to the commercial organizations and companies in raising their long-term capital through the sale of shares, stocks and bonds in the open market. Unlike commercial banks these institutions work primarily as middlemen between the corporate bodies and the investing public. Generally, they take the whole issue of new shares of the business corporations or of other bodies. Subsequently they reissue them to the public at a higher price. Sometimes they also act as agents on commission basis. But usually they underwrite the issue of securities.

Classification of Investment Banks

Investment banks may be classified as: (a) Originators, (b) Underwriters and (c) Retailers. As Originators, their task is to bring out the new issue of the securities. As underwriters, however, they undertake to buy up the entire issue if not subscribed or responded to by the investors. On the other hand, as retailers, they arrange the sale if the securities to the individuals and institutional investors. They may also arrange private placement of the shares through negotiation. All these functions may be performed separately or single institutions may also do all the jobs depending on the market situation.

Mechanism of Operation of Investment Banking

The investment bankers as Originators conduct the preliminary negotiations with the issuing company or corporation. They obtain from them the detailed reports on the background of the issuing corporation, its corporate powers, the description of its products, the valuation of plant and machinery and other assets, its ownership and capital structure, and the purpose of the new issue etc. Generally they get these reports verified by the experts, technicians, professionals and accountants. They also obtain legal opinion on the legality of the issue.

If the details favorable, the Originator comes into an agreement with the issuing company y or corporation agreeing to bring out the new issue. If the issue involves large amount the Originator requests other investment banks to join an ‘underwriting syndicate’. This syndicate acts as a selling group. Finally, the securities are offered for public subscription. Simultaneously, the Originator takes various steps to avoid any possible glut in the market prices of the securities. He generally leaves an “Open Order” to repurchase the securities. In this case the price is kept slightly below the price at which they are offered to the public.

Usefulness of Investment Banking

Investment bank renders highly useful services to the business and industry by providing the necessary capital for meeting the long-term needs. Considering this importance, it is frequently called the “entrepreneur of entrepreneurs”. On the other hand, the investing public is also immensely benefited by the activities of the investment banker. The independent and in depth analysis of the stock made by the investment banker gives an idea to the investors about the desirability of the shares. This helps the investors to make their decisions as to whether the shares can be brought or not. 

Deposit banking is actually deposit taking from the members of the public. That is why banks are now-a-days called deposit taking banks. Technically, deposit taking is a borrowing from the market. But unlike other kinds of borrowings, they are not payable otherwise than on demand by cheques. Banks are at liberty to use those deposits any way they like. In fact banks use those funds for lending. That is why second important function of a bank is lending. It is, therefore, clear that a modern joint stock banks starts actually from deposit banking.

It is interesting to note that banking did not start by deposit taking. Historically it started initially with money exchanging followed subsequently by money lending. It is well known that Italian goldsmiths, money lenders and indigenous bankers did the business of money exchanging and lending. They did this job on their own financial strength. Considering strength, financial soundness and goodwill, people at one stage started, however, depositing their money and valuables with them. This not only strengthened their capability to lend but also helped them to pay some interest on deposit.

But till the emergence of Joint Stock Company in the seventeenth century in Europe Deposit banking was not popular. With the popularity of Joint Stock Company having limited liability concept, the deposit banking as such also became popular. In fact, a modern bank now starts with deposits followed by lending and other functions like investment, remittance, foreign exchange business and safe custody etc.

The function of taking deposit or borrowing money has become so much a routine job that many banks even do asses marketing (lending) first to be subsequently matched by liability marketing (deposit mobilization). With the growing importance of wholesale banking (service to corporate and other big clients), some of the banks even borrow from call money market to meet the demands of such clients with the hope of paying them back later by mobilized deposits. It is, therefore, amply clear that Deposit banking is practically the most important function of a modern joint stock bank unlike in the past. 

Chain Banking

Chain banking – a common phenomenon under Unit banking system-is in fact an offshoot of Unit banking and relates to the ownership pattern of the banks. Under this system, two or more Unit banks are controlled by an individual or group of individuals or members of his/their family. For this purpose, the common owners hold majority of the shares in each bank. By virtue of the shareholding, they become common directors of each bank. Banks, however, maintain their separate identity. 

Holding Company Banking

Holding company banking – also called Group banking – actually refers to two or more Unit banks which are held as subsidiaries by a holding company. Such type of banking is in fact similar to Chain banking having, however, one difference between them. In case of Chain banking, one individual or group of individuals or members of the family own two or more banks while in case of Holding company banking, a company in place of individuals owns two or more Unit banks. Holding company may or may not however, undertake business of banking.

Chain and Holding Company Banking: For And Against

Chain banking and Holding company banking or Group banking – offshoots of Unit banking developed in the United States of America – have many advantages. They are found to be better placed to pool greater resources and hence they enjoy economies of scale as well. They can also concentrate on serving a locality more effectively.

However, these systems of banking have certain disadvantages as well. They may suffer from lack of control and wring utilization of funds. Moreover, they may help concentration of economic power. That is why, even the United States of America presently discouraging by law this system of banking. 

Branch banking system has many advantages over the Unit banking system. The main advantages of the branch banking system over the Unit banking system are the following:

1. Scale of Operation: Since Branch banking involves larger number of branches; operational cost under this system tends to be lower. The per unit cost of product as well as administrative cost are lower because staff members can be utilized more effectively. Larger resources help the banks in arriving at the advantages of scale of operation.  

2. Risk Diversification: Under branch banking system the risks of business can be diversified. Since branches are located in different localities/regions doing different kinds of business, risk or loss of one branch can be compensated by the other.

3. More Coverage: Branch banking can offer more services to a greater number of clients. Qualified and component staff members can meet various needs of customers located at various places through branches at their door-steps.

4. Utilization of Fund: Funds can be better utilized under Branch banking system. One branch having excess liquidity can remit the fund to another branch having shortage eliminating thus the incidence of idle fund.

5. Area Development: Credit needs of the areas where branches are located can be effectively met through Branch banking system. As result, area development is facilitated.

Branch banking, however, has some disadvantages as well. The disadvantages as pointed out by the followers of Unit banking system may be summarized as follows:

1. Control Problems: Larger banks having many branches located at different places suffer many times from the problems of controls. With the growth in number of branches, complexities in the areas like manpower, business and systems and procedures also develop which at times may go beyond control.

2. Delayed Decision: A bank following the branch banking system many times suffer from the problem of delayed decisions because of limited powers of the branches. Delay takes place due to time taken for processing and many other factors.

3. Centralized Economic Power: Larger banks mobilize larger amount of deposits which are deployable. Hence the management of those banks enjoys huge economic power. Many times they use these resources to further their interest at the cost of others.

4. Diversion of Fund: Banks following branch banking system can divert mobilized funds from one place to another ignoring the interest and needs of the people located at the command area of a particular branch. Thus funds of rural areas may be diverted to the urban areas at the cost of the rural people.

5. Uneconomic Expansion: Branch banking system may also lead the banks to open branches at unprofitable locations because of political and other pressures.  Thus they may be burdened with unprofitable branches/offices causing erosion in their profitability.

In conclusion, it may be said that the advantages of Branch banking are in reality the disadvantages of Unit banking. On the other hand, disadvantages of Branch banking often turn out to be the advantages of Unit banking. Considering this aspect of the issue, no separate discussion on advantages and disadvantages of Unit banking has been made here. 

As the very name suggests, banking operations under Unit banking system are conducted by a single office/unit of the bank. The office is located in particular area having no other branches. It collects deposits from the small communities living in that particular area. In turn, it places those deposits with the banks in the cities. City banks, in turn, place those deposits with the bigger banks in the bigger cities. Thus all the banks get connected with each other directly or indirectly.

Since the Unit banks are small in size, the can not provide remittance facilities to their customers. For providing such facilities, however, they take the help of larger banks through a mechanism called correspondent relationship banking. 

Branch banking - a popular system of banking in the sub-continent as well as in many other countries of Asia and Africa - refers to a system of banking where a large bank having a Head office operates through a network of branches throughout the country and abroad. In case of smaller banks, however number of branches may be small located in particular area.

The business of banking under Branch banking system is conducted in the branches whereas Head Office works as controlling and monitoring unit. No banking is performed at the Head office. The branches are managed by the Managers posted for the purpose. They run the operations on the basis of guidelines and manuals provided to them by the Head office. Under Branch banking system, a bank may have as many branches as it can profitably manage. Each branch is however, treated as a separate unit for assessing its performance.

The main characteristics of Branch banking may, therefore, be summarized as follows:

1. The bank having a Head office or registered office is guided, managed and controlled by a single Board of Directors, of which Managing Director (Chief Executive Officer) is the ex-official member. 
2. Actual banking operations are conducted at the branches and those are controlled, monitored and guided by the Head office through guidelines, instruction manuals, statements and returns.
3. Day-to-day management of the bank is vested with the Managing Director or Chief Executive Officer (CEO) who operates through other officials at Head office. 
4. Branches are managed by the Managers having appropriate business, financial and administrative powers delegated to them by the Head office.
5. Each branch is treated as a separate unit for business and performance purposes. But while assessing the performance of the bank, the performance of all the branches are aggregated.

Based on organizational characteristics banking systems may be categorized as follows: (a) Branch banking and (b) Unit banking. Associated with the Unit banking are: Chain banking and Holding company banking. On the other hand, based on techniques, banking system may be as follows: (a) Deposit banking, (b) Investment banking, (c) Merchant banking and (d) Mixed banking. By mixing together, these systems are also called hybrid system. 

Modern banking systems had evolved through historical process depending on socio-economic, political and geographical factors. Since historical experience varied from one country to another, system evolved also varied from one country to another. It is observed that Branch banking originated in the United Kingdom whereas the United States of America is the home of Unit banking. On the  other hand, the mixture of the two or hybrid system is found to be in operation in many countries of Asia and Africa, more particularly in India and other countries of the Far East. 

The Branch banking developed in the United Kingdom primarily because of improved communications system and development of joint stock companies. On the other hand, the Unit banking developed in the United States of America under peculiar circumstances not found elsewhere. the US federal constitution permits both the federal and state governments to regulate banks. By virtue of this authority, many state governments prohibited Branch banking in the U.S.A. The spirit of free enterprise, freedom, distrust of monopolistic business favored the idea of Unit banking. As a result, it is observed that the U.S.A. is still the home of the largest number of small banks working in the respective states. 

The mixture of the two systems (hybrid) is followed by many countries like India, France and West Germany etc. India, till the other day, was the home for a large number of small banks in addition to money lenders, cooperative banks and indigenous banks. With the development of communication system, nationalization of banks, legal intervention and merger etc. the number of banks in the recent past reduced substantially. Despite that it is observed that India has still both the bigger banks with country wide branch network and small regional banks with limited presence. By and large the , however, follow Branch banking. In addition, techniques of banking there include various elements like Deposit banking, Merchant banking, Investment banking, Specialized banking and Mixed banking etc.

France, on the other hand, has three groups of banks, namely Deposit banks, Investment banks and Specialized banks. France emphasized always on small business and personalized services. In west Germany, banks initially did rely on their own resources rather than Deposit banking. But bigger private banks are found to be engaged in Deposit, Investment and wholesale banking.

Between the system operating in different countries, sometimes some similarities are found. But dissimilarities are also substantial in nature. However, these are gradually disappearing primarily because of unprecedented progress in the communications system and replication of one's experience by the other. 

A commercial bank is a financial intermediary which collects credit from lenders in the form of deposits and further lends in the form of loans and advances. A commercial bank holds deposits from individuals and business in the form of savings accounts and term deposits of varying maturities, while it issues loans in the form of personal and business under different portfolios. The term commercial bank came about as a way to distinguish it from an investment bank. The primary difference between a commercial bank and its counterpart is that a commercial bank earns revenue by issuing primary loans from its pool of deposits while an investment bank brings debt and equity offering to market for a fee. Among its assets, include loans; a commercial bank holds a portfolio of other securities to generate proprietary income.

Primarily, commercial banks are profit making organizations. It deals with money as well as short term debt instruments. The main objective of a commercial bank is to earn and maximize its profit by providing loans and advances and rendering ancillary services to its clients.

Commercial bank’s function can be categorized into two types:

1. Principal functions: Principal functions of a commercial bank are of three types:

a)   Acceptance of deposit: An important function of commercial banks is to attract deposit from the public. Those people who have cash account and want their safety, they deposit that amount in the banks. Commercial banks accept deposits every class and source and take responsibilities to repay the deposit in the same currency whenever they are demanded by depositors.

b)   Lending: Another function of commercial bank is to make loans and advances out of the deposit receive in various form. Bank apply the accumulated public deposits to productive uses by way of loans and advances, overdraft and cash credits against approved securities.

c)   Investment: Now a days commercial banks are also involved in investment. Generally investment means long term and medium term investments.

2. Ancillary functions: Ancillary functions of commercial banks are of two types:

a)      Agency Services:

§  To collect and making payment of cheques.

§  Execution of standing instructions relation to payment of installment of other deposit accounts, insurance premium, rent etc.

§  Acting as correspondent or agent of it’s customer or other bank both home and abroad.

§  Collection or payment of bills – electricity, telephone etc.

§  Purchase and sale of stocks or share – act as a banker to issue,

§  Acting as a trustee, executor and administrator of estates or attorneys of it’s customers.

b)      Miscellaneous Services:

§  Money transfer or remittance facilities from one place to another by means of Demand Draft, Mail Transfer, Telegraphic Transfer through expeditious means.

§  Collection of money on behalf of clients from abroad through Western Union Money Transfer, Cash Over the Counter, Xpress Money, Transfast, Moneygram and other instant delivery facilities.

§  Creation of medium of exchange by way of issuing cheques, which may be circulated like money.

§  Discounting of bills, which means buying of a bill at a priceless than the face value, against which actual value is realized on maturity.

§  Dealing in foreign exchange buying and selling under the authority of central bank.

§  Undertakes import and export business by way of handling LCs.

§  Financing export import business.

§  Issuance of Travelers Cheques.

§  Handling Debit card, Credit card, SMS banking, ATM Service, Online banking, Internet banking, Mobile banking etc.

§  Providing credit report at the request of the client containing financial works and business reputations.

§  Providing Safe Custody and Lockers facilities.

Finally, commercial bank plays an important role to encourage and mobilize the savings of the society. It gathers small savings and create a pool large enough to be profitability employees in industrial and business ventures. Thus the ultimate function of a commercial banker is that of a broker and dealer in money. Through this process of inter-mediation, a commercial bank renders very valuable service to the community to exploit the productive capacity of the country, which accelerate the pace of economic development and create employment opportunities.

      

A central bank is fundamentally a chief bank of a nation. The essential responsibilities of the central bank include issuing and maintenance of stable influx of currency, keeping inflation under control and ensuring optimum employment. Other tasks of the central bank consists of holding deposits on the reserves of other banks, as well as overseeing lending and exchange practices of commercial banks.

Central bank is the monetary authority of a country. It maintains the price stability through economic and monetary policy measures, meaning the country’s foreign exchange and the gold reserve and regulating the banking sector of the country. The central bank is both the Government’s banker and the banker’s bank, a “Lender of the last Resort”. It exercises monopoly over the issue of currency and the banknotes. Detail functions of central bank are given below:

1. Note Issue: Central bank is the sole authority for issuance of bank notes in the country. This power enables the bank to regulate and control money supply in the country.

2. Banker to the Government: Being at the hub of financial activities central bank traditionally act as the banker, agent and adviser to the Government. It maintains banking accounts of the Government and its various organs, it makes temporary advances to the Government, carries out the Government’s transactions involving purchases or sales of foreign currencies. Generally, central bank is given remuneration for transacting Government business.

3. As Banker’s Bank: Traditionally central bank serves as banker to the banks. The commercial banks of a country maintain accounts and entrust their surplus funds with their central bank. They borrow money from it when necessary. At the same time, schedule banks are allowed rediscounting facilities from central bank against government securities and trade bills for a short term to enable them to meet their temporary requirements of fund.

4. Policy Maker: Some times, the central bank’s control over money supply may be undermined by the commercial bank’s mechanism of credit creation. The total amount of money in circulation has a relationship with the creation of credit. Of course, commercial bankers are not the only people having the power. The modern credit cards, debit cards and other forms of electronic money play a part in creation of money. Central bank exercises credit control through various methods in the following ways:

a)    Bank Rate Policy: It involves the variation of discount rates to influence the market rates of interest, which play a crucial role in creation of credit. Whenever central bank wants to reduce credit, the bank rate is raised and whenever the volume of bank credit is to be expanded the bank rate is lowered.

b)    Open Market Operation: It involves purchase and sale of securities, government or central banks own obligation in the open market to influence the quantum of the money circulation.

c)   Variable Reserve System: It involves the variation of the minimum reserves, which the commercial banks are required to keep with the central bank, to curtail or enlarge the power of the commercial banks to create credit.

d)    Selective Credit Control: This method involves directional control to influence the flow of credit in particular channels.

e)  Credit Rationing: Under this method, the central bank, during the time of monetary stringency, rations credit by limiting the amount of credit available to each applicant and restricting re-discount facilities to short term bills. It may also involve setting limits on the individual bank’s credit during a specified period.

f)    Margin Restriction: Under this method central bank set the level up to which the bank would provide finance for the underlying goods, services or the project. In relation to letter of credit the margin restriction implies rates of margin a bank should retain before the letter of credit is opened.

5. Lender of the last Resort: It means a lender to whom borrowers may approach when all other lending sources have failed. This is the characteristic function of central bank who is the last resort for the commercial banks to approach for accommodation when there is a shortage of funds in the market.

6. Custodian of National Reserve: Central bank is entrusted with the custody of the nations reserves. The reserves in the past were mainly kept in the form of gold but after the breakdown of gold standard currently convertible foreign currencies form the back-bone of reserve assets. Central bank also works as custodian of foreign reserves.

7. Bank of Central Clearance: Being the holder of the balances of the commercial banks, central bank is specially qualified to act as a bank of central clearance. It promotes and run the clearance system in the cities and towns where it has branches.

8. Exchange Control: Being responsible for the maintaining the exchange value of money notes central bank also administers exchange control in the country. This task is two fold. On the one hand, it ensures that all foreign exchange receipt are accounted for and surrendered to the authorized dealers. On the other hand, it allocates and rations foreign exchange in line with set priorities.   

9. Licensing Authority: No bank can commerce banking in a country and no existing bank can open a new branch in or outside the country or shift any branch from one place to another without obtaining a license or permission form central bank.

10. Credit Information Bureau: With a view to strengthening credit discipline and streamlining all sorts of data in a symmetric way for formulation of monetary, economic and credit policy, a full fledged credit information bureau is functioned by central bank.

From the above discussion, we can understand that central bank’s activities are running for the goodness and betterment of banking, economic development, making policies, doing job for the Government, making rules and regulations for banks and financial organizations, controlling the money market and social development works.