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.   

   

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

A. Classification on the Basis of Ownership

 On the basis of ownership, banks can be classified into three categories:

1)  Public Sector Banks: This type of banks are organized, controlled, directed and owned by the government.

2)    Private Sector Banks: These banks are owned by the private individuals or corporations and not by the government or co-operative societies.

3)  Cooperative Banks: Cooperative banks are operated on the cooperative lines. Coopera­tive credit institutions are organized under the law of cooperative society and play an important role in meeting financial needs in the rural areas.

B. Classification on the Basis of Functions

 
On the basis of functions, banks can be classified into five categories:

1)      Central Bank: Central bank is fundamentally a chief bank of a nation. Important functions of the central bank are:  

a)      It issues currency notes.

b)      It acts as the banker, agent and financial adviser to the state.

c)      It is the custodian of nation's reserves of international currency.

d)     It serves as the lender of the last resort.

e)      It functions as the bank of central clearance, settlement and transfer and

f)       It acts as the controller of credit.

2)      Commercial Banks: A commercial bank is a financial intermediary which collects credit from lenders in the form of deposit and further lends in the form of loans and advances. 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.

3)     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.

4)   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. 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.

5)   Exchange Banks: Exchange banks deal in foreign exchange and specialize 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.

Banking is of ancient origin. But a very little is known about it prior to the middle age when the supposedly first public bank "Bank of Venice" was established in Europe in 1157 A.D. Incidentally with its founding started the age of modern banking. During those days banking used to be conducted by the individuals of the society, families and the members of the trading communities knows variously as merchants, goldsmiths (bullion traders) and money lenders etc. The predominant ownership pattern was that of single proprietorships. Alongside subsequently grew banking by partnerships. Long back, however, such banking has mostly been replaced by modern limited companies, corporations and multinationals. Recently remnants of banking by families on the basis of sole proprietorship or partnership are also on the process of being taken over by the modern companies in view of globalization of the economy and banking. 

Alongside activities and emphasis of the bank have also undergone dramatic and epoch making changes. Everyday new functions are being added to the list of banking functions. Not only that various types of banks are also emerging throughout the world. 

Meanwhile banks have also emerged as powerful financial institutions influencing the lives of billions of people in the world. They have been following different banking systems to cater to the needs of the economy and societies .