Classification of Banks

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.