Useful Notes on the Classification of Bank on the Basis of their Functions

According to this theory, in the assets of banks are included short term loans in addition to cash. Hence, Commercial Banks are those banks which advance loans for short period. In the words of Culbertson,’ Commercial Banks are the institutions that make short term loans to business and in the process create money’. According to Reed and Gill,’ A commercial bank is a financial institution that accepts demand deposits and makes commercial loans and is regulated by a bank regulatory agency”.

According to Goldfield and Chandler it is wrong as well as confusing to call these banks as commercial banks. This is because of two reasons. First, these banks also give long period loans to agriculture and industry. Second, many other institutions have also come up which give only short-period loans.

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The principal function of these banks is that the credit created by these banks is accepted and functions like money as a medium of exchange. These banks do not issue notes but create credit on the basis of their cash deposits. Credit creation is the principal function of these banks.

Chandler therefore, maintains that it would be more appropriate to call these banks as Cheque Deposits Banks. But their current and popular name is Commercial Banks. Thus, a commercial bank is a bank which deals in money and credit for the purpose of earning profit. The State Bank of India, Punjab National Bank, Indian Bank, and Canara Bank are some of the examples of Commercial Banks.

2. Foreign Banks:

Foreign Banks are those banks which are incorporated in a foreign country. They have set up their branches in India. Their principal function is to make credit arrangement for the exports and imports of the country and these banks deal in foreign exchange.

These banks convert the country’s currency into currencies of other countries, and likewise foreign currencies are converted into domestic currency. To perform this function of currency- conversion, these banks have to keep with them currencies of the various countries. These banks have their head offices in foreign countries.

Most of the exchange banks in India are foreign banks; Grindlays Bank, Chartered Bank, Hong-Kong Bank, and Bank of America are examples of these banks in India.

3. Industrial Banks:

Industrial Banks are those banks which offer long term and medium term loans to the industries and also work for their development. These banks help industries in the sale of their debentures, bonds and shares.

Banks themselves purchase the shares as well as underwrite the debentures of the industries. Industrial Banks give loans to the industries for the purchase of land and machinery. In India many industrial banks have been established after independence, viz. Industrial Development Bank of India, Industrial Finance Corporation, State Finance Corporations and others.

4. Agricultural Banks:

Agricultural Banks are those banks which give credit to agricultural sector of the economy. Short period loans are given to the farmers for the purchase of seeds, fertilizers and other inputs. Long period loans are given for making permanent improvement land.

Agricultural Co-operative Banks and Regional Rural Banks deal in short period loans while long period loans are advanced by Land Development Banks. At the village level Primary Agricultural Co-operative Societies, at the tehsil level Co-operative Unions, at the district level Central Co-operative Banks and at the state level State Co-operative Banks function in India. To fulfil agricultural credit needs at the national level, National Bank for Agriculture and Rural Development (NAB ARD) has been established.

5. Saving Banks:

The principal function of these banks is to collect small savings across the country and put them to the productive use. These Banks have shown marked development in Germany and Japan. Saving Banks were first established in Hamberg city of Germany in 1765. In India a department of Post Offices functions as Saving Banks.

6. Indigenous Banks:

These Banks found their origin in India. These banks made a significant contribution to the development of agriculture and industry before independence. Mahajans, rural money lenders and jewellers have been the fore-runners of these banks in India. These agencies do their banking business with their own funds. Even these days nearly 40% of agricultural loans are offered by the indigenous banks in India.

7. Central Bank:

Central Bank is the Apex bank of the banking system of the country. It issues currency notes and acts as banker’s bank. It controls credit and regulates the banking system of the country. Central Bank occupies an important status in monetary and banking system of a country.

Economic stability is the principal function of these banks. The Central Bank issues all types of currency, controls all other banks in the country and functions as a bank of the Government. This Bank also controls and regulates the flow of credit.

The Reserve Bank of India, Bank of England and Federal Reserve System are the Central Banks respectively of India, England and U.S.A. Though the first Central bank in the world was established in 1668 in Sweden, but the true beginning of Central banking system is marked with the establishment of Bank of England in 1694.

In short, Central Bank is an institution that controls and regulates the banking system of a country.

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