Banking System In India

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 volume of operation, business pattern and area of operation of bank.

Types of Banking system in India :

The most common banking system in India are 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 de-localised banking system where a banking has its presence throughout the country and even outside the country.

The main features of Branch Banking :

  1. 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.
  2. The bank under this system has a head office and the Head Office controls the activities of all the branches .
  3. There is a branch manager for each of the branches of the bank who is responsible for managing the affairs of the branches.
  4. In the matter of preparation of financial statements, the assets and liabilities of the head office and the branches are arranged.

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

Unit Banking System :

Unit banking is a system where an independent isolated bank undertakes banking function 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 customer by taking the help of other banks.

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 bank’s possesses certain advantages stated below :

  1. Easy management and control : The management and control of unit banks is much easier and effective due to the small size and operations of the banks.
  2. Quick Decision : In this system there is a on the spot decision making by the bank management because there is no necessity of any consultation and approvals from external authority.
  3. Prevention Of Monopoly : Monopolistic tendences are absent in 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.
  4. Satisfaction of Local needs : Unit banking being a localised 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.
  5. Personalised Services : A unit bank has personal knowledge of each of his customer and thus can provide personalised services.
  6. Local Utilisation of deposits : In unit banking system, there is no possibility of transfer of resources by banks. The deposits mobilised by a unit bank in a particular are is utilised for the development of the same area. So, there is no chance for regional imbalances under this system.
  7. No inefficient branches : In this system, inefficient loss making banks are automatically eliminated ,and only the profit earning bank’s survive. There is no system of providing protection or compensate the losses of inefficient bank’s.

Group Banking System :

Group banking is that system of banking in which two or more bank’s 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 non banking company.

The individual bank’s may be unit banks, or bank’s 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 their 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 group failed and there after popularity and importance of group banking as a system declined.

Advantages Of Group Banking :

The group banking system has the following advantages :

  1. Economics of large scale operations : The participating banks can avail of the benefits of large scale operation. E.g. Economy in advertisement, purchasing stationeries.
  2. Broader Market : It offer broader market to the member bank’s. This helps the member bank’s to improve their earning capacity and network.
  3. Diversification of Risks : There is the possibility of diversifying and distributing risks of business under this system.
  4. Lower cash reserves : A bank can operate with lower cash reserves and thus reduce it’s idle cash reserves in group banking system. It is because, in case of shortage of cash, it can be easily transferred from one member bank to another.
  5. Enhanced operational efficiency : In this system there operational efficiency of participating banker is enhanced through shared knowledge and experience. The holding company also provides specialised services and advices to the participants bank’s.
  6. 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 bank’s are controlled by an individual or a group of individuals or members of a family. In this system a number of separately incorporated bank’s are controlled through holding majority of shares in each bank’s or inter-locking of directorship.

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

Chain banking developed in the USA towards the middle of 19th century. But like group banking, most of the chain bank’s 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 Indian banking system?

Ans: There are 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 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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