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Operations Of A Banking Business That You Must Know Research Team | Posted On Wednesday, March 27,2019, 03:42 PM

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Operations Of A Banking Business That You Must Know



What is Banking Business?  

Banking is a highly regulated industry with a seemingly divergent purpose of maximizing shareholder’s wealth while providing a secure place for customers to deposit savings.

A commercial bank is a financial institution authorized to receive deposits and offer loans and credit cards. Banking businesses offer services like wealth management, currency exchange and safe deposit boxes. All commercial banks are regulated by the central bank of the country.

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Operations of A Banking Business That You Must Know

Following are the Types of Banks Operating in India:

  • Commercial Banks: Commercial banks are the most important type of banks as the general public is the main beneficiary. The term ‘commercial’ signifies that banking is a business similar to any other business. Commercial banks are authorized to collect deposits from the general public and lend money to business firms (manufacturers), traders, farmers and other consumers. The current account and savings account deposits in commercial banks are used as a medium of exchange, that is, for making transactions.
  • Development Banks: Development banks are a part of a country’s capital market. In India, development banks are called public financial institutions. They are specialized financial institutions that offer long term finance to large and medium scale industries. They also perform promotional functions to accelerate the rate of capital formation in the country. This promotes industrial and economical development in general. IFCI, IDBI and ICICI are a few examples of development banks. These banks are important in supporting ever increasing proportion of industrial finances and multiple types of development assistance to business enterprises across India.
  • Co-operative Banks: Co-operative banks are established under the provision of the co-operative society’s laws of a country. In India co-operative banks are set up to offer loans to primary agricultural credit societies at low interest rates. These banks majorly function in rural areas.
  • Land Development Banks: Land development banks, also called ‘land mortgage banks’, issue long term loans to farmers for land development. They also provide long term loans for farmers to acquire new land for agriculture related activities.
  • Investment Banks: An investment bank is a financial institution or a corporate division involved in advisory based financial transactions on behalf of an individual, corporation or government. If a corporate body wants to issue new equity or debt security, then an investment bank performs the role of intermediary. They sometimes make investments in these companies by purchasing equity shares.
  • Merchant Banks: A merchant bank helps a company sell newly issued shares to the general public. The main role of a merchant bank is to raise money in order to lend to industries.
  • Foreign Banks: Foreign banks are those banks that follow obligations of both the home country and India. There are various foreign banks operating in India like the Citi Bank, the Hong Kong and Sanghai Bank HSBC, and the Bank of America. These banks are not nationalized like Indian commercial banks.
  • Central Bank: Central bank is the supreme body responsible for regulating the banking sector in the country. Central Bank is the banker’s bank. It is also the banker to the Government. The Reserve Bank of India, RBI, is the central bank of India. A central bank or the reserve bank or monetary authority is an institution responsible for managing currency, supply of money and managing interest rates of a state or formal monetary union and regulates the commercial banks. Unlike commercial banks, central bank has a monopoly of increasing the monetary base in the state and controls the printing of the national currency notes and coins.

Central bank is the lender of last resort to the commercial banks during a financial crisis. Most central banks have supervisory or regulatory powers to ensure the solvency of member institutions, to prevent bank runs and to eradicate unfair practices of the member banks. In most countries, central bank works independently with little to no political interferences.

SEE ALSO:  What Is Banking Business?  

Type Of Bank Accounts

  • Checking Accounts: A checking account allows you to have easy day to day access to the money you deposit. There is usually no minimum account balance to be maintained.
  • Savings Accounts: A savings account offers annual interest on the money deposited. As the name suggests, these accounts are designed to facilitate savings. Money deposited in these accounts earns annual interest. Money earned as interest is added to your income and is taxed as per your income tax slab.
  • Money Market Accounts: A money market account is a mixture of savings and checking account. Banks generally offer a higher rate of interest on these accounts over savings accounts, and also give you a limited monthly access to the money through cheques and debit card.
  • Certificates of Deposit (CDs): Certificates of deposit CDs, are a low risk investment option. CDs offer a much higher rate of interest than a normal savings account. Moreover, CDs of longer periods offer higher interest rates. Your money in a CD account would be locked until maturity, but you are allowed to make premature withdrawals. Note that there are penalties levied on premature withdrawals.
  • Brokerage Accounts: Brokerage accounts are investment accounts. You can utilize the money deposited in brokerage accounts to buy financial instruments like stocks, bonds and mutual funds.

Following are the Major Functions of a Banking Business:

  • Safely Facilitating Savings: Banks are one of the safest options for individuals to keep their money. You can safely deposit money in both savings and current bank accounts. Banks offer annual interest on the money deposited in the savings bank accounts while current accounts earn no interest.  Banks also offer physical safety lockers / vaults, to deposit your valuables like gold jewelry and important documents like sale deed, agreements and so on. If you are planning to go on a vacation for a fairly long time, then you can make use of these lockers to safeguard your valuables.
  • Commercial Lending: Commercial loans, also referred to as business loans, are the loans that are intended for business purposes. Like other loans, creation of commercial loans involves interest while repaying. There are various types of business loans that include bank loans, mezzanine financing, invoice financing, microloans, business cash advances, cash flow loans, asset based financing and so on. IndusInd bank is a popular commercial loan lender in India.
  • Clearinghouse For Liquidity: Banks perform the role of economic clearing houses, promoting higher efficiency in the capital markets. Banks support cross-currency transactions and act as money changers that allow businesses and individuals run businesses in foreign countries. Banks make use of “fractional” banking system, based on a notion that at any given point in time, only a small portion of bank deposits can be redeemed by customers, and the rest is idle cash which can be loaned out or safely invested in treasury notes for profit. Over time, these types of services have grown in composure and can involve heavily customized transactions that are tailored to meet a specific individual’s needs.
  • Real Estate Lending: Banks offer loans for real estate purchases. The real estate market is a crucial indicator of the strength of the domestic economy. Economic booms and busts usually occur in concert with movements in real estate lending business. Banks are authorized by the Reserve Bank of India to offer loans to developers who purchase land, the construction companies building homes and families purchasing these properties. The innovation of securitizing loans involves bundling and reselling them. This has offered banks with additional liquidity to fund more real estate lending activities across the nation.
  • Agricultural Banking: Agricultural banking facilitates the agri-business sector in India. Farmers can buy land and machinery related to agriculture which would be collateralized against the agriculture loan, by the underlying assets or the future revenue generated by crops. The farming industry has become highly structured due to large companies becoming highly dominant in each step of food processing. The compliance with highly structured processes of modern agriculture generally requires some kind of financing from a bank.

SEE ALSO:  Type Of Bank Accounts

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