Forms of Banking

Explanation of different forms of banking.

1. FORMS OF BANKING

2. Forms of Banking There are different forms of banking : Unit banking Versus Brach banking Retail banking Versus Wholesale banking Group Banking Versus Chain Banking Correspondent Banking Universal Banking

3. Meaning of Banking Banking refers to a business activity in which the entity accepting deposits from the customers, safeguards it and lends it to those who need it, and earns a profit.  Different countries of the world adopt different types of the banking system .  Basically there are two types of banking system prevalent in most of the countries, which are unit banking and branch banking. 

4. Unit Banking A  unit banking  is a banking system in which one bank, generally a small independent bank that renders banking services to its local community. Unit banking  refers to a bank that is a single, usually small bank that provides financial services to its local community. A unit bank is independent and does not have any connecting banks and branches in other areas.

5. Continue It is managed by its own governing body or the Board members. It has an independent existence, as it is not under the control of any other individual, bank, or body corporate. The unit bank serves a limited area, and so it possesses an expert knowledge of the problems and basic needs of the localities and aims at resolving them.

6. Branch Banking Branch banking refers to a bank that is connected to one or more other banks in an area or outside of it; to its customers, this bank provides all the usual financial services but is backed and ultimately controlled by a larger financial institution. Branch banking , as the name suggests, is one in which a bank has more than one office in a country or outside at different locations and renders banking services to the customers of that area.

7. Continue It has a central office called as the head office and other offices which are set up at different locations to serve the customers are called as branches. The branches are controlled and coordinated by the head office, with the help of their regional or zonal offices. The bank is under the control of the Board of Directors (BOD) and it is owned by shareholders. Each bank branch has a manager who looks after the management of the concerned branch of which he/she is the in charge, as per the policies and instructions laid down from time to time by the head office.

8. Continue For the purpose of financial reporting at the end of the financial year, the assets and liabilities of all the branches and the head office are summed up.

9. Comparison between Unit banking and Brach banking Basis for comparison Unit Banking Branch Banking Meaning Unit banking is that system of banking in which there is a single small banking company, that provides financial services to the local community. Branch banking is a banking method wherein a bank operates in more than one place to provide banking services to customers, through its branches. Local economy Affected by the ups and downs of the local economy. It is not affected by the ups and downs of the local economy.

10. Comparison between Unit banking and Brach banking Basis for comparison Unit Banking Branch Banking Independence of operations More Comparatively less Supervision Cost Low Comparatively high Financial Resources Limited financial resources Large pool of financial resources Competition No or little within the bank Exist between the bank branches Rate of interest Not fixed, as the bank has its own policies and norms. Fixed by the head office, and directed by the central bank.

11. Comparison between Unit banking and Brach banking Basis for comparison Unit Banking Branch Banking Decision making Quick Time Consuming Specialization Specialization not possible due to lack of trained staff and knowledge Division of labour is possible and hence specialization possible Profits Used for the development of the bank Shared by the bank with its branches Deposits and assets Deposits and assets are not diversified and are at one place, hence risk is not spread. Deposits and assets are diversified, scattered and hence risk is spread at various places.

12. Retail Banking Retail banking refers to that banking which targets individuals and the main focus of such banks is retail customers. Also known as consumer banking or personal banking, retail banking is the visible face of banking to the general public, with bank branches located in abundance in most major cities.

13. Continue Most retail banking is conducted by separate divisions of banks, large and small. Customer deposits garnered by retail banking represent an extremely important source of funding for most banks. Loans such as car, housing, educational, personal loans are some of the examples of loans given in retail banking.

14. Wholesale Banking Wholesale banking refers to banking services between merchant banks and other financial institutions. It is also known as Corporate Banking. Wholesale banking refers to that banking which targets corporate or big customers and their main focus is providing services to corporate clients. This type of banking deals with larger clients, such as large corporations and other banks,. Wholesale banking services include currency conversion, working capital financing, large trade transactions, and other types of services.

15. Continue Wholesale banking is meant to describe the financial practice of lending and borrowing between two large institutions. Banking services that are considered "wholesale" are reserved only for government agencies, pension funds, corporations with strong financials and other institutional customers of similar size and stature. These services are made up of cash management, equipment financing, large loans, merchant banking, and trust services, among others.

16. Differences between Wholesale and Retail Banking

17. Group Banking Group banking refers to the system of banking in which two or more banks are directly controlled by a corporation, an association or a business trust. The holding company may or may not be a banking company. Although each bank maintains its separate entity, but business is managed by the holding company. This type of banking was popular in the U.S.A between 1925-29.

18. Advantages of Group Banking (a) Each member bank retains its separate entity and maintains its board of directors. But, at the same time, grouped banks enjoy the benefits of centralized administration. (b) There is greater liquidity and mobility of resources. In case of crisis, funds can be transferred from other banks. (c) There is economy of advertisement expenditure. There is also a common purchasing agency which leads to economy in purchases.

19. Continue (d) Services of experts can be made available to the member banks to manage their business efficiently. (e) Common standardized accounting system improves the working of the member banks. (f) Large-scale banking operations allow superior credit facilities.

20. Limitations of Group Banking (a) The control of member banks under the group baking system is less direct and more flexible. Thus , effective supervision is not possible. (b) Efficiency of the member banks is adversely affected by the management of the holding company which uses the banks as vehicles of manipulation and speculation. (c) The failure of one bank has its adverse effects on other member banks. ( d) The common purchasing agencies often indulge in corrupt practices.

21. Chain Banking It is a banking system where the same individual or group of individuals controls two or more banks, as against control by a holding company under group banking. This is done by stock ownership in two or more banks. Stockholders directly or through their nominees exercise control of competing banks.

22. Continue The management can also be established via a board of directors that can effectively create a network and undertake supervision of banking activities . Chain banking systems took shape in USA around 1925 when 33 chains were co-existing having ownership of 933 banks. The purpose was to maximise profit and goodwill in the market. The banks which entered into chains within a community, had little scope of competition

23. Continue There is generally no holding company to control the interests of banks. Thus , the underlying principles of chain banking are: A small group of principles of chain banking are: A small group of persons own and control a number of independent banks Each bank carries its operations independent banks. Each bank carries its operations independently without any external interference by any holding company . Every member of the chain retains its independent identity.

24. Universal Banking Universal banking is a system in which banks provide a wide variety of financial services, including commercial and investment services. It is a place where all financial products are available under one roof. Universal banking is common in some European countries, including Switzerland . Universal banking combines the services of a commercial bank and an investment bank, providing all services from within one entity.

25. Continue The services can include deposit accounts, a variety of investment services and may even provide insurance services.  Universal banking is done by very large banks. These banks provide a lot of finance to many companies. So, they take part in the Corporate Governance (management) of these companies. These banks have a large network of branches all over the country and all over the world. They provide many different financial services to their clients.

26. Advantages of Universal Banking Investors' Trust  : Universal banks hold stakes (equity shares) of many companies. These companies can easily get other investors to invest in their business. This is because other investors have full confidence and faith in the Universal banks. They know that the Universal banks will closely watch all the activities of the companies in which they hold a stake.

27. 2. Economics of Scale Universal banking results in economic efficiency. That is, it results in lower costs, higher output and better products and services.

28. 3. Resource Utilisation Universal banks use their client's resources as per the client's ability to take a risk. If the client has a high risk taking capacity then the universal bank will advise him to make risky investments and not safe investments. Similarly , clients with a low risk taking capacity are advised to make safe investments. Today , universal banks invest their client's money in different types of Mutual funds and also directly into the share market. They also do equity research. So, they can also manage their client's portfolios (different investments) profitably.

29. 4. Profitable Diversification Universal banks diversify their activities. So, they can use the same financial experts to provide different financial services. This saves cost for the universal bank. Even the day-to-day expenses will be saved because all financial services are provided under one roof, i.e. in the same office.

30. 5. Easy Marketing The universal banks can easily market (sell) all their financial products and services through their many branches. They can ask their existing clients to buy their other products and services. This requires less marketing efforts because of their well-established brand name. For e.g. Bank of Kigali may ask their existing bank account holders in all their branches, to take house loans, insurance, to buy their Mutual funds, etc. This is done very easily because they use one brand name (BK) for all their financial products and services.

31. One-stop Shopping Universal banking offers all financial products and services under one roof. One-stop shopping saves a lot of time and transaction costs. It also increases the speed or flow of work. So, one-stop shopping gives benefits to both banks and their clients.

32. Disadvantages of Universal Banking Different Rules and Regulations  : Universal banking offers all financial products and services under one roof. However , all these products and services have to follow different rules and regulations. This creates many problems. For e.g. Mutual Funds, Insurance, Home Loans, etc. have to follow different sets of rules and regulations, but they are provided by the same bank.

33. 2. Effect of failure on Banking System  Universal banking is done by very large banks. If these huge banks fail, then it will have a very big and bad effect on the banking system and the confidence of the public. For e.g. Recently, Lehman Brothers a very large universal bank failed. It had very bad effects in the USA, Europe and even in India.

34. 3. Monopoly   Universal banks are very large. So, they can easily get monopoly power in the market. This will have many harmful effects on the other banks and the public. This is also harmful to economic development of the country.

35. 4. Conflict of Interest Combining commercial and   investment banking can result in conflict of interest. That is, Commercial banking versus Investment banking. Some banks may give more importance to one type of banking and give less importance to the other type of banking. However , this does not make commercial sense.

36. Corresponding Banking A correspondent bank is a bank that provides services on behalf of another, equal or unequal, financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits, and gather documents on behalf of another financial institution. Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries, acting as a domestic bank's agent abroad.