FABP

1. VFP 311 Financial Accounting and Banking Practices (3+1) 4
Unit V
Banking systems- Branch banking versus Unit Banking and other banking systems – Deposit
Banking versus – creation of credit by commercial banks – Stature and functions of central bank.
Banking
A banking system is a collection of institutions that provides us with financial services.
These organizations are in charge of running a payment system, making loans, accepting
deposits, and assisting with investments. The features of the Indian banking system are: Deals
with Money. Provides Loans.
Banking consists of various activities that can be done through financial institutions that
will accept deposits from individuals and other entities. These financial institutions will then
utilize this money to offer loans and invest it for a profit.
Banking is known to be important in the economy because it provides services to businesses and
consumers, such as offering loans, checking accounts, and various other services.
Need for Banking Systems
The purpose of banking systems is to give security and confidence to the economy. A
banking system operates in line with managing the flow of money between people and
businesses.
The functions of a bank are mentioned below:
 Accepting withdrawals and deposits
 Providing loans
 Offering different types of accounts
 Internet banking features
 Customer support
 Credit and debit cards
 Remittance of funds
 Bill payments
Bank Classification in India
The table below represents the different types of banks in India and how it is further divided:
1. Central Bank
2. Commercial Banks a) Private Sector Banks
b) Public Sector Banks
c) Regional Rural Banks
d) Foreign Banks
3. Co-operative Banks a) State Co-operative Banks
b) Urban Co-operative Banks
4. Payments Banks

2. 5. Scheduled Banks
6. Non-Scheduled Banks
7. Small Finance Banks
1) Central Bank
The central bank of India is known as the Reserve Bank of India. The R.B.I. is a financial
institution that is mandated to regulate and oversee all of the other banks in the country.
2) Commercial Banks
Commercial banks are regulated under - the Banking Regulation Act of 1949, and their business
model has been constructed to make profits.
The primary function of the commercial bank is to accept deposits and offer loans to the public,
businesses, and the government. A commercial bank is further divided into the following:
a) Private Sector Banks
b) Public Sector Banks
c) Regional Rural Banks
d) Foreign Banks
a) Private Sector Banks
Private sector banks are the ones with a major stake or equity being held by private
shareholders. All of the banking rules and regulations laid down by the Reserve Bank of India
(central bank) are applicable to private sector banks.
Here is the list of private sector banks in India:
1. I.C.I.C.I. Bank
2. R.B.L. Bank
3. I.D.F.C. Bank
4. South Indian Bank
5. IDBI Bank
6. Tamilnad Mercantile Bank
7. YES Bank
8. Axis Bank
9. City Union Bank
10. Karnataka Bank
11. Dhanlaxmi Bank
12. Kotak Mahindra Bank
13. D.C.B. Bank
14. Karur Vysya Bank
15. Federal Bank

3. 16. Lakshmi Vilas Bank
17. H.D.F.C. Bank
18. Nainital Bank
19. IndusInd Bank
20. Bandhan Bank
21. Jammu and Kashmir Bank
b) Public Sector Banks
A public sector bank is a nationalized bank, and it accounts for more than 75% of the total
banking sector in the country. They are banks with a majority of the stakes held by the
government.
Here is a list of public sector banks in India:
1. Bank of Maharashtra
2. Indian Bank
3. Bank of Baroda
4. Canara Bank
5. State Bank of India
6. Central Bank of India
7. Union Bank of India
8. Indian Overseas Bank
9. UCO Bank
10. Punjab & Sind Bank
11. Bank of India
12. Punjab National Bank
c) Regional Rural Banks
A regional bank is a scheduled commercial bank, but it is established to provide credit to the
weaker section of the society, such as marginal farmers, small businesses, and agricultural
labourers. They would typically operate at a regional level in different states of the country and
have branches in selected urban areas.
d) Foreign Banks
A foreign bank is a bank with its headquarters in a foreign country but also operates in other
parts of the country as a private entity. These banks need to follow the regulations of the home
country as well as the country where they operate.
Here is a list of foreign banks that operate in India:
1. Australia and New Zealand Banking Group Ltd.
2. National Australia Bank
3. Westpac Banking Corporation
4. Bank of Bahrain & Kuwait BSC
5. AB Bank Ltd.
6. Credit Agricole Corporate & Investment Bank
7. Societe Generale
8. Deutsche Bank
9. HSBC Bank
10. PT Bank Maybank Indonesia TBK
11. Mizuho Bank Ltd.
12. Sumitomo Mitsui Banking Corporation
13. M.U.F.G. Bank, Ltd.

4. 14. Coöperatieve Rabobank U.A.
15. Sonali Bank Ltd.
16. Bank of Nova Scotia
17. Industrial & Commercial Bank of China Ltd.
18. BNP Paribas
19. Doha Bank Q.P.S.C.
20. Qatar National Bank (Q.P.S.C.)
21. JSC VTB Bank
22. Sberbank
23. United Overseas Bank Ltd
24. FirstRand Bank Ltd
25. Shinhan Bank
26. Woori Bank
27. Barclays Bank Plc.
28. Standard Chartered Bank
29. The Royal Bank of Scotland plc
30. American Express Banking Corporation
31. Bank of America
32. Citibank
33. J.P. Morgan Chase Bank N.A
34. Kookmin Bank
35. S.B.M. Bank (India) Limited
36. K.E.B. Hana Bank
37. Industrial Bank of Korea
38. Bank of Ceylon
39. D.B.S. Bank India Limited
40. Credit Suisse A.G.
41. C.T.B.C. Bank Co., Ltd.
42. Krung Thai Bank Public Co. Ltd.
43. Abu Dhabi Commercial Bank Ltd.
44. Mashreq Bank P.S.C.
45. First Abu Dhabi Bank P.J.S.C.
46. Emirates Bank NBD
3) Co-operative Banks
A Co-operative Bank is one that is registered under the Co-operative Societies Act of 1912 and is
run by an elected managing committee. It works on a non-profit no-loss basis, and it will mainly
serve entrepreneurs, small businesses, self-employment, and more in urban areas.
In the rural areas, they will mainly function to finance agriculture-based activities like farming,
livestock, and hatcheries. There are mainly these types of Co-operative Banks:
a) State Co-operative Banks
b) Urban Co-operative Banks
a) State Co-operative Banks
A State Co-operative Bank is a federation of the central Co-operative banks that will act as a
custodian of the Co-operative banking structure in the State.

5. b) Urban Co-operative Banks
The Urban Co-operative Bank is the primary Co-operative bank located in urban and semi-urban
areas. The banks essentially lent to smaller borrowers and businesses centred around a
community, locality, and more.
4) Payments Banks
The payments banks are a relatively new banking model in the country that has been
conceptualized by the RBI. This bank is allowed to accept a restricted deposit. This amount is
limited to Rs. 1 lakh for a customer.
The bank also offers services such as ATM cards, net banking and more.
5) Scheduled Banks
These banks are covered under the 2nd Schedule of RBI Act 1934, and they need to have a paid-
up capital of Rs. 5 lakh or more.
6) Non-Scheduled Banks
The non-scheduled banks are local area banks that are not listed in the 2nd Schedule of the RBI
Act 1934.
7) Small Finance Banks
It Is a niche small finance bank in India with the objective of providing financial inclusion to
sections of society that have not been served by other banks. The core customers of this bank are
inclusive micro industries, unorganized sector entities, marginal farmers, and more.
This type of bank is licensed under Section 22 of the Banking Regulation Act 1949 and it is
governed by the Provisions Act of 1934.
1. AU Small Finance Bank Ltd.
2. Utkarsh Small Finance Bank Ltd.
3. Fincare Small Finance Bank Ltd.
4. Ujjivan Small Finance Bank Ltd.
5. Jana Small Finance Bank Ltd.
6. ESAF Small Finance Bank Ltd.
7. Suryoday Small Finance Bank Ltd.
8. Equitas Small Finance Bank Ltd.
9. Capital Small Finance Bank Ltd.
10. North East Small Finance Bank Ltd.
https://groww.in/banking
The features of the Indian banking system:
1. Deals with Money
A bank’s main characteristic is that it handles all financial transactions. You can put your money
in a bank account, for example, to store it safely, and you will be interested in the money you
save in the account.
2. Provides Loans
Banks gain additional money by providing loans for a variety of products. The bank earns the
additional funds by lending money to the qualifying person at predetermined rates.
Banks now provide loans for a variety of purposes, including study loans, vehicle loans, housing
loans, personal loans, and so on.
3. Withdrawal and payment facilities

6. Customers can use a bank’s numerous payment and withdrawal services to receive their money
quickly and easily. Customers can use cheques and draughts to withdraw money, as well as
ATMs established by banks at various sites throughout the city.
4. Internet services
Modern banks now provide internet services, which is another element of a bank. The growth of
the internet and its integration into the banking industry has made it even easier for customers to
do numerous transactions. Through their apps, banks are providing online services. You can pay
your bills, buy groceries, and shop without having cash on you.
5. Business
Banking’s sole purpose is not to supply consumers with banking services. To make additional
money, all banks are involved in subsidiary enterprises. Their only responsibility is to deliver
optimum customer satisfaction and maximum interest rates in order to attract more clients to
bank with them. To make a profit, money is moved from one hand to the next.
Indian banking system meaning
A banking system is a collection of institutions that provides us with financial services. These
organizations are in charge of running a payment system, making loans, accepting deposits, and
assisting with investments.
The importance of banking system in India
 Insufficient capital formation makes economic development difficult in a country. Commercial
banks are encouraging individuals to save their money and mobilize it for beneficial uses at this
time.
 Credit creation boosts output, boosting economic growth and, in turn, creating a large number of
job prospects.
 Commercial banks promote balanced regional development in India by providing the required
financial infrastructure and money to backward areas.
 By providing timely loans to agricultural farmers, commercial banks aid in the promotion of the
primary sector.
 They offer advanced loans to consumers for the purchase of assets such as residences, consumer
goods, and furniture, among other things, and they encourage individuals to pursue a higher level
of living.
 The banking sector plays a significant part in the Indian economy, as commercial banks support
the Indian government in achieving each aim of the country’s planned economic development.
 For both internal and external trade, commercial banks offer the necessary financial backing and
infrastructure.
https://unacademy.com/content/bank-exam/study-material/general-awareness/a-brief-note-on-
indian-banking-system/#:~:text=...Read%20full-
,A%20banking%20system%20is%20a%20collection%20of%20institutions%20that%20provides,
Provides%20Loans

7. Definition of Branch Banking
Branch Banking implies a banking system wherein a banking organization,
through its wide network of branches provides banking services to its
customers throughout the country and even in abroad.
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.
Advantages of Branch Banking
Rapid Growth and Wide popularity of the branch banking system in the 20th century are due to
various advantages of branch banking as discussed below:
1. Economies of Large-Scale Operations
Under the branch banking system the bank with a number of branches possesses huge
financial resources and enjoys the benefits of large-scale operations:
 Highly trained and experienced staff is appointed which increases the efficiency
of management.
 Division of labor is introduced in the banking operations which ensures a greater economy in
the working of the bank. Right persons are appointed at the right place and specialization
increases.
 Funds are made available liberally and at cheaper rates.
 Foreign exchange is done economically.
 Large financial resources and wider geographical coverage increases public confidence in the
banking system.
2. Spreading of Risk
Another advantage of a branch banking system is the lesser risk and greater capacity to meet
risk.
1. Since there is geographical spreading and diversification of risk, the possibility of the failure
of the bank is remote.
2. The losses incurred by some branches may be offset by the profits earned by other branches.
3. Large resources of branch banks increase their ability to face any crisis.

8. 3. Economy in Cash Reserves
Under the branch banking system, a particular branch can operate without keeping large
amounts of idle reserves. In times of need, resources can be transferred from one branch to
another.
Diversification of Deposits and Assets
There is greater diversification of both deposits and assets under the branch banking system
because of wider geographical coverage.
1. Deposits are received from the areas where savings are in plenty.
2. Loans are extended in those areas where funds are scarce and interest rates are high. The
choice of securities and investments is larger in this system which increases the safety and
liquidity of funds.
4. Cheap Remittance Facilities
Since bank branches are spread over the whole country, it is easier and cheaper to transfer
funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-
bank indebtedness.
5. Uniform Interest Rates
Under a branch banking system, the mobility of capital increases and in turn brings about
equality in interest rates. Funds are transferred from areas with deficit demand for money to
areas with excessive demand for money. As a result, the uniform rate of interest prevails in
the whole area.
6. Proper Use of Capital
Under a branch banking system, capital can be used properly. If a branch has ex- cess
reserves, but has no opportunity for investment, it can transfer the resources to other branches
which can make the most profitable use of these resources.
7. Better Facilities for Customers
Under the branch banking system, the customers are getting better and greater facilities. It is
because of the small number of customers per branch and increased efficiency achieved
through large-scale operations.
8. Banking Facilities in Backward Areas
Under the branch banking system, the banking facilities are not restricted to big cities. They
can be extended to small towns and rural as well as underdeveloped areas. Thus, this system
helps in the development of backward regions of the country.
9. Effective Control
Under the branch banking system, the Central Bank can have more efficient control over the
banks, because it has to deal only with a few big banks and not with each individual branch.
This ensures better implementation of monetary policy.
Disadvantages of Branch Banking

9. The following are the main limitations or disadvantages of branch banking system:
1. Problem of Management
Under the branch banking system, a number of difficulties arise with regard to management,
supervision, and control. They are:
1. Management of banks is concentrated at the head office, the managers can afford to be lax
and indulgent in their duties and are often involved in serious irregularities while using the
funds.
2. Branch Manager has to seek permission from the head office on each and every matter, this
results in unnecessary delay and red-tapism in the banking business.
2. Lack of Initiative
Branch managers generally lack initiative in taking decisions on all important matters. They
can not take independent decisions and have to wait for the clearance signal from the head
office.
3. Monopolistic Tendencies
Branch Banking encourages monopolistic tendencies in the banking system. A few big banks
dominate and control the whole banking system of the Country through their branches. This
can lead to the concentration of resources in a few hands.
4. Regional Imbalances
Under the branch banking system, the financial resources collected in the smaller and
backward regions are transferred to the bigger industrial centers. This encourages regional
imbalances in the Country.
5. Adverse Linkage Effect
Under a branch banking system, the losses and weaknesses of some branches have an effect
on the other branches of the bank.
6. Inefficient Branches
In this system, the weak and unprofitable branches continue to operate under the protection
cover of the large and more profitable branches.
7. Other Defects
Other defects of branch banking are:
 Preferential treatment is given to the branches near the head office.
 Higher interest rates are charged in the developed area to compensate for the lower rates
charged in the backward areas.
 There is concentration and unhealthy competition among the branches of different banks in
big cities.
 Many difficulties are faced when a bank opens branches in foreign countries.
Definition of Unit Banking
Unit Banking implies a banking practice wherein the banking operations are carried out by only
one office, which is situated in a specified location. It is managed by its own governing body or

10. the Board members. It has an independent existence, as it is not under the control of any other
individual, bank, or body corporate.
A unit bank has no branches at all and for the purpose of providing facilities related to remittance
and collection of funds, a unit bank takes recourse of the correspondent banking system. A
correspondent bank refers to a financial institution, which enters into an agreement with another
bank to render services to the customers as a representative of the latter.
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.
Advantages of unit banking -
Advantages of the unit banking system are as follows -
1) Easier and effective Management -
In unit Bank System, the management and supervision of Unit Bank is much easier and
effective.
2) Utility for the local development-
In Unit Banking, the funds of the locality are utilized for the local development and are not
transferred to other areas.
3) Tackle the local problems-
Unit banking can tackle the local problems as they are in the position to take initiative to
tackle as they have full knowledge of the local problems.
4) fewer chances of fraud-
There are fewer chances of fraud and regularities in the financial management of the unit
banks.
5) No inefficient Banks-
There will be no inefficient Banks as weak and inefficient banks are automatically eliminated.

11. Disadvantages of unit banking -
Disadvantages of unit banking are as follows-
1) Lacks benefit of specialization and division of labor -
The unit banking system lacks the benefit of specialization and division of labor.
2) Destructive competition -
In this type of system, there will be destructive competition as they are independently run by
different management.
3) Limited resources -
Limited sources of the unit Bank restrict their ability to face financial crisis.
4) No banking development in backward areas -
In this type of system, there will be no banking development in backward areas as banking
activity is uneconomical and no bank is opened.
5) Expensive transfer of Funds -
In the unit banking system, the transfer of fund is very expensive because unit banks have
no branches at other places.
6) Different interest rates -
In such a system, the interest rate may vary at different places because there is no movement
of funds from place to place.
7) Local pressure -
There will be highly local pressure and interference which disrupt their normal functioning.
8) Diversification of risk -
In this type of system, there is little possibility of diversification of risk under the
localizable unit banking system.

12. 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.
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.
Decision making Quick Time Consuming
Deposit Banking
A bank deposit is the money someone places into a bank account. The depositor lets the
bank safe keep their money for some time, in return for which the bank pays the depositor
interest payments. The bank uses this money to invest or provide loans to its borrowers and, in
return, receive interests payments from them.
Types of Deposits
On the basis of purpose they serve, bank deposit accounts may be classified as follows:
 Savings Bank Account
 Current Deposit Account
 Fixed Deposit Account
 Recurring Deposit Account

13. Savings Bank Account
As the name suggests this type of account is suitable for people who have a definite income and are
looking to save money. For example, the people who get salaries or the people who work as
laborers. This type of account can be opened with a minimum initial deposit that varies from bank
to bank. Money can be deposited at any time in this account.
Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using
an ATM card. Normally banks put some restriction on the number of withdrawal from this account.
Interest is allowed on the balance of deposit in the account. The rate of interest on savings bank
account varies from bank to bank and also changes from time to time. A minimum balance has to be
maintained in the account as prescribed by the bank.
Current Deposit Account
Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make
payment through their bank accounts. Since there are restrictions on the number of withdrawals
from a savings bank account, that type of account is not suitable for them. They need to have an
account from which withdrawal can be made any number of times.
Banks open a current account for them. Like a savings bank account, this account also requires a
certain minimum amount of deposit while opening the account. On this deposit, the bank does not
pay any interest on the balances. Rather the account holder pays a certain amount each year as an
operational charge.
These accounts also have what we call the overdraft facility. For the convenience of the account
holders banks also allow withdrawal of amounts in excess of the balance of the deposit. This facility
is known as an overdraft facility. It is allowed to some specific customers and up to a certain limit
subject to previous agreement with the bank concerned.

14. Fixed Deposit Account
Some bank customers may like to put away money for a longer time. Such deposits offer a higher
interest rate. If money is deposited in a savings bank account, banks allow a lower rate of interest.
Therefore, money is deposited in a fixed deposit account to earn interest at a higher rate.
This type of deposit account allows the deposit to be made of an amount for a specified period. This
period of deposit may range from 15 days to three years or more during which no withdrawal is
allowed. However, on request, the depositor can encash the amount before its maturity. In that case,
banks give lower interest than what was agreed upon. The interest on a fixed deposit account can be
withdrawn at certain intervals of time. At the end of the period, the deposit may be withdrawn or
renewed for a further period. Banks also grant a loan on the security of the fixed deposit receipt.
Recurring Deposit Account
While opening the account a person has to agree to deposit a fixed amount once in a month for a
certain period. The total deposit along with the interest therein is payable on maturity. However, the
depositor can also be allowed to close the account before its maturity and get back the money along
with the interest till that period.
The account can be opened by a person individually, or jointly with another, or by the guardian in
the name of a minor. The rate of interest allowed on the deposits is higher than that on a savings
bank deposit but lower than the rate allowed on a fixed deposit for the same period.
The Recurring Deposit Accounts may be of the following types:
1. Home Safe Account or Money Box Scheme: For regular savings, the bank provides a safe or
box (Gullak) to the depositor. The safe or box cannot be opened by the depositor, who can
put money in it regularly, which is collected by the bank’s representative at intervals and
the amount is credited to the depositor’s account. The deposits carry a nominal rate of
interest.

15. 2. Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited at regular
intervals in this account. The accumulated deposits over time along with interest can be
used for payment of medical expenses, hospital charges, etc.
3. Home Construction deposit Scheme/Saving Account: In this account, we can deposit the
money regularly either for the purchase or construction of a flat or house in future. The rate
of interest offered on the deposit, in this case, is relatively higher than in other recurring
deposit accounts.
https://www.toppr.com/guides/general-awareness/banks/types-of-deposit-and-accounts/
Commercial banks
A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans for
investment, and other such activities. These banks are profit-making institutions and do
business only to make a profit.
Function of Commercial Bank:
The functions of commercial banks are classified into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and fixed
deposits. The surplus balances collected from the firm and individuals are lent to the
temporary requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans
and advances to the entrepreneurs and business people, and collect interest. For every
bank, it is the primary source of making profits. In this process, a bank retains a small
number of deposits as a reserve and offers (lends) the remaining amount to the

16. borrowers in demand loans, overdraft, cash credit, short-run loans, and more such
banks.
Credit cash: When a customer is provided with credit or loan, they are not provided
with liquid cash. First, a bank account is opened for the customer and then the money is
transferred to the account. This process allows the bank to create money.
(b) Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the amount
of money to be paid against the goods purchased at a given point of time in the future.
The amount can also be cleared before the quoted time through a discounting method
of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account
to overdraw up to the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of
selling and buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their
valuables or documents safely. The banks charge a minimum of an annual fee for this
service.
Paying and gathering the credit : It uses different instruments like a promissory note,
cheques, and bill of exchange.
https://byjus.com/commerce/functions-of-commercial-
banks/#:~:text=A%20commercial%20bank%20is%20a,only%20to%20make%20a%20pr
ofit.

17. Examples of Commercial Banks
Few examples of commercial banks in India are as follows:
1. State Bank of India (SBI)
2. Housing Development Finance Corporation (HDFC) Bank
3. Industrial Credit and Investment Corporation of India (ICICI) Bank
4. Dena Bank
5. Corporation Bank
Role of Commercial Banks
The banking industry as a whole runs the economy of a nation. The roles of a
commercial bank are as follows:
 They aid in the successful implementation of monetary policies.
 They boost the industrial sector by offering short, medium, and long-term finance.
 They accelerate trade by offering agency services, overdraft facilities, and other solutions
to wholesale and retail businesses.
 These financial institutions help lower and middle-class customers in procuring
consumer products on loans—easy repayment options.
 Banks also operate on rural and regional fronts.
 The agricultural sector receives strong financial backing from commercial institutions
facilitating crop cultivation, irrigation facilities, dairy farming, poultry farming,
horticulture, and pisciculture.

18.  They adopt innovative ways to facilitate easy banking—automation, digitalization, and
artificial intelligence.
 They ensure a superior level of data security for their clients.
Types of Commercial Banks
They are further classified into the following categories:
1. Private Sector Banks: The majority stake is owned by private shareholders (individuals
or corporates). They accept deposits and distribute loans to individual customers, small
businesses, and medium-sized businesses.
2. Public Sector Banks: For public banks, majority equity lies in the hands of the
government. Nationalized banks provide financial services to mass customers at
affordable rates.
3. Foreign Banks: As the name suggests, these financial institutions operate in foreign
countries but have head offices in the parent country. The bank’s foreign branches take
deposits, extend loans, engage in securities trading, and facilitate foreign exchange
functions.
https://www.wallstreetmojo.com/commercial-bank/

19. Central bank
A central bank is a public institution that is responsible for implementing monetary
policy, managing the currency of a country, or group of countries, and controlling the
money supply.
Central bank is regarded as an apex financial institution in the banking system. It
is considered as an integral part of the economic and financial system of a nation. The
central bank functions as an independent authority and is responsible for controlling,
regulating and establishing the monetary and banking structure of the country.
In India, the Reserve Bank of India is regarded as the central bank. It was set up in
1935. Central banks are responsible for maintaining the financial stability and economic
sovereignty of the country.
Features of Central Bank
The basic nature of Central banks is that they are non-market-based and also
anti-competitive institutions. The key features of a central bank are:
 Most central banks are centralized though there could be central banks
that are not government agencies.
 Even if the central government does not own a central bank, the law
establishes and protects the privileges of a central bank.
 It has a legal monopoly status that enables it to issue cash and banknotes
as opposed to private commercial banks that can issue only demand
liabilities, for example, checking deposits.

20. Functions of central bank
The functions of a central bank can be discussed as follows:
1. Currency regulator or bank of issue
2. Bank to the government
3. Custodian of Cash reserves
4. Custodian of International currency
5. Lender of last resort
6. Clearing house for transfer and settlement
7. Controller of credit
8. Protecting depositors interests
The above mentioned functions will be discussed in detail in the following lines.
Currency regulator or bank of issue: Central banks possess the exclusive right to
manufacture notes in an economy. All the central banks across the world are involved in
issuing notes to the economy.
This is one of the most important functions of the central bank in an economy and due
to this the central bank is also known as the bank of issue.
Earlier all the banks were allowed to publish their own notes which resulted in a
disorganised economy. To avoid this situation the government around the world
authorised the central banks to function as the issuer of currency, which resulted in
uniformity in circulation and balanced supply of money in the economy.
Bank to the government: One of the important functions of the central bank is to act
as the bank to the government. The central bank accepts deposits and issues funds to
the government. It is also involved in making and receiving payments for the
government. Central banks also offer short term loans to the government in order to
recover from bad phases in the economy.

21. In addition to being the bank to the government, it acts as an advisor and agent of the
government by providing advice to the government in areas of economic policy, capital
market, money market and loans from the government.
In addition to that, the central bank is instrumental in formulation of monetary and fiscal
policies that help in regulation of money in the market and controlling inflation.
Custodian of Cash reserves: It is a practice of the commercial banks of a country to
keep a part of their cash balances in the form of deposits with the central bank. The
commercial banks can draw that balance when the requirement for cash is high and pay
back the same when there is less requirement of cash.
It is for this reason that the central bank is regarded as the banker’s bank. Central bank
also plays an important role in the credit creation policy of commercial banks.
Custodian of International currency: An important function of the central bank is to
maintain a minimum balance of foreign currency. The purpose of maintaining such a
balance is to manage sudden or emergency requirements of foreign reserves and also
to overcome any adverse deficits of balance of payments.
Lender of last resort: The central bank acts as a lender of last resort by providing
money to its member banks in times of cash crunch. It performs this function by
providing loans against securities, treasury bills and also by rediscounting bills.
This is regarded as one of the most crucial functions of the central bank wherein it helps
in protecting the financial structure of the economy from collapsing.
Clearing house for transfer and settlement: Central bank acts as a clearing house of
the commercial banks and helps in settling of mutual indebtedness of the commercial
banks. In a clearing house, the representatives of different banks meet and settle the
inter bank payments.
Controller of credit: Central banks also function as the controller of credit in the
economy. It happens that commercial banks create a lot of credit in the economy that
increases the inflation.
The central bank controls the way credit creation by commercial banks is done by
engaging in open market operations or bringing about a change in the CRR to control
the process of credit creation by commercial banks.

22. Protecting depositors interests: Central bank also needs to keep an eye on the
functioning of the commercial banks in order to protect the interests of depositors.
Examples of Central Banks
Some of the well known central banks across the world are:
1. Federal Reserve (USA)
2. Reserve Bank of India (India)
3. People’s Bank of China (China)
4. Bank of England (UK)
5. European Central Bank (EU or European Union)