Explanation of different forms of banking.

1. FORMS OF BANKING

2. Forms of Banking
There are different forms of banking :
1. Unit banking Versus Brach banking
2. Retail banking Versus Wholesale
banking
3. Group Banking Versus Chain
Banking
4. Correspondent Banking
5. 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.

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 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.

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 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.

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 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.

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 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.

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 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.

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 (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.

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 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,

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 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:
1. A small group of persons own and control a
number of independent banks Each bank
carries its operations independent banks.
2. Each bank carries its operations
independently without any external
interference by any holding company.
3. 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.

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 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
1. 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
1. 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

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.