SYSTEM OF BANKING

Branch Banking Unit Banking Group Banking Chain Banking Correspondent Banking Universal Banking Mixed Banking Investment Banking Virtual Banking

Branch Banking
1. Under branch banking system bank carries on banking business through a large network of branches spread all over the country. 2. The branches are controlled from one location, referred to as the head office. 3. The day to day working is directed by their managers in accordance with the regulations and policies of the head office.

Branch Banking
Advantages
Economies of large scale. Economy of cash reserves. Cost effective. Diversification of loan risks. Better management through proper staff selection, training and development. Higher mobility of capital. More banking facilities. Easy cheque clearing system.

Disadvantages
Delay in decision making. Lack of personal contact Difficulty in management, supervision and control. Unnecessary competition. Encourages monopoly. Wider effect of failure. Expensive system.

Unit Banking
Unit banking refers to the system of banking when individual banks carry on their business with a single office and each bank has its separate entity. It is not controlled by another bank or a corporation. Unit banks have no branches and if they have it is restricted to a limited area.

It is a popular concept of USA.

Unit Banking
Advantages
Local use of local funds.
No possibility of inter bank frauds. Timely decisions. Limited ill- effect of bank failure. Effective dealing with local issues.

Disadvantages
Absence of division of labour and specialization. Limited contribution to the economic development. Absence of efficiency in banking business. Inability to face economic crisis. No geographical diversification of risk.

Group Banking
This system originated between 1925-1929 in USA. Group banking is the system of bringing two or more banks under single control and management. Two or more banks are incorporated separately and operate under the control of Holding company. Holding company need not be a banking company. It aims at increasing the efficiency in banking operations with the decrease in operational cost. Group banking enjoys economies of scale, better and extensive customer services, greater mobility of funds, efficient management, training programmes etc. There are centralized resources as well as the member banks are able to pool large resources to finance large borrowers. The success of group banking depends on the services provided by holding company like; auditing, investment counseling, research in operating methods and procedures, advertising, tax guidance, personnel recruitment etc.

Chain Banking
It is a development over Group Banking. Unlike Group Banking the power is not vested in a holding company, but it is vested on a single person or group of persons through stock ownership, common membership of

board directors or otherwise.

Chain Banks refer to specifically incorporated banks brought under common control by a device other than the holding company.

Correspondent Banking
Correspondent banking refers to linking banks through deposits. Under this system small banks operating in smaller localities deposit their cash reserves in bigger banks .

This arrangement helps each bank to make remittances through the

correspondents. The smaller banks are called respondent bank while the larger banks who holds the deposits are called correspondent banks.

Investment Banking
These banks are organizations which assist business corporations and governmental bodies to raise funds for long term capital requirements through the sale of shares , stocks. Unlike commercial banks, these act as middlemen between business corporations and investors. Investment banks are classified as, originators, underwriters and retailers. As originators they bring out new issues of securities; as underwriters they underwrite the issue; and as retailers they retail the securities to individuals and institutional investors. The investment banker thus performs a highly useful service to the business world by providing the necessary capital for the long term need of the industry. Thus, it is rightly termed as entrepreneur of the entrepreneurs. The investing public is also benefitted as independent and comprehensive analysis is made by investment banker in order to gauge the desirability of the securities which he proposes to underwrite.

Mixed Banking
In the mixed banking system the operations of investment banking are extended into commercial banking field. It reduces liquidity of the bank. During periods of depression, banks suffer heavy losses when the securities of companies lose their value because of fall in demand for the sale of securities held by it. Banks with poor reserves may fail. During periods of boom, banks are tempted to over invest their funds in industries beyond safe limits. The bank may indulge into speculation of shares in the hope of earnings higher profits. This carries great results into huge losses. Recognizing the incompatibility of mixing investment banking into commercial banking, most of the countries have enacted suitable legislations accepting the principle of bifurcating of these two systems of banking.

Universal Banking
Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window. Definition of Universal Banking: As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters". In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while can deposit and borrow. It includes not only services related to savings and loans but also investments.

Universal Banking
However in practice the term 'universal banking' refers to those banks

that offer a wide range of financial services, beyond the commercial

banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries. For example, in Germany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In Germany, there has never been any separation

between commercial banks and investment banks, as there is in the

United States.

Universal Banking
Advantages
Economies of Scale Profitable Diversions Resource Utilization Easy Marketing on the Foundation of a Brand Name One-stop shopping Investor Friendly Activities

Disadvantages
Grey Area of Universal Bank No Expertise in Long term lending NPA Problem Remained Intact