Important Short notes:
1) Group
Bank: Group Bank is a system of banking under which there will be
holding company controlling the subsidiary companies which carry out banking
business. In some cases, both the holding and subsidiary companies may carry
out banking business. An example in India is SBI which has many subsidiary
banks such as State Bank of Mysore, State Bank of Indore, State Bank of
Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State
Bank of Travancore. These subsidiaries carry out banking and other operations
such as leasing, merchant banking and so on.
Merits of
Group Banking: Following are the advantages of Group Banking:
a) Efficient
Management: The holding company stimulates efficiency of the group banks. The
group banks are efficiently managed being under the overall control of Holding
Company.
b) Adequate
Liquidity: there is high degree of liquidity of the concerned group being the
whole group of banks is controlled and managed by one parent company. The
member banks have to maintain the requisite degree of liquidity.
c) Economical:
It is an economical system of banking, because many expenses such as
advertisement and publicity are done collectively be the group as whole under
the direct control of the holding company.
d) Specialization:
In Group banking, different subsidiary companies tend to specialize in
different aspects of banking. This promotes the overall efficiency of the group
system.
Disadvantage
of Group Banking: Main demerits of Group Banking are as under:
a) Right
Control: There is rigid control in Group Banking due to lack of flexibility
which often leads to corruption.
b) Less
Mobility of Funds: Funds are less mobile in Group Banking than Branch banking
system.
c) Few
Branches: Group Banking has relatively very few branches as compared to Branch
Banking system.
2) Chain
Bank: Chain Bank is a system under which different banks come under a
common control through common shareholders or by the inter-locking of
directors. An example in India is KarurVysya Bank and Lakshmi Vilas Bank having
their head offices located in the same place, viz., Karur and sharing common
directors by which they may have common management policy.
Merits of
Chain Banking: Following are the advantages of Chain Banking system:
a) This
system of banking is found most suitable to meet the local needs of credit and
finance;
b) The system
facilitates appropriate use of the limited resources.
c) The chain
banking system exhibits efficient system of management;
d) This
system is not prone to risk-taking;
e) It is the
cheap system of banking and not too much expensive.
Demerits
of Chain Banking: Chain Banking system has certain demerits:
a) Profitability
remains limited due to limited risk-taking.
b) The chain
banks generally do not conduct the programmes of social welfare and
development;
c) This
system of banking promotes the tendency of bossism in management.
3) Pure Banking: Under pure
Banking, the commercial banks give only short-term loans to industry, trade and
commerce. They specialize in short term finance only. This type Of banking is
popular in U.K.
4) Mixed Banking: Mixed banking
is that system of banking under which the commercial ban s perform the dual
function of commercial banking and investment banking, i.e., it combines
deposit and lending activity with investment banking. Commercial banks usually
offer both short-term as well as medium term loans. The German banking system
is the best example of mixed Banking.
5) Relationship banking: Relationship
banking refers to the efforts of a bank to promote personal contacts and to
keep continuous touch with customers who are very valuable to the bank. In
order to retain such profitable accounts with the bank or to attract new
accounts, it is necessary for the bank to serve their needs by maintaining a
close relationship with such customers.
6) Narrow Banking: A bank may be
concentrating only on collection of deposits and lend or invest the money
within a particular region or certain chosen activity like investing the funds
only in Government Securities. This type of restricted minimum banking activity
is referred to 'Narrow Banking’.
Key Features of Narrow Banks
a) No lending
of deposits. It reduces risk significantly at the cost of low return on
investment for depositors and shareholder.
b) Investment
in extremely high liquidity typically in short-term assets e.g. government
bonds.
c) Extremely
high asset security.
d) Lower
interest rates are paid to depositors as a result of no lending to borrowers.
e) Possibly
specific regulatory framework with higher level of scrutiny and operational or
investing restrictions.
f) No off
balance sheet assets.
g) No
derivatives are there is narrow banking.
h) High
degree of institutional transparency e.g. regular real time disclosure of financial
records.
7) Correspondent Banking: Correspondent
banking system is developed to remove the difficulties in unit banking system.
It is the system under which unit banks are linked with bigger banks. The big
correspondent banks are linked with still bigger banks in the financial
centers. The smaller banks deposit their cash reserve with bigger banks. The
bigger banks with whom such deposits are so made are called correspondent
banks. Therefore, correspondent banks are intermediaries through which all unit
banks are linked with bigger banks in financial centers. Through correspondent
banking, a bank can carry-out business transactions in another place where it
does not have a branch.