Types of Banks

Not every bank does the same job. Modern economies operate several distinct kinds of banks, each designed for a particular purpose, and a Telangana Intermediate commerce banking and insurance student should be able to place any real-world bank into one of these categories.

Central bank. Every country has one apex monetary authority that does not deal directly with the general public but instead regulates and controls every other bank in the system. It issues currency, acts as banker to the government, supervises commercial banks and manages the country's monetary policy. In India this role is performed by the Reserve Bank of India (RBI), which is covered in detail later in this chapter.

Commercial banks. These are the banks an ordinary person deals with every day — they accept deposits from the public and lend that money out at a margin, earning their income mainly from the difference between the interest they pay depositors and the interest they charge borrowers. Commercial banks may be organised as public sector banks (majority-owned by the government), private sector banks, or foreign banks operating branches in India; all of them perform broadly the same core functions described later in this chapter.

Cooperative banks. Organised on the cooperative principle of mutual help rather than pure profit, these banks are formed by a group of people — often farmers, small traders or a local community — to pool their savings and lend to one another at reasonable rates. They operate at the state, district and primary (village or town) level and are especially important in financing agriculture and small-scale rural enterprise.

Development banks. Also called term-lending institutions, these do not accept everyday public deposits in the way commercial banks do; instead they raise long-term funds and lend them for the specific purpose of industrial and infrastructure development — financing new factories, expansion projects and long-gestation ventures that ordinary commercial banks are reluctant to fund because of the long repayment period involved. …