Useful Notes on the Classification of Commercial Banks

In this banking system a particular bank functions in a limited area. Bank is of small size and generally it has no branch office. Such a bank deposits its money in some big bank, called Correspondent Bank. The control and ownership of these banks is generally in the hands of local individuals. This banking system is popular in U.S.A.

(b) Branch Banking:

Branch banking refers to that system of banking in which a bank establishes its head office in some big city and operates the various branches all over the country. Some of its branches may also be in foreign countries. Branch Banking System is popular in India, Britain, Canada, France, Germany and various other countries. In the words of Goldfield and Chandler, ‘A branch bank is a banking corporation that directly owns two or more banking agencies.’

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Branch Banking is a system in which:

(i) A bank renders its banking services at two or more places

(ii) Head office has the overall control over the working of various branches

(iii) Branches can be opened in the same town, state or the country in which the concerned head office is located or at different places

(iv) Overall control of all the branches is done by one central authority, viz. Board of Directors.

(c) Group Banking:

Group Banking is that banking system is which two or more banks operate under the control of a holding company. In the words of Goldfield and Chandler, ‘Group Banking refers to the system a corporation or a holding company operates two or more banks simultaneously.

These banks are known as subsidiaries of the corporation or the holding company. These banks may be unit banks or branch banks.’ Group banking system is most popular in the United States of America.

According to Bank Holding Company Act, 1956 (U.S.A.) ‘A holding company is the one which has at least 25% equity of the concerned group of banks.

There can be more than one or many banks under the control and management of the holding company. The holding company is popularly known as parent company and the group of banks operating under it is called operating companies or subsidiary companies. Each bank in the group is controlled by the parent company. ‘This system of Banking is prevalent largely in the United States of America. Presently there are nearly 500 group banks in America.

(d) Chain Banking:

Chain Banking is a banking system where the same individual or group of individuals controls two or more banks. In this system an undivided or a group of individuals buy the bulk of shares of two or more banks and thus happen to control and manage them. This system of banking became popular in U.S.A. in 1920.

In this system every bank in the banking chain has its own identity as well as independent board of management. However, it is possible that one individual is the member of various management boards.

(e) Correspondent Banking:

‘Correspondent Banking is an arrangement that exists among banks throughout the country based on the practice of smaller banks carrying deposits with larger banks in exchange for the performance of various services, ‘state Reed and Gill.

Services rendered by the larger banks include cheque clearing, sale and purchase of securities, making advances for big loans and the like. These larger banks are called Correspondent Banks.

Correspondent banking system has developed owing to the facts that (a) Smaller Banks can generally not afford funds for rendering certain major banking services such as the sale and purchase of securities and (b) Smaller banks find it difficult to function as clearing agents. Correspondent banks perform the following principal functions:

(i) To procure currency and coins from the Central Bank for distribution among smaller banks

(ii) To facilitate clearing and collection of cheques for their member banks.

(iii) To facilitate domestic as well as foreign payments on behalf of the member banks.

(iv) To render such agency services on behalf of the member banks as sale and purchase of securities, issuing bank drafts and the like. Correspondent banking is fairly popular in countries like USA.