With development of banking institutions, various systems of banking have come into existence. Generally most of the people refer banking system to the foundation of banking institutions classified on the basis of functions namely, central bank, commercial banks, and development finance institutions and so on.
But according to the Encyclopedia Britannica, the structure of banking system is defined on the basis of organizational characteristics and techniques or functions of the system.
Following is the structure of Banking System:
Banking system based of organizational characteristics:
- Branch banking
- Unit banking
- Chain banking
- Holding Company/group banking
Banking system based of techniques/functions:
- Deposit banking
- Investment banking
- Merchant banking
- Mixed banking
Whereas chain banking and group banking is associated with Unit Banking.
These modern banking systems had evolved through a historical process depending on socio economic, political and geographical factors. Since historical experience varied from one country to another. It is observed that Branch banking originated in the United Kingdom whereas the United States of America is the home of Unit banking. On the other hand, the mixture of the two or hybrid system is found to be in operation in many countries of Asia and Africa, more particularly in India and other countries of the Far East.
1. Branch banking
Branch banking is a system where the banking business is carried on by single bank with a network of branches throughout the length and breadth of the country. The bank will have a head office in one town and branches in different parts of the country. The branch manager in accordance with the regulations and policies of the head office directs the affairs of the branch. Each bank is a single entity owned by a group of shareholders and controlled by a group of directors.
A bank may decide to establish a branch banking organization, when regulation permit, particularly if it serves a rapidly growing region and finds itself under pressure either to follow its business and household customers as they move into new areas or lose them to more conveniently located competitors.
2. Unit Banking
In the unit banking system, the banking operations are carried through a single office and confined to a particular area. The banks maintain no branches. Unit Banks, offer all their services from one office, though a small number of services (such as taking deposits or casing checks may be offered from limited service facilities, such as drive in windows, automated teller machines, and retail store pint of sale terminals that are linked to the bank’s computer system. These organizations are common in U.S. banking today.
The unique feature of unit banking system is the correspondent banking system. This is an arrangement with which banks carry account with banks in the neighboring cities and these banks in turn have accounts with the large cities like New York. Banks in New York have correspondent bank relation with many branches throughout the country. The small bank in the small community, which holds deposits with the city bank, is the responded bank while the city bank holding the deposits for the small bank is the correspondent bank.
The major service of correspondent bank is clearing of cheques and movement of funds from one place to another. Another valuable service rendered by the bank is strengthening the financial resources of banks during tight money periods. It also acts as source of information and helps in various banking operations.
3. Chain banking:
Chain banking refers to the system where one or few individuals control two or more banking companies or by the same group of persons through purchase of shares of such banks.
The main difference between the two systems is that in case of group banking, the affairs of the group are controlled by the holding company, whereas in case of chain banking system has more or less the same advantages and disadvantages of the group banking system.
4. Group Banking:
Group banking is a system where a group of banks are brought under the control of a holding company. The holding company controls the affairs of all units in the group. But each bank in the group maintains its separate identity. The purpose of group banking is to unify the management of banks, to achieve economies of large-scale operation and to grab more power.
The chief advantage of this system is that each bank need not carry large cash reserve; such cash reserves are concentrated in one or few member banks of the group. In times of need the bigger banks will help the smaller banks. Secondly, economies of large-scale production can be achieved by cutting down operating cost, by purchasing supplies in bulk and improving the efficiency of management.