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STUDY MATERIAL FOR B.A ECONOMICS
MONEY AND BANKING - II
SEMESTER - VI, ACADEMIC YEAR 2020 - 21
UNIT CONTENT PAGE Nr
I EVOLUTION OF BANKING 02
II COMMERCIAL BANKING 08
III CENTRAL BANKING 21
IV MONETARY POLICY 28
V MODERN BANKING 35
Page 1 of 41
STUDY MATERIAL FOR B.A ECONOMICS
MONEY AND BANKING - II
SEMESTER - VI, ACADEMIC YEAR 2020 - 21
UNIT - I
EVOLUTION OF BANKING
DEFINITION OF BANKING:
Banks are a very important part of the economy because they provide vital services for
both consumers and businesses. As financial service providers, they give you a safe place to
store your cash. Through a variety of account types such as checking and savings accounts,
and certificates of deposit (CDs), it helps to conduct routine banking transactions like deposits,
withdrawals, check writing, and bill payments. The money stored in most bank accounts is
federally insured by the Federal Deposit Insurance Corporation (FDIC)
Types of Banks:
Retail banks deal specifically with retail consumers. These banks offer services to the
general public and are also called personal or general banking institutions. Retail banks provide
services such as checking and savings accounts, loan and mortgage services, financing for
automobiles, and short-term loans like overdraft protection. Most retail banks also offer credit
card services to their customers, and may also supply their clients with foreign currency
exchange. These banks also cater to high-net-worth individuals, by giving them specialty
services such as private banking and wealth management. Examples of retail banks include TD
Bank and Citibank.
Commercial or corporate banks provide specialty services to their business clients from
small business owners to large, corporate entities. Along with day-to-day business banking,
these banks also provide their clients with other things such as credit services, cash
management, commercial real estate services, employer services, and trade finance. JPMorgan
Chase and Bank of America are two popular examples of commercial banks.
Investment banks focus on providing corporate clients with complex services and
financial transactions such as underwriting and assisting with merger and acquisition (M&A)
activity. As such, they are known primarily as financial intermediaries in most of these
transactions. Clients commonly range from large corporations, other financial institutions,
pension funds, governments, and hedge funds. Morgan Stanley and Goldman Sachs are
examples of U.S. investment banks.
Unlike the banks listed above, central banks are not market-based and don't deal
directly with the general public. Instead, they are primarily responsible for currency stability,
controlling inflation and monetary policy, and overseeing a country's money supply. They also
regulate the capital and reserve requirements of member banks. Some of the world's major
central banks include the U.S. Federal Reserve Bank, the European Central Bank, the Bank of
England, the Bank of Japan, the Swiss National Bank, and the People’s Bank of China.
Indian Banking System
Unit Bank is a type of bank under which the banking operations are carried by a single
branch with a single office and they limit their operations to a limited area. Normally, unit
banks may not have any branch or it may have one or two branches. This unit banking system
has its origin in United State of America (USA) and each unit bank has its own shareholders and
board of management.
According to Shapiro, Soloman and White,” An independent unit bank is a corporation
that operates one office and that is not related to other banks through either ownership or
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STUDY MATERIAL FOR B.A ECONOMICS
MONEY AND BANKING - II
SEMESTER - VI, ACADEMIC YEAR 2020 - 21
control.”
Advantages of Unit Banking:
Easy Management:
The management and control of unit banks is much easier and effective due to the small
size and operations of the banks. There are less chances of fraud and irregularities in the
financial management of the unit banks.
Localized Banking:
Unit banking is localized banking. The unit bank has the specialised knowledge of the
local problems and serves the requirements of the local people in a better manner than branch
banking. Since the bank officers of a unit bank are fully acquainted with the local needs, they
cannot neglect the requirements of local development.
Quick Decision:
A great advantage of unit banking is that there is no delay of any kind in taking decisions
on important problems concerning the unit bank.
No Monopolistic Tendencies:
Unit banks are generally of small size. Thus, there is no possibility of generating
monopolistic tendencies under unit banking system.
Promotes Regional Balance:
Under unit banking system, there is no transfer of resources from rural and backward
areas to the big industrial commercial centres. This tends to reduce regional in balance.
Initiative in Banking Business:
Unit banks have full knowledge of and greater involvement in the local problems. They
are in a position to take initiative to tackle these problems through financial help.
Flexibility in operation:
The unit banks are more flexible. The manager of the unit bank can use his discretion
and arrive at quick decision.
No Inefficient Branches:
Under unit banking system, weak and inefficient branches are automatically eliminated.
No protection is provided to such banks.
No diseconomies of Large Scale Operations:
Unit banking is free from the diseconomies and problems of large-scale operations
which are generally experienced by the branch banks.
Disadvantages of Unit Banking:
Limited Scope:
The scope of unit banking is limited. They do not get the benefits of large scale
operations.
No. Distribution of Risks:
Under unit banking, the bank operations are highly localized. Therefore, there is little
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STUDY MATERIAL FOR B.A ECONOMICS
MONEY AND BANKING - II
SEMESTER - VI, ACADEMIC YEAR 2020 - 21
possibility of distribution and diversification of risks in various areas and industries.
Inability to Face Crisis:
Limited resources of the unit banks also restrict their ability to face financial crisis. These
banks are not in a position to stand a sudden rush of withdrawals.
Lack of Specialization:
Unit banks, because of their small size, are not able to introduce, and get advantages of,
division of labor and specialization. Such banks cannot afford to employ highly trained and
specialized staff.
Operates only in urban areas and big towns:
Unit banks, because of their limits resources, cannot afford to open uneconomic
banking business is smaller towns and rural area. As such, these areas remain unbanked.
Costly Remittance of Funds:
A unit bank has no branches at other place. As a result, it has to depend upon the
correspondent banks for transfer of funds which is very expensive.
Difference in Interest Rates:
Since easy and cheap movement of does not exist under the unit banking system,
interest rates vary considerably at different places.
Local Pressures:
Since unit banks are highly localised in their business, local pressures and interferences
generally disrupt their normal functioning.
Undesirable Competition:
Unit banks are independently run by different managements. This results in undesirable
competition among different unit banks.
What Is Branch Banking?
Branch banking is the operation of storefront locations away from the institution's
home office for the convenience of customers.
In the U.S., branch banking has gone through significant changes since the 1980s in
response to a more competitive and consolidated financial services market. Most crucially,
since 1999 banks have been permitted to sell investments and insurance products as well as
banking services under the same roof.
More recent innovations including internet banking services and phone apps are
dramatically changing the banking landscape again.
Understanding Branch Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorized well-
capitalized banks to acquire branch offices or open new ones anywhere in the United States,
including outside their home states. Most states had already passed laws enabling such
interstate branching.
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