If we have to define banking then in simple words banking means the business activity of accepting and safeguarding money by other individuals and entities, and then lending out that money to earn profit. This business of banking is a very risky but is profitable to the economy of the country, depositors as well as the banks themselves.
Types of banks and their functions
Banking industry offers its services to different types of clientele, and on types of products offered and clientele served there are mainly six types of banks in the banking sector.
Retail banks: these type of banks offer very basic services to the consumers. Examples of such banks are saving banks and recurring and fixed deposits and the service they provide includes safe deposit boxes, saving and current accounting and different loans.
Commercial banks: these banks act as an intermediaries, who have to raise funds through the depositors and lending that raised money to borrowers. This type of bank can become bankrupt in one day if all the depositors come to withdraw their money on the same day, because they have to give time to borrowers to refund, unlike the depositors. There are only two types of these banks- public sector bank and private sector bank.
Investment banks: these types of banks help individuals, companies and government in raising capital by underwriting or act as the client’s agent in issuance of securities.
Cooperative banks: they provide cheap credit to their members and governed by province of state cooperative societies act.
Specialized banks: these types of banks provide financial aid to the industries, heavy projects and foreign trades. The banks that fall under this category are industrial banks, development banks and foreign exchange banks.
Central banks: these are the banks which implements monetary policy, issue paper money, acting as a banker to government and other banks and regulating the bank industry. One of the best example of this type of bank is Reserve Bank of India.
Challenges for the modern banks
Though banking is a very large sector and consists of big names like San Francisco Banking system, but like every other sector they also have tough challenges in front of them, few of them are: 1.Banks are still not making enough return on investments, that the shareholders require. 2. Many banks are not able to deliver that kind of experience that people are expecting especially in the field of technology. 3. The growth of financial technology companies has become a very big challenge for banks because not only they provide better technology but also are more adaptable than the banking sector. And at last, regulatory requirements are a very huge challenge because due their increasing needs banks spend a big chunk out of their budget on building a system to keep up with the escalating requirements.