Classification of Banking System & the Forms of Business in which Banking Companies may Engage

Broadly banks can be classified into the following categories:

A) Classification of banks based on ownership.
B) Classification of banks based on structure.
C) Classification of banks based on functions.


Based on the ownership the banks can be classified in to the following types:

1. Public sector banks: This refers to a type of bank in which the major stake is held by the government and these banks will operate under the guidelines framed by the Reserve Bank of India (RBI). Generally these banks are nationalized by the government in India. State Bank of India (SBI), Bank of Baroda can be the examples of public sector banks in India.

2. Private sector banks: This refers to a type of bank in which major stake is held by private businessmen and individuals. ICICI and HDFC banks can be the examples of private sector banks in India.

3. Foreign banks: This refers to a type of bank which is operating branches in different countries but the main headquarters of that particular bank is situated in a foreign country.


Based on the structure the banks can be classified in to the following types:

1. Unit bank: This is a type of bank under which the banking operations are carried out by a single branch with a single office. Generally the operations of the bank are classified are confined to a limited area.


a) Effective management and control
b) Attends to local interest
c) Close contact with the customers
d) Prevents monopoly formation
e) Quick decision making


a) Limited resources
b) Cannot provide complex banking services
c) Could not follow strict economic policies in granting loans

2. Branch bank: In this branch banking system every bank as a single legal entity which is having one board of directors and a group of shareholders and that bank operates through a network of branches throughout the country.


a) Larger mobilization of deposits
b) Risk spreading and bearing
c) Uniform interest rate
d) Remittance of funds


a) Ineffective remote control
b) Delay in decision making
c) Close contact with customers is not possible
d) Concentration of enormous funds in few hands.

3. Group bank: Group banking is a type of banking in which there is a holding company, controlling the subsidiary companies which are doing banking service. That holding company will have control over the subordinate banking companies.

4. Chain bank: When different banks are under a common control through common shareholders or by the inter-locking of directors, such banks are known as chain banks.

5. Correspondent bank: When two banks of different structure and size are linked by another bank. The bank which links the banks of different structures is known as a correspondent bank.

Classification of banks based on their functions

Based on the functions performed the banks can be classified into the following types:

1. Commercial banks: Generally the main function of the commercial bank has been to attract deposits from the general public for shorter periods and lend them to traders, industrials and other sectors of the people.

2. Industrial banks: These banks stimulate the promotion of new industries and assist in the expansion and modernisation of existing industries, furnishing technical and managerial aid to increase production by granting long-term and medium-term loans etc.

3. Cooperative banks: these banks were started to provide economically weaker sections i.e. agriculturists, landless labourers, artisans etc. bank finance at lower interest rates.

4. Agricultural development banks: These banks provide long-term loans to agriculturists for the purposes of purchase of agricultural machinery, purchase of new land, soil conservation etc.

Statutory definition of Banking and Banking business:

Section 5(b) of the Banking Regulation Act, 1949 defines banking. This section defines the term banking as “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”(1)

Section 5 (c) of the Banking Regulation Act 1949 defines banking company and banking business. The section states that “banking company” means any company which transacts the business of banking in India.

Explanation — Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause.(2)

Forms of business in which banking companies may engage

Section 6 (1) of the Banking Regulation Act 1949 describes the forms of business in which banking companies may engage. (3)
Some of the important forms of business which are mentioned in the section are listed below:

1. Acting as agents: Acting as agents for any government, local authority, other person carrying on agency business and the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers of any description but excluding the business of a Managing Agent or Secretary and Treasurer of a company.

2. Borrowing: Raising, lending or advancing of money, drawing, making, accepting, discounting bills of dealing in stock, funds, shares, debentures etc.

3. Contracting: Contracting for public and private loans and negotiating and issuing the same

4. Dealing:  Dealing with any property, right, title or interest in any property, which may form security or part of security for any loans or advances or connected with any such security.

5. Executing trusts: Executing trusts, administration of estates as an executor, trustee or otherwise.

6. Funds: Supporting funds, institutions, help in supporting funds, institutions that benefits an employee.

7. Guaranteeing: Ensuring, underwriting or participating in managing and carrying out of any issue of shares, stocks, debentures, public or private, of state, municipal.

8. Holding: Selling, realising any property which may come into the possession of the company in satisfaction of any of its claims

9. Indemnity: Carrying on and transacting every kind of guarantee and indemnity business

10. Any other form of business which the central government may specify by notification in an official gazette (OG).


These are the various classifications of banks based on the structure, ownership and functions & various forms of business in which banking companies may engage as mentioned in Banking Regulation Act, 1949.



This article is authored by Bhagavatula Naga Sai Sriram, student of School of law, Sastra University.

Also Read – How to lodge a complaint against your bank?

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