Bank - a financial institution licensed to receive deposits and make loans.

Banks may also

provide financial services, such as wealth management, currency exchange, and safe deposit
boxes. There are two types of banks: commercial/retail banks and investment banks. In most
countries, banks are regulated by the national government or central bank.

Nature of the banking business - connects those in need of funds (borrowers) with those with
an excess of funds (savers) while paying a return to the saver less than the interest charged to the
borrower (in betting terms, this would be known as the 'vig' or 'vigorish'). Banks can lend money
to borrowers in a variety of ways depending on how the money supply is defined and the nature
of the deposits it holds.

Types of Banks

Commercial banks are the banks that accept money in the form of deposits from the public and
give loans and advances to its customers by charging interest. They mobilize small savings and
promote the growth of trade and commerce. Generally, commercial banks lend money for a short
period only. They only provide working capital to the organizations. But in recent times
commercial banks are providing long-term capital also to the organizations.

Co-operative Banks are the banks that usually provide short term, medium term, long term
credit to agricultural purposes. Co-operative Banks also provides loans to small-scale artisans.
Co-operative Banks usually provide credit facilities to farmers, small-scale industries, etc at a
cheaper rate of interest. Co-operative Banks are mainly situated in rural areas and can also be
seen in urban areas.

Central Banks aims at non-profit functioning. It regulates the monetary and credit system of the
country. Central Bank acts as controller, supervisor, and regulator of the activities of commercial
banks and other financial institutions in the country. The Central bank is considered as the apex
institution of the country’s money market.

Industrial banks are also called as Investment Banks. Industrial banks provide long-term loans
to the industries. Industries require long-term capital for buying machinery, construction of
buildings, expansion of operations, etc. These capital required by industries is provided by
industrial banks for industrialists to grow their businesses. Industrial banks accept long-term
deposits from the public. They secure capital by issuing shares and debentures.

Agricultural Banks are the banks which provide agricultural credit to the farmers. The
Agricultural Development Banks provide medium term and long term credit. Some examples of
Agricultural Banks in India are Agricultural Finance Corporation, Agricultural Refinance and
Development Corporation, National Bank for Agricultural and Rural Development
(NABARD).Agricultural Banks are established by the government to promote agricultural credit
in the country.
Savings Banks mainly concentrates on the mobilization of savings of the people. In India Post
offices run by Postal department act as savings banks. Since Commercial banks are providing
these facilities of savings banks to the public, the need for separate savings bank is fading.

Foreign Exchange Banks are the banks which provide finance for foreign trade. These banks
accept deposits from the public. Foreign Exchange Banks are specialized banks in providing
credit for the foreign trade. These banks usually have their branches in foreign countries for
uninterrupted functioning of their services. But in recent times commercial banks are also
financing foreign trade.

Exchange Banks are the banks which operate by financing the imports and exports of the
country. These banks are mainly concerned with providing foreign exchange to their customers
and help to promote international trade. They also offer to discount of foreign bills of exchange
to their customers.

Private Bankers are the individuals who do banking business individually or as a partnership. It
is purely an unorganized sector. Most of the private bankers do not receive or accept any deposits
from the public, they do banking business with their own capital. They lend money to the people
for high-interest rates.

Basic Principles of Banking Operations

1. Principle of Liquidity.

The principle of liquidity is very important for the commercial bank. Liquidity refers to the
ability of an asset to convert into cash without loss within a short time. Paying the deposited
money on demand of customers is called liquidity in sense of banking.

2. Principle of Profitability

The main objective of the commercial bank is to earn a profit. For earning profit commercial
bank have to make the investment by providing short-term loan, before providing loan
commercial bank have to compensate a certain amount of money as liquidity.

3. Safety

The safety of funds lent is another principle of lending. Safety means that the borrower should be
able to repay the loan and interest in time at regular intervals without default. The repayment of
the loan depends upon the nature of security, the character of the borrower, his capacity to repay
and his financial standing.

4. Diversity
In choosing its investment portfolio, a commercial bank should follow the principle of diversity.
It should not invest its surplus funds in a particular type of security but in different types of
securities. It should choose the shares and debentures of different types of industries situated in
different regions of the country. The same principle should be followed in the case of state
governments and local bodies. Diversification aims at minimising risk of the investment
portfolio of a bank.

The principle of diversity also applies to the advancing of loans to varied types of firms,
industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one
basket.” It should spread it risks by giving loans to various trades and industries in different parts
of the country.

5. Stability

Another important principle of a bank’s investment policy should be to invest in those stocks and
securities which possess a high degree of stability in their prices. The bank cannot afford any loss
on the value of its securities. It should, therefore, invest it funds in the shares of reputed
companies where the possibility of decline in their prices is remote.

Government bonds and debentures of companies carry fixed rates of interest. Their value
changes with changes in the market rate of interest. But the bank is forced to liquidate a portion
of them to meet its requirements of cash in cash of financial crisis. Otherwise, they run to their
full term of 10 years or more and changes in the market rate of interest do not affect them much.
Thus bank investments in debentures and bonds are more stable than in the shares of companies.