Basics of Banking:

Financial Systems:

A Bank is a familiar word and we all know that banks form an integral part of the very financial system. So, to
understand banks and banking, it is desirable to get a macro perspective of the financial system as a whole. This
leads us to the fundamental question as to what constitutes the financial system.

The Financial System is a set or aggregation of institutions, instruments, markets and services. A complex interplay
of these components makes the financial system vibrant. As with any other system, the financial system too has a
paramount objective, i.e. to ensure smooth flow of money from those who have it [savers] to those who want to use it
[users], so that the latter can make an effective use of the same, in the process benefiting themselves, the savers and
the economy as a whole.

1. Financial System – Constituents

Financial Institutions are engaged in the business of ‘money or finance’. They can be further classified into three
categories:

-  Intermediaries
-  Non-Intermediaries
-  Regulatory Agencies

1.1 Intermediaries

Intermediaries are the financial institutions that accept deposits from the savers and channelize the same as lending/
investment to the users. In other words, financial intermediaries function as a bridge between the savers and the
users in any economy. The financial intermediaries by their smooth ‘conduit function’ make the economy infinitely
more efficient in the usage of money.

Examples of financial intermediaries are:

 
-  Banks,
-  Investment Companies
-  Non-Banking Finance Companies [NBFCs],
-  Insurance companies,
-  Mutual funds,
-  Stock Brokerages
-  Credit Card Companies

1.2 Non-Intermediaries
These are popularly known as Development Banks. These institutions fund the users of money, but, as a matter of
policy, do not accept deposits from ordinary savers. They get funds from their owners or members as capital
contribution/subscription & not from depositors.
Classic examples of such institutions in the international context are
-  Asian Development Bank
-  World Bank
-  International Monetary Fund (IMF).
-  State Financial Corporation’s (In the Indian context)
 
1.3 Regulatory Agencies

These are agencies whose sole function is to monitor and regulate the functioning of the intermediaries and non-
intermediaries and are referred to as ‘Regulatory Authorities’. They are like the traffic cops that lay down the “Do’s
and Don’ts” for the players in the market. To make their regulations enforceable, these agencies are generally armed
with punitive powers, which can be exercised in case of non-compliance by any of the players.
 
Examples:

Banking Sector: In the Indian context, Reserve Bank of India [RBI], is the regulatory agency vis-à-vis the banking
system. In US it is called the Federal Reserve Bank. In UK till eight years ago, Bank of England was the regulator of
the banking system; today that role is being performed by the Financial Supervision Authority [FSA].

Capital Market: Financial regulators, such as the U.S. Securities and Exchange Commission, Financial Services
Authority in the UK, Financial Supervision Authority in Finland, and Securities & Exchange Board of India [SEBI] are
responsible for regulating the capital market segment to ensure that investors are protected against wrong selling.

2. Financial Services

The term “Financial Services” is generally used to refer to the services provided by the finance industry. It is also a
term used to represent organizations that deal with the management of money & provide a variety of money and
investment related services. It is the largest industry in the world in terms of profits & represents over 20% of the
market capitalization or the market value. The term financial services became more prevalent in the United States
partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies in the
US financial services industry to merge. Today almost every company which previously described itself as a bank,
insurance company, or brokerage house, considers itself in some way as a financial services institution.

Important Financial Services offered include:

 
-  Banking Services
-  Investment Planning
-  Insurance Planning
-  Wealth Management & Estate Planning
-  Share Broking
-  Credit Cards Services

3. Financial Instruments

As is the case with financial markets, financial instruments are dime a dozen. Some of the most well known ones are:

-  Simple Check
-  Demand draft drawn in one’s favor
-  Shares
-  Trade Bills
-  Debentures
-  Bonds
-  Government Securities
-  Treasury Bills and Commercial Papers
-  National Saving Certificates
-  Fixed Deposit Receipts

4. Financial Markets

The financial markets can be divided into different subtypes:

-  Capital markets which consist of:
 
1 Bond markets
2 Stock market
 
-  Commodity markets
-  Money markets
-  Derivatives markets
-  Futures markets
-  Foreign Exchange markets
-  Insurance markets

4.1 Capital Market (securities markets) is the market for securities, where companies and the government can raise
long-term funds. The capital market includes the stock market and the bond market. The capital markets consist of
primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets.
Secondary markets allow investors to sell securities that they hold or buy existing securities

-  The bond market, also known as the debt, credit, or fixed income market, is a financial market where participants
buy and sell debt securities usually in the form of bonds. Bond Markets provide financing through the issuance of
Bonds, and enable the subsequent trading thereof.
 
-  A stock market is a market for the trading of company stock, and derivatives. Both of these include securities listed
on a stock exchange as well as those only traded privately. It provides financing through the issuance of shares or
common stock, and enables subsequent trading.
 
4.2 Commodity Markets facilitate the trading of commodities & are markets where raw or primary products are
exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized Contracts. Items traded include: Food stuffs, Livestock, Precious metals (Gold, Silver), and
Industrial metals, Fuel etc.

4.3 Money Market is a financial market for short-term borrowing and lending, typically up to thirteen months. In the
money markets, banks lend to and borrow from each other, short-term financial instruments such as certificates of
deposit (CDs) or enter into agreements such as repurchase agreements (repos). It provides short to medium term
liquidity in the global financial system. Money market derivatives include forward rate agreements (FRAs) and short-
term interest rate futures. Common money market instruments are
 
-  Bankers' acceptance - A draft or bill of exchange accepted by a bank to guarantee payment of the bill.
-  Certificate of deposit
-  Commercial paper
-  Eurodollar deposit
-  Federal Agency Short-Term Securities
-  Federal funds (in the US): Interest-bearing deposits held by banks and other depository institutions at the Federal
Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis
-  Municipal notes
-  Repurchase agreements
-  Treasury bills
-  Money market mutual funds

4.4 The Derivatives Markets are the financial markets for derivatives, which provide instruments for the management
of financial risk. The market can be divided into two, one for exchange traded derivatives and that for over-the-
counter derivatives. The legal nature of these products is very different as well as the way they are traded, though
many market participants are active in both
-  Future Markets provide standardized forward contracts for trading products at some future date. A futures
exchange is a corporation or organization which provides a marketplace in which to trade derivatives such as futures
contracts and options
 
4.5 Foreign Exchange (Currency or Forex or FX) Market is where one currency is traded for another. It is by far the
largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks,
currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade
happening in the Forex markets across the globe currently exceeds $1.9 trillion/day (on average). Retail traders
(individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks
and may be targets of Forex scams
 
4.6 Insurance Markets, which facilitate the redistribution of various risks.

5. Central / Apex Bank – Its Functions

In most countries, the Central bank is the pivot of the financial system. It is called the ‘Regulatory Bank’. In India,
Reserve Bank of India is the central bank & in US it is the Federal Reserve Bank that is responsible for maintaining
the stability of the financial system. Similarly each country has an Apex/Central Bank to regulate & control its
Financial System

Functions of the Central bank vary from country to country. The following could be listed as generic ones:
 
-  Issue currencies and coins. Put into circulation currency notes of all denominations
-  Monitor and regulate the functioning of intermediaries and non-intermediaries
-  Make regulations (Compliance Norms) and exercise powers to monitor compliance/ non Compliance
-  Act as bankers to commercial banks, i.e.: Banks are entitled to maintain their accounts with the Central bank. In
fact, in most other countries, it is mandatory that banks, which participate in the clearing system, maintain their
accounts with the central bank or one of its agent institutions.
-  Function as banker to the Government
-  Act as the lender of last resort to banks during times of crisis
-   Regulate extension of credit by banks. Such a regulation could relate to direction of credit, its quantum and/or its
price. E.g.: In India, banks are mandated by the RBI to ensure that 40 per cent of their credit goes to those borrowers
who are classified as priority sector
-  Manage the country's foreign exchange, gold reserves, and Government’s stock register & control their use
-  Framing the Monetary policy as well as its implementation. Through such a periodic policy pronouncements the
central banks influence the general interest rates and the level of activity in the economy. In India, RBI comes out
with such a monetary policy twice a year—April and October
-  Setting the official interest rate to manage both inflation and the country's exchange rate
-  In certain countries central banks have nothing to do with issue of currency

6. Banking System - India

Indian Banking System is fairly complex because of the presence of a variety of banks and a phenomenal number of
branches. (Possibly; in terms of sheer branch network, Indian banking system could be reckoned as the largest in the
world. Incidentally, SBI is the largest bank in terms of number of branches/ personnel.

As for the structure, the Ministry of Finance is the super-regulator with RBI operating under its guidance. RBI is the
regulator of the banking system in India. It is responsible for bank licensing, as well as branch licensing, issuing
directives and supervising the functioning of banks.

It is empowered with punitive powers that can be exercised against errant banks. Besides the RBI, there are
agencies such as the Deposit Insurance, Corporation & Guarantee Corporation of India (DICGC) and the Banking
Ombudsman that have jurisdiction over banks in select matters

Categories of banks in India include: Public Sector Banks, Private Sector Banks, Foreign Banks, Cooperative Banks,
Local Area Banks and Regional Rural Banks.

Examples of Public sector banks are SBI & its associates and nationalized banks such as Canara Bank, UCO Bank,
Syndicate Bank, etc. Old generation Private sector banks include: Karur Vysya Bank, Federal Bank, Catholic Syrian
Bank, etc. & those incorporated after 1992 are branded as “New Private Sector Banks. E.g.: HDFC Bank, ICICI Bank
and Indus land Bank. Foreign banks are those that are incorporated outside India but carry on their operations in
India under license from the RBI [E.g.: Citibank, Standard Chartered, HSBC Bank, etc.]

While the above categories of banks are treated as ‘commercial banks’, there are also other banks in India such as
Cooperative Banks, Local Area Banks and Regional Rural Banks. The regulatory framework could vary in detail from
one category of banks to another.

7. Banking Systems – UK
In the UK, banks that deal with the public are called ‘high Street banks. They take care of the transactional
requirements of the general public. Besides, there is a unique institution by name ‘Discount House’ operating in the
UK. A ‘discount house’ does not deal with the general public. Instead, it is primarily focused on dealing with banks
and other financial institutions. On the regulatory front, while till eight years ago Bank of England was the regulator of
the banking system, today that role is being performed by the Financial Supervision Authority [FSA].

8. Banking Systems – US

The US banking system is possibly the most fragmented system one can find anywhere in the world. In the first
place, there are a number of types of banks in the US: International banks, national banks, state banks and unit
banks. The number of banking entities is phenomenally large in the US (around 9000). On the regulatory front, these
banks/ banking entities are governed by various regulators.

Within the US itself, banking regulations differ from state to state. Till a few years back, the US banking laws were
totally anti-competitive, but some of the new regulations put in place during and after 1999 has triggered
consolidation of banks in the country.

Banking in United States began in 1781 with the establishment of the Bank of North America in Philadelphia. During
the American Revolutionary War, the Bank was given a monopoly on currency prior to which private banks printed
their own bank notes, backed by deposits of gold and/or silver.

The Bank of North America was succeeded by the First Bank of the United States, chartered in 1791which expired in
1811. Similarly, the Second Bank of the United States chartered in 1816 and shut down in 1836. The dissolution of
the Second Bank of the United States in 1836 lead 18 states to establish clear rules for incorporation.
 
The first banks in the United States concentrated on providing credit to businesses, agriculture, and foreign trade
operations. They did not offer services to consumers or nontraditional businesses. Even consumers did not use a
bank because there was no guarantee that the money deposited into a bank would be safe.

In 1863, Congress passed the National Bank Act as the federal government recognized the need for a stable, central
banking system. This opened up an option for chartering banks nationally & brought all banks in the United States
under federal supervision. With this new law, banks were no longer allowed to create their own bank notes. With the
additional capital from consumers, banks could expand products and services for consumers as well as businesses,
agriculture, and foreign trade operations.

 
Legislation passed by the federal government during the 1980s, such as the Depository Institutions Deregulation and
Monetary Control Act of 1980 and the Depository Institutions Act of 1982, diminished the distinctions between banks
and other financial institutions in the United States. This legislation is frequently referred to as "deregulation," and it is
often blamed for the failure of over 500 savings and loan associations between 1980 and 1988.

Over time, banks have tailored themselves to meet the diverse needs of their customers. Full-service banks offer a
wide variety of financial products and services including basic services like Savings & loans, investment management
and advice, brokering insurance and securities, Tax preparation services, leasing services etc.,
 
Today, American businesses, individuals, government agencies, and private institutions maintain about $3.6 trillion in
bank accounts. This clearly reflects the high level of confidence public has in these banks. This confidence has been
a major factor in the functioning of the U.S. economy.

Advances in information technology allowed more competitors to enter the financial services field and the distinction
between banks and financial services businesses started blurring. As a result of the new regulations and increasing
competition, banks have reorganized their business plans in order to serve their customers more effectively.

Laws and advances in technology between the late 1980s and 1990s created significant changes in the banking
industry. In the USA almost every company now which previously described themselves as a bank, insurance
company, or brokerage house, now describes themselves in some way as a financial services institution.
     
9. What is a Bank?
Definition of a Bank
 
The term bank is generally understood as an institution that holds a banking license granted by the Bank regulatory
authority and is provided rights to conduct the most fundamental banking services. All Banks come under the
Intermediaries categories functioning as a bridge between the savers and the users.
 
A Bank is a commercial institution licensed as a receiver of deposits. It is a financial institution that accepts deposits
and channels the money into lending activities. It provides banking services for profit. The essential function of a bank
is to provide services related to the storing of deposits and extending of credit. A bank generates profits from
transaction fees on financial services and on the interest it charges for lending.

10. Banking Services

 
Although the nature of services offered by a bank depends upon the type of the bank and the country, the primary
services provided include
 
-  Taking deposits from the general public and issuing checking and savings accounts, keeping money safe while also
allowing withdrawals when needed
 
-  Providing loans to individuals, businesses & Corporate
 
-  Encashing cheques
 
-  Facilitating money transactions such as wire transfers and cashier’s checks (Inter Bank, Intra Bank, Inter/Intra
country etc…)
 
-  Issuing credit cards, ATM, and debit cards
 
-  Storing valuables, particularly in a safe deposit box
 
-  Facilitation of standing orders and direct debits, so that payments for bills can be made automatically

11. Banks and their Uniqueness

 
Among all financial institutions in the financial system, banks are the most popular since; they discharge two unique
and critical functions, namely serving as payment conduits and more importantly, influencing money supply in the
country/world.
 
11.1 Banks as Payment Conduits
In the entire financial system only banks can transfer money from place to place and from person to person. They are
the backbone of the very Payment System. This unique ability to move money makes banks possibly the most vital
part of the financial system

11.2 Banks as Credit-Creators/ Money-Creators

Besides moving money Banks accept Deposits & extend credit. This unique capacity of banks to create credit/
deposit is an outcome of the fact that they offer chequeable or in other words demand deposits. Thereby Banks are in
a position to directly influence the quantum of money that is available in the economy. The degree to which, banks
can add ‘money’ is inversely proportional to the cash reserve and other reserves maintained by them. The more is the
reserve maintained, either voluntarily or due to statutory stipulation, the less is the ability of Banks to create deposit
money/credit and vice versa.

12. Types of Banks

 
Banking activities can be characterized as Retail banking and Investment banking. Most banks are profit-making,
private enterprises. Some are owned by government, or are non-profit making. In some jurisdictions retail and
investment activities have been, separated by law.

The Types of Retail banks & their primary activities in operation today can be broadly classified as follows:

12.1 Retail Banks or Commercial Banks

 
Commercial banks provide products & activities dealing directly with individuals, small businesses & Corporate. It is
the term used for a normal Bank to distinguish it from an Investment Bank & is what people normally call a "Bank".
In some English-speaking countries outside North America, the term "Trading Bank" is used to denote a commercial
bank
A Commercial Bank undertakes the following functional roles:

-  Raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and
time (or term) deposits
-  Makes loans to businesses and consumers
-  Trades in Corporate bonds and Government bonds
-  Its primary liabilities are deposits and primary assets are loans and bonds
-  It can be further subdivided into
-  A Retail Banking Division-that deals directly with individual consumers and small businesses
-  Commercial Divisions that deal with Corporations or large businesses.
Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from
Corporations or large businesses, as opposed to normal individual members of the public (retail banking)

Some Examples are: ABN AMRO, ANZ Bank, Bank of America, Bank of New York, Bank of Nova Scotia BNP
Paribas, Canadian Imperial Bank of Commerce (CIBC), Citibank, Credicorp Ltd, SBI, Punjab National Bank, ICICI
bank, and HDFC Bank etc.

12.2 Community Development Banks (CDBs)

Community Development Banks are special Banks designed to serve the residents of low to moderate income (LMI)
areas to spur economic development in those areas.
-  They are Regulated banks that provide financial services to underserved markets/ populations
-  Like any national bank, all federally chartered CDBs are regulated primarily by the Office of the Comptroller of the
  Currency
-  CDBs are required to accept deposits, lend, invest, and provide services primarily to LMI individuals or communities
in whom it is chartered to conduct business

E.g. : Shore Bank in Chicago, Albina Community Bank in Portland, Carver Federal Savings Bank in New York,
Central Bank of Kansas City, City First Bank of D.C. Dryads Savings Bank in New Orleans, Liberty Bank & Trust in
New Orleans, Louisville Commune, Regional Rural Banks or Village Cooperative Banks in India

12.3 Postal Savings Banks

-  Postal Savings Banks are Associated with National Postal Systems. They were offered by Post Offices of many
Nations to provide Banking facilities to depositors who did not have access to banks. This was a safe and convenient
method to save money and promote the habit of savings among the poor.
-  The first Nation to offer such an arrangement was Great Britain in 1861, through the Girobank as it was seen as a
cheap way to finance public debt and also helps the rural citizens and the poor who had no other means of safety for
their money but to keep them at home or on their persons.
-  The United States began a similar system in 1911 under the Act of June 25, 1910 (36 Stat. 814). It was later
abolished by the Act of March 28, 1966 (80 Stat. 92).
-  In Japan, the Post office is one of the Nation's leading bankers, holding trillions of Yen from conservative, risk
adverse citizens.
-  France's La Poste does not offer deposit services, but offers some fee-free financial services, such as monetary
withdrawals from private bank accounts and money changing. La Poste is the second largest employer in France
-  Germany has, like Japan, a Postal banking system. Deutsche Post bank is a subsidiary of Deutsche Post. Postal
banking services are available at all branches
-  Austria had a similar system, where the Österreichische Post used to own the Österreichische Postsparkasse
(P.S.K.).
-  Many other countries adopted such systems, but they have generally been abolished or spun off

12.4 Savings Bank

A Savings Bank is a financial institution whose primary activity is accepting savings deposits. It may also perform
some other functions. In Europe, Savings Banks originated in the 18th & 19th centuries. Their original objective was
to provide easily accessible savings products to all strata of the population. Presently Savings Banks focus on retail
banking services like payments, savings products, credits and insurances for individuals or small and medium-sized
enterprises. They differ from commercial banks by their broadly decentralized distribution network, providing local and
regional outreach and by their socially responsible approach to business and society.
 
12.5 Private Banks
Private Banks are banks that are owned by either an individual or with limited partners. These banks normally have
two distinct divisions - private banking, and corporate banking. Private banking has been viewed as very exclusive,
only catering to high net worth individuals with liquidity of over $1 million, although it is now possible to open accounts
in some private bank with around $50,000.

An institution's private banking division provides various services such as Asset/Wealth management, Savings,
Inheritance, and Tax planning etc for their clients.

E.g.: JP Morgan Chase, Goldman Sachs, Merrill lynch, Citigroup Private Bank, Credit Suisse Private Banking are
some examples of Institutions that provide Private Banking services.

12.6 Investment Banks

Investment Banks are those that provide investment related services. They do not provide direct credit as done by
Commercial Banks.
 
The main activities rendered by an Investment Bank include:
 
-  Help companies, governments and their agencies to raise money by issuing and selling securities in the primary
market
-  Assist public and private corporations in raising funds in the capital markets (both equity and debt) and the division
handling this is called the "Investment Banking Division" (IBD)
-  Provide financial services such as the trading of fixed income, foreign exchange, commodity, and equity securities
and act as intermediaries in trading for clients.
-  “Underwrite" stock and bond issues and other types of financial transactions
-  Offer assistance in the purchase and sale of stocks, bonds, and mutual funds
-  Operate as both brokerages and investment banks
-  Advice on mergers and acquisitions

Some examples are: Goldman Sachs of the USA, Nomura Group of Japan, Lehman Brothers, Morgan Stanley, Bears
Stearns, and Merrill Lynch etc.

12.7 Merchant banks

A Merchant Bank is a traditional term for an Investment Bank & can also be used to describe the private equity
activities of banking. Merchant Banks were traditionally banks engaged in trade financing. In present day scenario it
refers to banks which provide capital to firms in the form of shares rather than loans. They deal in all activities starting
from underwriting bonds to originating foreign loans, provide advisory services to corporations and wealthy individuals
on how to use their money, counsel on M&A, recommend on the type of credit needed etc.

Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in
America. This type initiates loans and then sells them to investors (Fitch 2000).

E.g.: Blackstone Group, LCF Rothschild Group, Chinavest and Goldman Sachs

12.8 Universal Banks

 
The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L.
No. 106-102, 113 Stat. 1338 (November 12, 1999), opened up competition among Banks, Securities companies and
Insurance companies.
 
The Act (GLBA) allowed Commercial and Investment banks to consolidate. For example, Citibank merged with
Travelers Group, an Insurance company, and in 1997 formed the conglomerate Citigroup, a corporation combining
banking and insurance underwriting services.
 
The law was passed to legalize mergers of Banking, Investment & Insurance organizations. This combined industry
has come to be known as the Financial Services Industry. The Financial Services Company offering all these
services came to be known as the Universal Bank. The justification was that individuals usually put more money in
investments when the economy is good, but put the same into savings accounts when it turns bad.

Thus Universal Banks are large financial services conglomerates that combine commercial banking and investment
banking, and sometimes insurance.

In recent years, the lines between the two types of structures namely Commercial Banks & Investment Banks have
blurred, especially as commercial banks have started offering more investment related services. Almost all large
financial institutions have diversified and engage in multiple activities. In Europe and Asia, big Banks are much
diversified groups that also distribute Insurance, whereby the term Bancassurance. ‘Bancassurance’ is the term used
to describe the sale of insurance products in a Bank. The word is a combination of "banque or bank" and "assurance"
signifying that both banking and insurance is provided by the same corporate entity

Some examples of Universal Banks are the HSBC Bank, ABN Amro, JP Morgan Chase, ING Group, Citigroup &
CIBC. To quote Citigroup, it is involved in Commercial and retail lending; it owns a Merchant bank (Citicorp Merchant
Bank Limited) and an Investment bank (Salomon Smith Barney); it operates a Private Bank (Citigroup Private Bank);
and its subsidiaries in tax-havens offer offshore banking services to customers in other countries

12.9 Other types of Banks

Islamic Banks adhere to the concepts of Islamic law. Islamic banking revolves around well established concepts
which are based on Islamic canons. Since the concept of Interest is forbidden in Islam, all banking activities must
avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities that it extends to
the customers. Its deposit makers earn a share of the Bank’s profit as opposed to a predetermined interest. E.g.,
Nasir Social Bank in Egypt, Dubai Islamic Bank, Faisal Islamic Bank of Sudan, Bahrain Islamic Bank…

13. Credit Unions

A Credit Union is a cooperative financial institution that is owned and controlled by its members. Credit unions differ
from other financial institutions (banks, savings and loan, etc.) in that the members who have accounts in the Credit
Union are the owners of the Credit Union.

Policies of the Credit union governing interest rates and other matters are set by a voluntary Board of Directors
elected by and from the membership itself. Only a member of a Credit Union may deposit money or borrow money
from it. As such, Credit Unions have historically marketed themselves as providing superior member service and
being committed to helping members improve their financial health.

Credit unions typically pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans
than banks. Credit union revenues (from loans and investments) do, however, need to exceed operating expenses
and dividends (interest paid on deposits) in order to maintain capital and solvency.
Due to their status as not-for-profit financial institutions, Credit Unions in the United States are exempt from Federal
and State income taxes. Credit unions exist in a wide range of sizes, ranging from volunteer operations with a handful
of members, to institutions with several billion dollars in assets and hundreds of thousands of members.

14. NBFCs

Non-Bank Financial Companies (NBFCs) also known as Non-Banks are financial institutions that provide banking
services without meeting the legal definition of a Bank, i.e. one that does not hold a banking license. Regardless of
this, its operations are still exercised under the Banking regulation. However this depends on the jurisdiction, as in
some jurisdictions, such as New Zealand, any company can do the business of banking, and there are no banking
licenses issued.

Non-Bank institutions frequently acts as suppliers of loans and credit facilities, supporting investments in property,
providing services such as funding private education, wealth management and retirement planning. However they are
typically not allowed to take deposits from the general public and have to find other means of funding their operations
such as issuing debt instruments.

Summary

-  Financial system is an aggregation of institutions, instruments, markets and services that enables smooth
movement of money from the savers to the users so that it can be used in an economically advantageous way.
 
-  Financial institutions can broadly be classified as intermediaries, non-intermediaries and regulatory agencies. While
an intermediary accepts deposits from savers and lends the same to the users of money, a non-intermediary funds
projects, but without taking deposits from savers. Regulatory agencies are responsible for regulating the players in
the system.
 
-  Of all the financial institutions, Banks are unique for two reasons. One they can act as payment conduits and two
they are also capable of creating credit and thus influencing the overall money supply in the economy.
 
-  In most countries, Central Bank is the pivot of the financial system. It is responsible for currency issue, besides
acting as banker to banks and Governments. It may also supervise banks and may also on the role of lender of last
resort in case of need.
 
-  In India, there are different types of banks in the system: Public sector banks, old private sector banks, new private
sector banks, foreign banks, cooperative banks, regional rural banks and local area banks. While RBI is the nodal
regulator, the regulatory framework it uses could vary according to bank type.

-  A Bank is a financial institution that accepts deposits and channels the money into lending activities. The essential
function of a bank is to provide services related to the storing of deposits and extending of credit.
 
-  Banking activities can be characterized as Retail banking and Investment banking. Most banks are profit-making,
private enterprises. However, some are owned by government, or are non-profit organizations. In some jurisdictions
retail and investment activities have been, separated by law.

- Banks in operation today can be broadly classified as Retail Banks or Commercial Banks, Community development
Banks, Private Banks, Postal Savings Banks, Regular Savings Banks, Investment Banks, & Merchant Banks.

-  Commercial banks also known as Retail Banks provide Products & activities dealing directly with individuals, small
businesses & Corporate. Investment Banks are those that provide investment related services & Merchant Banks are
traditionally banks engaged in trade financing providing capital to firms in the form of shares rather than loans.
 
-  Universal Banks are large financial services conglomerates that combine commercial banking and investment
banking, and sometimes insurance. In recent years, the lines between the two types of structures namely
Commercial Banks & Investment Banks have blurred and almost all large financial institutions have diversified and
engage in multiple activities.
 
-  Islamic banks adhere to the concepts of Islamic law. Islamic banking revolves around well established concepts
which are based on Islamic canons.