Types of Banks and Their Services: A Comprehensive Guide to the Banking Industry

This guide provides a comprehensive overview of banks and the financial services they offer. Learn about different types of banks (commercial, investment, central, etc.), understand their roles in the financial system, and explore the various services available to individuals and businesses.

Top Banking Interview Questions and Answers

What is a Bank?

Question 1: What is a Bank?

A bank is a financial institution licensed to receive deposits and make loans. Banks also offer various financial services, such as wealth management, currency exchange, and safe deposit boxes.

Types of Banks

Question 2: Types of Banks

Different types of banks cater to various needs:

Retail Banks: Serve individual customers.
Commercial Banks: Serve businesses and corporations.
Investment Banks: Provide financial services to corporations and governments.
Agricultural Banks: Focus on agricultural loans and services.
Cooperative Banks: Owned by their members.

Commercial Banks

Question 3: What is a Commercial Bank?

Commercial banks provide a wide range of services, including accepting deposits, offering loans, and providing basic investment products to both individuals and businesses. They earn profit from the interest earned on loans given out to their customers.

Functions of a Commercial Bank

Question 4: Functions of a Commercial Bank

Key functions:

Accepting deposits (savings, checking, fixed deposits).
Providing loans (personal, auto, home, business).
Offering locker facilities.
Dealing in foreign exchange.
Trading in securities.

Types of Commercial Banks

Question 5: Types of Commercial Banks

Commercial banks are often categorized as:

Public Sector Banks: Government-owned.
Private Sector Banks: Privately owned.
Foreign Banks: Banks based in other countries.

Investment Banking

Question 6: Investment Banking

Investment banking focuses on providing financial advisory and underwriting services to corporations and governments. Activities include mergers and acquisitions, debt and equity financing, and portfolio management.

Consumer Banks

Question 7: Consumer Banks

Consumer banks specialize in providing loans for consumer goods (e.g., appliances, electronics) with easy payment plans.

Reasons for Joining the Banking Sector

Question 8: Reasons for Joining the Banking Sector

(This requires a personal response. The candidate should highlight their interest in finance, their skills relevant to banking, and their career aspirations within the industry. Avoid generic answers about job security.)

Types of Bank Accounts

Question 9: Types of Bank Accounts

Common account types:

Savings Accounts: Earn interest; typically have withdrawal limits.
Checking Accounts: For everyday transactions; typically don't earn interest.
Money Market Accounts: Combine features of savings and checking accounts, typically offering a higher interest rate than savings accounts.
Certificates of Deposit (CDs): Fixed-term deposits with higher interest rates; penalties for early withdrawal.
Retirement Accounts: For saving for retirement (e.g., IRAs).

Operating a Bank Account

Question 10: Ways to Operate a Bank Account

Common methods:

In-person at a branch.
Telephone or mobile banking.
Online banking.
ATMs (Automated Teller Machines).

Question 11: Crossed Checks

A crossed check is a check that has two parallel transverse lines drawn across its face, optionally with the words "and company" or "not negotiable" between the lines. This marking signifies that the check must be deposited directly into a bank account and cannot be cashed over the counter.

Types of Crossing:

General Crossing: Two parallel transverse lines across the face of the check, optionally with words like "and company" or "not negotiable." This is the most common type and indicates the check must be deposited into a bank account.
Special Crossing: Two parallel transverse lines with the name of a specific bank written between the lines. This means the check can only be deposited into an account at that particular bank. This offers enhanced security.

Purpose of Crossing a Check:

Increased Security: If a crossed check is lost or stolen, it's difficult for the thief to cash it, as it must be deposited into a bank account.
Proof of Payment: Provides a clear record of payment as the check must pass through the banking system.
Reduced Risk of Fraud: Makes it more challenging for fraudulent activities, as the payee's bank details are involved in the transaction.

How Crossed Checks Work:

The drawer draws two parallel transverse lines on the check.
The payee receives the crossed check.
The payee endorses the check and deposits it into their bank account.
The payee's bank presents the check to the drawee bank (the drawer's bank).
The drawee bank verifies the check and transfers the funds to the payee's bank.

Key Considerations:

Not Negotiable: Adding "not negotiable" between the lines makes the check safer. Even if the check is endorsed to another person, it still must be deposited into a bank account, and the new holder doesn't get better title than the original payee.
Account Payee Only: While not technically a crossing, adding "Account Payee Only" strengthens the security by indicating that the check should only be deposited into the account of the named payee.
Crossing by Banks: A bank can also cross a check that isn't already crossed when it's presented for deposit.
Legal Implications: If a bank cashes a crossed check over the counter, it may be liable for any resulting losses.

Crossed checks provide an important layer of security in financial transactions. They help protect both the drawer and the payee by ensuring the funds are transferred through the banking system and not easily diverted.

What is a Bank?

Question 1: Definition of a Bank

A bank is a financial institution that accepts deposits and provides loans. Banks also offer various other services to individuals and businesses.

Types of Banks

Question 2: Types of Banks

Banks come in many forms, including retail banks, commercial banks, investment banks, and specialized banks (like agricultural banks).

Commercial Banks

Question 3: Commercial Banks

Commercial banks provide services to individuals and businesses, including accepting deposits, giving out loans, and offering basic investment products.

Functions of Commercial Banks

Question 4: Functions of Commercial Banks

Key functions:

Accepting deposits.
Providing loans.
Offering safe deposit boxes.
Dealing in foreign exchange.
Trading securities.

Types of Commercial Banks

Question 5: Types of Commercial Banks

Commercial banks can be categorized into:

Public Sector Banks: Government-owned.
Private Sector Banks: Privately owned.
Foreign Banks: Banks from other countries operating internationally.

Investment Banking

Question 6: Investment Banking

Investment banking focuses on helping corporations and governments raise capital and manage investments. This involves services such as mergers and acquisitions advisory and underwriting securities.

Consumer Banks

Question 7: Consumer Banks

Consumer banks specialize in lending for consumer purchases (e.g., cars, appliances).

Reasons for Joining the Banking Sector

Question 8: Reasons for Joining the Banking Sector

(This question requires a personalized answer. The candidate should explain their interest in the financial industry, their relevant skills, and career goals.)

Types of Bank Accounts

Question 9: Types of Bank Accounts

Common account types:

Savings Accounts: Earn interest; limited transactions.
Checking Accounts: For everyday transactions; usually don't earn interest.
Money Market Accounts: Higher interest rates than savings accounts; often have minimum balance requirements.
Certificates of Deposit (CDs): Fixed-term deposits with a specified interest rate and maturity date; penalties for early withdrawal.
Retirement Accounts: Tax-advantaged accounts for retirement savings.

Operating Bank Accounts

Question 10: Ways to Operate a Bank Account

Methods for accessing and managing a bank account:

In-person at a branch.
Telephone banking.
Mobile banking.
Online banking.
ATMs (Automated Teller Machines).

Crossed Checks

Question 11: Crossed Checks

A crossed check is a check marked with two parallel transverse lines, indicating that it must be deposited into a bank account and cannot be cashed over the counter.

Overdraft Protection

Question 12: Overdraft Protection

Overdraft protection automatically transfers funds from another account to cover insufficient funds in a checking account, preventing checks from bouncing.

Opening a Bank Account

Question 13: Things to Consider When Opening a Bank Account

Before opening an account, consider:

The type of account (savings, checking, etc.).
Interest rates (for savings accounts).
Fees (monthly fees, overdraft fees, etc.).
Debit card options.
Online banking features.

Overdraft Protection Fees

Question 14: Overdraft Protection Fees

Banks typically charge fees for overdraft protection services; these fees are only charged when the service is used.

Documents Required to Open an Account

Question 15: Documents Required to Open a Bank Account

Required documents generally include proof of identity (e.g., passport, driver's license), proof of address, and photographs.

Annual Percentage Rate (APR)

Question 16: Annual Percentage Rate (APR)

APR is the annual interest rate charged on a loan or credit card. It includes all fees and charges, expressed as a yearly percentage.

Fixed vs. Variable APR

Question 17: Fixed vs. Variable APR

Loans can have either fixed APRs (interest rate remains constant) or variable APRs (interest rate can change over time).

Prime Rate

Question 18: Prime Rate

The prime rate is a benchmark interest rate that banks use to set interest rates for their most creditworthy customers. Variable APRs are often tied to the prime rate.

Amortization and Negative Amortization

Question 19: Amortization and Negative Amortization

Amortization is the repayment of a loan in installments. Negative amortization occurs when the payment is less than the interest due, causing the principal balance to increase.

Debt-to-Income Ratio

Question 20: Debt-to-Income Ratio

The debt-to-income ratio is calculated as total monthly debt payments divided by gross monthly income. It's a key measure of a borrower's ability to repay debt.

Cost of Debt

Question 21: Cost of Debt

The cost of debt is the interest expense a company incurs on its borrowings.

Balloon Payments

Question 22: Balloon Payments

A balloon payment is a large, lump-sum payment due at the end of a loan term when the loan hasn't been fully amortized.

Checks vs. Demand Drafts

Question 23: Check vs. Demand Draft

Both are used for transferring funds, but:

Checks: Issued by account holders; can be canceled.
Demand Drafts: Issued by banks; usually cannot be canceled.

Debt-to-Income Ratio (Again)

Question 24: Debt-to-Income Ratio (Again)

The debt-to-income ratio is a key financial metric used to assess a borrower's creditworthiness. A high debt-to-income ratio suggests that the applicant may have difficulty meeting debt obligations.

Adjustment Credit

Question 25: Adjustment Credit

In some financial systems, adjustment credit is a short-term loan provided to banks to meet reserve requirements or manage liquidity.

Banking Software Applications

Question 26: Banking Software Applications

Banking software applications help manage various banking operations:

Core Banking System: Networked branch access.
ATM Banking: Automated teller machines.
Internet Banking: Online banking services.
Loan Management Systems: Manage loan accounts and payments.
Credit Management Systems: Assess credit risk.
Investment Management Systems: Manage investment portfolios.
Stock Market Management Systems: Manage securities and bonds.
Financial Management Systems: Manage income, expenses, and assets.

Foreign Drafts

Question 27: Foreign Drafts

A foreign draft is a payment instrument drawn on a foreign bank, used for international transactions. They are considered a safer and more reliable alternative to other methods like sending cash.

Question 28: Loan Grading

Loan grading is a risk assessment system used to categorize loans based on their risk profile. Factors considered include the borrower's creditworthiness and the loan's repayment terms. This helps banks manage risk and pricing.

Co-makers

Question 29: Co-makers

A co-maker (or co-signer) is an individual who agrees to be jointly responsible for repaying a loan. They share the responsibility with the main borrower.

Bank Profitability

Question 30: How Banks Make a Profit

Banks generate profit through:

Interest earned on loans.
Fees charged for services (e.g., account maintenance, transaction fees).
Investment income.
Other services (e.g., wealth management).

Lines of Credit

Question 31: Lines of Credit

A line of credit is a pre-approved borrowing limit. The borrower can draw funds as needed, paying interest only on the amount borrowed.

Bank Guarantees vs. Letters of Credit

Question 32: Bank Guarantee vs. Letter of Credit

Both provide payment assurance, but:

Bank Guarantee: Protects against non-performance.
Letter of Credit: Ensures payment for goods/services.

Credit Netting

Question 33: Credit Netting

Credit netting combines multiple financial transactions into a single net amount, reducing the number of individual credit checks needed.

Credit Checks

Question 34: Credit Checks

A credit check reviews a borrower's credit history to assess their creditworthiness. Banks use this to determine the risk of a loan.

Inter-bank Deposits

Question 35: Inter-bank Deposits

An inter-bank deposit is when funds are transferred between banks. The bank receiving the funds is the correspondent bank.

Cashier's Checks

Question 36: Cashier's Checks

A cashier's check is a check guaranteed by the bank. The payment is made from the bank's funds, offering greater payment assurance than a personal check.

Home Equity Loans

Question 37: Home Equity Loans

A home equity loan lets you borrow money using your home's equity as collateral. The loan amount is based on the difference between your home's value and the outstanding mortgage balance.

Card-Based Payments

Question 38: Card-Based Payments

Two main types:

Credit Cards: Borrowed funds; interest charged.
Debit Cards: Funds withdrawn directly from your account.

ACH (Automated Clearing House)

Question 39: ACH (Automated Clearing House)

ACH is an electronic network for financial transactions between banks and other financial institutions.

Convertibility Clause

Question 40: Convertibility Clause

A convertibility clause allows a bank to change a loan's interest rate from fixed to variable (or vice-versa).

LIBOR (London Interbank Offered Rate)

Question 41: LIBOR (London Interbank Offered Rate)

LIBOR is a benchmark interest rate based on the average rates at which banks lend to each other. It is an important benchmark for various financial instruments.

Charge-Offs

Question 42: Charge-Offs

A charge-off occurs when a lender writes off a debt as uncollectible.

Payday Loans

Question 43: Payday Loans

Payday loans are short-term, high-interest loans typically due on the borrower's next payday.

Banking Software Applications in India

Question 26: Banking Software Applications in India

Various software applications support banking operations in India, such as core banking systems, ATM systems, internet banking platforms, loan management systems, and other specialized financial management software.