Certain banks undertake
both commercial and industrial banking. This system knows as mixed banking.
The feature of mixed banking is to attract deposits and raise capital
and loans from the public and make them available to industries for
both short and long periods. The traditional view of banking was that
commercial bank should strictly confine themselves to short term lending
and maintain a high degree of liquidity as they are traders in others
deposits. But banks in some European countries activity lend to industries
for long term and subscribe to share capital of new companies. Such
banks in Germany are known as universal bank or mixed banks as they
combine commercial banking with industrial finance.
The need for mixed banking
1. The need for
industrial revival was felt both by the government and the banks. Many
industrial units to which the banks had supplied short-term loans were
not in a position to repay. So the bank took a wise step to take debentures
of such companies in view of short-term loans instead of writing them
2. The deposits
of commercial banks were fast increasing it was advisable for the banks
to advance loans for long periods
3. The growth of big industries led to a decrease in the dependence
of bank finance as they built up their own surplus funds to supplement
their working capital. Thus banks were deprived of their best customers.
So they were compelled to grant long-term loans to big industries and
gradually start holding industrial securities
4. The government policy was for quick industrialization in countries
like Germany and Japan. Bank undertook the responsibility of supplying
long-term finance to industries for speedy industrialization
5. Stock exchange was increased for the marketability of securities
of joint stock companies. The bank companies as they could sell them
in the stock exchange at any time and convert them into cash.
Merits of mixed
1. It grants short-term
loans for the purchase of raw materials and the payment of wages and
salaries and also grants long term loans for the purchase of plant and
machinery and other assets. Thus an industrial concern need not go to
different types of banks for its different types of requirements.
2. A commercial
bank raises large funds from the public by way of deposits. Many people
do not like to subscribe shares and debentures of the industrial banks
because they prefer to keep their money in various deposits. Thus if
a commercial bank undertakes industrial banking, it will have large
funds to provide substantial aid to industries.
3. A mixed bank appoints experts to access the soundness of industrial
unit and to evaluate its securities. It can provide various other services
to the industrial undertaking like management of capital issues. On
the basis of the advice given by the experts it can subscribe to the
shares and debentures of the companies and can appoint its nominees
on their board of directors.
4. The banks can
join together into groups to share the risk of industrial finance. The
mixed bank s followed this practice and appointed their men on the board
of directors of companies. This helps the banks to have personal knowledge
of the working of the industrial enterprises.
5. Mixed bank provides
valuable advice to its customers on investments in shares and debentures
since it has a personal knowledge of the working of number industrial
organizations. Thus mixed banking stimulates capital formation in the
6. Mixed banking
facilities industrialization in developing countries. It does so by
providing both short term and long-term financial accommodation.
Demerits of Mixed banking
1. It reduces liquidity
of the bank. A large part of the funds of the bank is raised from deposits,
which are repayable either on demand or after a short period.
2. When a bank grants
long-term loans, its funds are locked up and consequently it may not
be able to pay the depositors when they demand back their money.
3. During periods
of depression, banks suffer heavy losses when the securities of companied
lose their value because of fall in demand for the sale of securities
held by it. Banks with poor reserves may fail. This is a serious drawback
of mixed banking.
4. During periods
of boom, banks are tempted to over invest their funds in industries
beyond safe limits. The bank may indulge into speculation of shares
in the hope of earning higher profits. This carries great results into
Thus the system
of mixed banking has serious evils despite the fact that it has several
advantages. Many banks failed in France, America and other countries
due to industrial finance. The central bank of the country must be strong
enough to guide and control the operations of the mixed banks. In countries
like India, mixed banking should be under taken with great care.
In a nutshell it
is a system of banking under which commercial banks provide both short
and long-term loans for commerce and industries.
Trade requires both
short term loans whereas industries requires short and long term loans.
Under the mixed banking system the commercial banks meet the short as
well as long term requirements of industries. Therefore, it is know
as mixed banking. The German banking system falls under this category.
They are also referred to as universal banks.
The banks help the
industrial units to appoint experts in various departments. There is
efficiency and economy in the operations. These banks also help the
companies in mobilizing larger financial resources by selling their
shares to the public. Due to its long term accommodation to industries
there is a wide spread industrial development in the country.
Thus in case of
specialized banking a commercial bank is not in a position to give a
sound advice for the purchase of securities. Thus mixed banking stimulated
capital formation in the country.