Mixed Banking its Merits and Demerits

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 other’s 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 off

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 banking

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 country.

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 huge losses.

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.


______________________________________________________________________________

 

 

 

 


Topics

  • Management - Home
  • Asset Management

  • Brand Management
  • Business Process Management

  • Change Management

  • Data Management

  • Database Management

  • Debt Management

  • Document Management
  • Facility Management

  • Information Management

  • Inventory Management

  • Medical Management Software
  • Network Management

  • Performance Management

  • Portfolio Management

  • Project Management

  • Property Management Software
  • Quality Management

  • Risk Management

  • Sales Management

  • Security Management

  • Technology Management

  • Time Management

  • Warehouse Management
  •  


    FREE Subscription

    Stay Current With the Latest Trends & Developments Realted to Management. Signup for Our Newsletter and
    Receive New Articles Through Email.

    Name:

    Email:

    Note : We never rent, trade, or sell our email lists to anyone. We assure that your privacy is respected and protected.

     

    Copyright - © 2005 - 2017 - www.management-hub.com

    | Management-Hub.com Privacy Policy | Disclosure | Disclaimer | Contact |