Mixed Banking
Mixed Banking is a system of banking that combines the functions of both commercial banking and investment banking. Under this system, a single bank provides short-term working capital for trade and industry (like a commercial bank) as well as long-term finance for industrial and developmental purposes (like an investment or development bank).
Mixed banking, therefore, bridges the gap between short-term credit and long-term investment needs, supporting both day-to-day operations and capital formation in the economy.
Meaning and Concept
In a pure commercial banking system, banks focus mainly on short-term credit for working capital—such as loans for trade, inventories, and production cycles. Conversely, in an investment banking system, institutions provide long-term funds for infrastructure, plant, and machinery.
Mixed banking integrates these two approaches. It allows banks to meet the comprehensive financial requirements of businesses—covering both short-term and long-term financing.
This system is prevalent in Germany, Japan, and some European countries, and it has influenced the development of universal banking in India.
Definition
According to R. S. Sayers,
“Mixed banking is a system in which commercial banks undertake both short-term as well as medium- and long-term lending to industry and commerce.”
Thus, it represents a hybrid form of banking that serves as a link between commercial and industrial finance.
Features of Mixed Banking
- Combination of Functions: Performs both commercial and investment banking functions.
- Diverse Credit Facilities: Provides loans for working capital as well as for fixed capital formation.
- Long-Term Association with Industry: Banks often develop close relationships with industrial enterprises.
- Investment in Industrial Securities: Banks may invest in shares, debentures, or bonds of industrial firms.
- Encouragement of Industrialisation: Plays an active role in promoting and financing industrial growth.
- Risk Diversification: Reduces risk through diversification of short-term and long-term assets.
- Institutional Flexibility: Adjusts to the changing financial needs of enterprises across business cycles.
Objectives of Mixed Banking
- To provide comprehensive financial support to industries and trade.
- To encourage industrial development by meeting both fixed and working capital needs.
- To strengthen the link between banking institutions and industrial enterprises.
- To ensure balanced economic growth by financing both short-term and long-term projects.
- To make the financial system more resilient and diversified.
Functions of Mixed Banking
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Short-Term Finance:
- Provides working capital loans, cash credit, overdrafts, and trade bills.
- Facilitates smooth functioning of daily business operations.
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Long-Term Finance:
- Grants medium- and long-term loans for fixed assets, plant expansion, and technological upgrades.
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Investment Activities:
- Invests in shares, debentures, and bonds of industrial and infrastructure companies.
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Underwriting and Issue Management:
- Assists in underwriting new issues and managing public offerings of securities.
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Advisory Services:
- Offers financial and managerial consultancy to industries regarding project feasibility and capital structure.
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Developmental Role:
- Encourages industrial modernisation and entrepreneurship through long-term partnerships.
Advantages of Mixed Banking
1. All-Round Financial Support:
- Enterprises can obtain both working capital and long-term capital from the same institution.
2. Promotes Industrial Development:
- Helps establish and expand industries, contributing to economic growth.
3. Builds Long-Term Relationships:
- Banks develop close ties with industries, improving credit evaluation and monitoring.
4. Better Resource Utilisation:
- Enables banks to utilise surplus funds effectively by investing in industrial projects.
5. Stability of Earnings:
- By diversifying into long-term investments, banks ensure stable income streams.
6. Encourages Innovation and Entrepreneurship:
- Provides capital for new ventures and technological innovations.
7. Development of Capital Markets:
- By underwriting and investing in securities, mixed banks help deepen capital markets.
Disadvantages of Mixed Banking
1. Risk of Conflict of Interest:
- Banks investing in industries may prioritise their own interests over depositor safety.
2. Financial Risk Exposure:
- Long-term industrial investments can expose banks to greater risks during economic downturns.
3. Reduced Liquidity:
- Investment in long-term assets reduces banks’ liquidity, making it harder to meet short-term withdrawals.
4. Industrial Monopoly:
- Close ties between banks and industries can lead to concentration of economic power.
5. Credit Misallocation:
- Banks may favour industries in which they have a financial stake, neglecting other productive sectors.
6. Difficulty in Supervision:
- It becomes complex for regulators to monitor and control banks engaged in both short- and long-term finance.
Mixed Banking vs. Pure Commercial Banking
| Basis | Mixed Banking | Commercial Banking |
|---|---|---|
| Nature of Lending | Both short-term and long-term loans. | Primarily short-term loans. |
| Purpose | Meets working capital and fixed capital needs. | Focuses mainly on trade and commerce. |
| Investment in Industry | Invests directly in industrial securities. | Generally avoids equity investments. |
| Risk Exposure | Higher due to long-term industrial financing. | Lower due to short-term lending. |
| Flexibility | Greater flexibility in credit operations. | More rigid and conservative. |
| Examples | German and Japanese banks. | British and early Indian commercial banks. |
Mixed Banking in India
India’s banking system gradually adopted the mixed banking model after independence, influenced by the German system.
Key Developments:
- Post-Independence Industrialisation: Banks began financing long-term industrial projects.
- Nationalisation of Banks (1969): Public sector banks were encouraged to support both short-term and long-term credit needs.
- Development Finance Institutions (DFIs): Institutions like IDBI, ICICI, and IFCI were created to supplement long-term finance.
- Universal Banking (Post-1990s): With financial liberalisation, the concept of universal banking—an advanced form of mixed banking—gained importance, enabling banks to offer all types of financial services under one roof.
Examples:
- ICICI Bank and HDFC Bank combine commercial and investment functions, offering a wide range of services including corporate finance, retail banking, and project funding.
Advantages of Mixed Banking in the Indian Context
- Helped in the growth of industries, especially small and medium enterprises.
- Supported government’s developmental and infrastructure projects.
- Promoted financial inclusion by extending both short-term credit and developmental finance.
- Enabled banks to achieve income diversification and better asset utilisation.
Challenges in India’s Mixed Banking System
- Asset-Liability Mismatch: Balancing short-term deposits with long-term loans remains a challenge.
- Rising NPAs: Long-term industrial lending increases the risk of bad loans.
- Regulatory Constraints: RBI restricts excessive exposure of banks to long-term industrial credit.
- Competition from Non-Banking Financial Companies (NBFCs): NBFCs often outperform banks in project financing.
Relevance of Mixed Banking Today
In the modern financial environment, mixed banking has evolved into universal banking, where banks provide an integrated range of services—commercial banking, investment banking, insurance, mutual funds, and advisory functions.
Mixed banking remains relevant because:
- It supports industrial and economic growth.
- It enhances financial stability by diversifying income sources.
- It aligns with India’s developmental priorities, such as infrastructure and entrepreneurship.
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