Banking system in India

Wed,May 8, 2019 02:05 AM

Today let’s discuss the Banking system in India. In this chapter we will look at the basics of banking system, their types, historical background, the role of RBI, Monetary policy, latest issues in the banking sphere like Non Performing Assets issue, Bankruptacy code etc.. we will be not only dealing with the banking sector in totality after India’s independence but also concentrate more on what has been happening to this sector especially after economic reforms in 1991.

This is the third chapter in our preparation. This is in continuation with the article published on 17th, April 2019, in these columns.

Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit.
However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks. The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.

A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.

The banking system in India has different types of banks to canter to different customers and their needs. We need to understand this in the beginning itself to understand the whole gamut of banking structure in India.
1. Commercial banks
Public sector banks
Nationalized banks
Regional Rural Banks (RRB’s)
Private sector banks
Foreign banks
2. Cooperative banks
3. Development banks
4. Scheduled banks
5. Non-scheduled banks

Commercial Banks:
A commercial bank is a business organization which deals in money.
It borrows and lends money. In this process of borrowing and lending of money it makes profit.

Public Sector Banks:
They are owned by the Government- either totally or as a majority stake holder, since the beginning or since the inception of the bank.
Examples: State Bank of India

Nationalized banks:
Banks which are taken over by the government through an Act or Ordinance are called nationalized banks.
Currently there are 19 nationalized banks.
Examples: Indian Overseas Bank, oriental bank of commerce etc.,

Regional Rural Banks:
They are mainly sponsored by Public Sector Banks.
They were set up as government-sponsored, regional based rural lending institutions under the Regional Rural Banks Act, 1976.

RRBs were configured as hybrid micro banking institutions, combining the local orientation and small scale lending culture of the cooperatives and the business culture of commercial banks.
Their mission was to fulfill the credit needs of the relatively unserved sections in the rural areas -small and marginal farmers, agricultural labourers and socio-economically weaker sections.
Shareholding pattern of RRBs among the three sponsoring entities is 50:35:15 among central government, sponsoring bank and state government respectively.

Examples: Andhra Pradesh Grameena Vikas Bank, Manipur Rural Bank etc.,

Private Sector Banks:
These are banks where greater part of stake or equity is held by private shareholders and not by government. These include domestic and foreign banks.
Examples: Axis bank, HDFC bank etc.,

Foreign Banks:
Foreign banks are those banks whose branch offices are in India but they are incorporated outside India, and have their head office in a foreign country.
These banks were allowed to set up their subsidiaries in India from the year 2002. They have to operate their business by following all the rules and regulations laid down by the RBI - Reserve Bank of India.
Examples: BNP Paribas, Deutsche bank etc.,

Co-operative Banks:
These are another class of banks and are not considered as commercial banks as they have social objectives and profit is not the motive.
Co-operative Banks are subject to CRR and SLR requirements like other banks. However, their requirements are less than commercial banks.

Examples:The Andhra Pradesh State Co-operative Bank Ltd., The Uttaranchal RajyaSahakari Bank Ltd. etc
Commercial bank vs Cooperative bank:
Commercial banks are governed by the Banking Regulation Act. Co-operative banks are governed by the Co-operative Societies Act of 1904.
Commercial banks are subject to the control of the Reserve Bank of India directly. Co-operative banks are subject to the rules laid down by the Registrar of Co-operative Societies.
Co-operative banks have lesser scope in offering a variety of banking services than commercial banks.
Commercial banks in India are on a larger scale. They have adopted the system of branch banking, so they have countrywide operations. Co-operative banks are relatively on a much smaller scale. Many co-operative banks follow only unit-bank system, though there are co-operative banks with a number of branches but their coverage is not countrywide.

Commercial banks mostly provide short-term finance to industry, trade and commerce, including priority sectors like exports, etc.

Development Banks:
It is defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities — economic development in general, and industrial development, in particular.
It is essentially a multi-purpose financial institution with a broad development outlook. In short, a development bank is a development- oriented bank.
Examples: Industrial Finance Corporation of India (IFCI) ;Industrial Development Bank of India (IDBI) ;Industrial Credit and Investment Corporation of India (ICICI) that was merged with the ICICI Bank in 2000.

Scheduled Banks
Today all banks are broadly classified into two types - Scheduled Banks and Non- scheduled Banks.
Scheduled banks are those banks which are included in the Second Schedule of the Reserve Bank Act, 1934. They satisfy two conditions under the Reserve Bank of India Act:

paid-up capital and reserves of an aggregate value of not less than Rs 5 lakh.
Any activity of the bank will not adversely affect the interests of depositors.
Every Scheduled bank enjoys the following facilities
Such bank becomes eligible for debts/loans on bank rate from the RBI
Such banks automatically acquire the membership of clearing house.

Non-scheduled banks
These are those banks which are not included in the second schedule of the RBI Act as they do not comply with the above criteria and so they do not enjoy the benefits either.

The Government of India and the Reserve bank of India from time to time can notify new banks in a particular category or de-notify any bank. The Banking Regulation Act is also used by the GoI and RBI in controlling the activities of various banks, for the ultimate benefit of the Indian Economy.


1. Commercial banks are governed by the...

A. Cooperative Societies Act
B. Banking Regulation Act
C. Both a and b
D. None of the above

2. A bank is a financial institution which primarily deals in...

A. Accepting deposits
B. Lending money
C. Both a and b
D. Issuing debit and credit cards

3. State Bank Of India is an example of...

A. Regional Rural bank
B. Cooperative bank
C. Public Sector bank
D. Private Sector bank

4. Which of the following statements is correct?

A. A Foreign bank has its head office in India
B. A foreign bank has its branch offices in India
C. A foreign bank has to abide by the rules and regulations laid down by the SEBI.
D. HDFC is an example of a foreign bank

5. A Development bank is concerned with providing financial assistance to...

A. Businesses
B. Individuals
C. State governments
D. Both a and b

Answers for the test of 17th April, 2019:

1. B 2.B 3.A 4.A 5.B


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