Structure of Banking in India

The banking system in India has undergone significant changes over several decades to meet the credit and banking needs of the economy. Understanding the current banking structure is crucial for aspirants preparing for exams and for practical knowledge.

Key Points:

• India’s banking structure consists of multiple layers catering to diverse borrowers and customers.
• The banking system plays a vital role in mobilizing savings and promoting economic growth.
• Post-1991 financial sector reforms, the banking structure’s strength and performance have improved remarkably.
• India’s commercial banking system’s financial soundness is comparable to developed countries.

Meaning & Overview – Structure of Banking in India

The banking system is crucial for maintaining the financial system of a country. Banks mobilize deposits and provide credit to various sectors of the economy. India’s current dynamic banking structure has evolved over time.

Significance of Strong Banks in Developing Countries:

• Banks aid in developing financial intermediaries and markets based on the country’s needs.
• Banks support the corporate sector’s financial needs due to less developed bond and equity markets.

Banking in India

• Introduction

  • Banking has a long history in India, dating back to ancient times.
  • References to banking can be found in the Manu writings, and bankers played a significant role during the Mughal era.
  • Modern banking in India began in the early 20th century.

• Origin of Indian Banking

  • During the early days of the East India Company, banking services were primarily provided by agency houses.
  • Modern banking in the form of joint-stock companies emerged in the 1700s.
  • The General Bank of India was established in 1786.

• What is a Bank?

  • A bank is a financial institution that provides banking and other related services to customers.
  • Banks accept deposits and provide loans.
  • Banks are a subset of the financial services industry.
  • Non-banking financial institutions offer similar banking services but do not meet the definition of a bank.

Indian Banking Domain

The Indian banking sector can be categorized into two main sectors: organized and unorganized. The organized sector comprises the Reserve Bank of India (RBI), commercial banks, cooperative banks, and specialized financial institutions like ICICI, IFC, and IDBI Bank.

Types of Banks in India

1. Reserve Bank of India (RBI)

The RBI is the central bank of India and is responsible for regulating the country’s banking system. Established on April 1, 1935, under the Reserve Bank of India Act, the RBI uses monetary policy instruments to maintain financial stability and regulate currency and credit systems. Headquartered in Mumbai, the RBI plays a crucial role in the financial markets. Its primary objective is to supervise the financial domain, including commercial banks, financial institutions, and non-banking finance companies.

2. Scheduled Banks

Scheduled banks are those banks that are included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are subject to stricter regulations and supervision by the RBI. Scheduled banks can be further classified into:

• State Bank of India (SBI) and its associate banks: SBI is the largest commercial bank in India and has a wide network of branches across the country. Its associate banks include State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore.

• 20 nationalized banks: These banks were nationalized by the Government of India in 1969 and 1980. Some prominent nationalized banks include Punjab National Bank, Canara Bank, Bank of Baroda, and Union Bank of India.

• Regional Rural Banks (RRBs): RRBs are specialized banks established to provide banking services in rural areas. They are sponsored by commercial banks and the Government of India.

• Other scheduled commercial banks: This category includes private sector banks such as HDFC Bank, ICICI Bank, and Axis Bank, as well as foreign banks operating in India.

3. Non-Scheduled Banks

Non-scheduled banks are those banks that are not included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are not subject to the same level of regulation and supervision as scheduled banks.

4. Cooperative Banks

Cooperative banks are financial institutions that are owned and controlled by their members. They provide banking services to a specific group of people, such as farmers, artisans, or employees of a particular organization.

5. Foreign Banks

Foreign banks are banks that have their headquarters in a country other than India. They operate in India through branches or subsidiaries. Some well-known foreign banks in India include Citibank, HSBC, and Standard Chartered Bank.

Scheduled Banks

Scheduled banks are those banks that are included in the second schedule of the Reserve Bank of India Act of 1934. These banks are eligible for debts and loans on bank rate from the RBI and automatically acquire the membership of a clearing house.

To be listed in the second schedule of the RBI Act, a bank must satisfy the following eligibility criteria:

• The paid-up capital and reserves together should not be less than INR 5 lakhs.
• The working of the bank should not be detrimental to the interests of the depositors.
• They should either be a company as per the Companies Act 1956 or a State Cooperative Bank or a corporation or any institution notified by the government of India in this regard.

Every week, the scheduled banks have to provide the details of their activities to the RBI. All the RRBs, Cooperative Banks, Indian, and foreign commercial banks belong to the scheduled banks category.

Scheduled banks are further classified into commercial banks and cooperative banks.

Non-Scheduled Banks

Non-scheduled banks are those banks that are not included in the second section of the Reserve Bank of India Act of 1934. Their paid-up capital is less than INR 5 lakhs and they are not eligible to borrow funds from the RBI for regular banking requirements, unless in case of emergencies.

Non-scheduled banks are sometimes legal entities, but they do not have procedural support from the government. These banks have to compulsorily reimburse a reserve amount of INR 5 lakh to the RBI and this capital must be held throughout their operational phase.

Non-scheduled banks are not bound to the rules and regulations of the RBI and they are required to maintain the CRR (Cash Reserve Ratio) with themselves and not with the RBI.

Commercial Banks

A commercial bank is the one whose primary business is accepting deposits and extending loans. These banks can be scheduled commercial or non-scheduled commercial. Such banks cater to the banking needs of individuals, businesses, and organizations. Their services consist of opening different types of bank accounts as well as providing loans to businesses.

The commercial banks in India originally focus on providing short-term loans for agriculture, trade, and industry. These banks deal directly with the customers, unlike the development banks. SBI, HDFC Bank, ICICI Bank, Dena Bank, Corporation Bank, etc. are the commercial banks in India.

Public Sector Banks

Public sector banks are the ones in which the government owns the majority of the shares. For instance, the SBI is one of the public sector banks whose 58.60% shares are held by the government. Such banks are further divided into nationalized banks and state banks and its associates.

In nationalized banks, the central government supervises and regulates the functioning of the banking institution.

Structure of Banking FAQs

What is a bank?

A bank is a financial institution that provides banking and other related services to its customers.

What is the purpose of setting up a bank?

Banks are responsible for mobilizing deposits and disbursing credit to various sectors of the economy.

What are the categories of banks in India?

The main types of banks in India are:

• Central bank
• Scheduled banks
• Non-scheduled banks
• Foreign banks
• Cooperative banks
• Development banks

What is a Regional Rural Bank?

Regional Rural Banks (RRBs) are set up with the primary objective of bridging the credit gaps and promoting financial inclusion for the rural population.

What is the difference between a scheduled bank and a non-scheduled bank?

A scheduled bank is a bank that is included in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. Non-scheduled banks are those that are not included in the Second Schedule.