MODULE 2

STRUCTURE OF INDIAN BANKING ECONOMY

Banking is considered to be the “Backbone of a Nation’s Economy”. The Indian Banking, today,
is divided into commercial banks which are Private, Public scheduled and non-scheduled banks,
Regional and Rural, and Cooperative Banks.
Banking Companies Act of 1949 defined banking as accepting for the purpose of lending or
investment of depositing money from the public, repayable on demand or otherwise and
withdrawable by cheque draft or otherwise. Let us learn more about the History of Banking
System in India.

History of Banking System in India

During ancient time there was Barter System which prevailed in society. As there was no
concept of money or due to the lack of a common unit of currency goods and services were
exchanged against the goods and services.  The barter system has the concept of ‘exchange
of goods with the goods ‘. People exchange their goods or services with others for the wants
of their goods. Barter system one of the biggest drawbacks is saving the wealth for the
future generation

Later, many coins were introduced by the Kings and Rajas as per being ruled with their
varieties of inscriptions in Sanskrit or Urdu.  The advent of British East India Company in
1600 then introduced the new currency named ‘rupaiya’ which grew in popularity to other
British colonies too.

During the 18th century for the first time ‘Paper Money’ was introduced in the British India.
After 1857 revolt, Rupee made official currency of colonies of India, with the head of King
George VI. Later in 1987, the Indian currency was introduced with the portrait of Mahatma
Gandhi and Ashok Pillar watermark.

The Banking sector in India has seen a lot of transitions and changes over the
centuries. It can be broadly categorized into 3 sub-parts that are:
1. Pre-Independence (Before 1947)
2. II Phase (1947 to 1991)
3. III Phase (1991 and beyond). 

Banking during Pre-Independence (1770 to 1947)

There were quite a few banks established during this time. The Banking System in
India began with the establishment of the Bank of Hindustan in 1770 but it stopped
operating by 1832. 
During this period, over 600 banks were established. However, very few were able
to succeed. Some of the banks were – 
 The General Bank of India (1786-1791)
 Bank of Bengal (1809)      
 Bank of Bombay (1840)
 Oudh Commercial Bank (1881-1958)    
 Bank of Madras (1843)   
This phase also witnessed the alliance of the 3 major banks – Bank of Bengal,
Bank of Madras, and Bank of Bombay established by The East India Company. 
They together amalgamated and formed the Imperial Bank. This was taken over by
the SBI (State Bank of India) in 1955. 
Other Banks that were established during this time were –  Allahabad Bank (est.
1865), Punjab National Bank (est. 1894), Bank of India (est. 1906), Bank of
Baroda (est. 1908), and Central Bank of India (est. 1911). 
The reasons why many major banks failed to survive during the pre-independence
period, the following conclusions can be drawn:
 Indian account holders had become fraud-prone.
 Lack of machines and technology.
 Human errors & time-consuming.
 Fewer facilities.
 Lack of proper management skills.
Following the Pre-Independence period was the post-independence period which
observed some major changes in the banking industry scenario and has to date
developed a lot. 
II Phase of Indian Banking – Banking Post Independence (1947 to 1991)
The then Government – after Indian Independence, decided to nationalize the
Banks because all the major banks were led privately which was a cause of
concern as people in the rural areas still turned to money lenders for assistance.
Under the Banking Regulation Act, 1949, these banks were nationalized and the
Reserve Bank of India was nationalized in 1949. These banks are:
1. Allahabad Bank               
2. Bank of India                          
3. Bank of Baroda
4. Central Bank of India
5. Bank of Maharashtra  
6. Canara Bank         
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank                         
11. Syndicate Bank             
12. Union Bank of India
13. United Bank 
14. UCO Bank
In  1980, 6 other banks were nationalized that are: 
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank 
Seven subsidiaries of SBI which were nationalized in 1959:
1. State Bank of Patiala 
2. State Bank of Hyderabad 
3. State Bank of Bikaner & Jaipur 
4. State Bank of Mysore 
5. State Bank of Travancore 
6. State Bank of Saurashtra 
7. State Bank of Indore
All these banks were later merged with the State Bank of India in 2017, except for
the State Bank of Saurashtra, which was merged in 2008.  State Bank of Indore
was merged in 2010.

Impact of Nationalisation on Banking System

There were several reasons for nationalism in the banks of India that are:
1. Nationalism led to an increase in funds and thereby increased the economic
condition of the country. 
2. It increased efficiency. 
3. It helped in boosting the rural and agricultural sector of the country. 
4. This opened up a major employment opportunity for the people. 
5. The profit gained by Banks was used by the Government for the betterment
of the people. 
6. The competition was decreased and work efficiency had increased. 
The post-independence phase was the one that led to the major development of the
banking sector in India. 
III Phase of Indian Banking(1991 to beyond)
To provide stability and profitability to the Nationalised Public sector Banks, the
Government decided to set up a committee under the leadership of Shri. M
Narasimham to manage the various reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India. RBI
gave license to 10 Private sector banks to establish themselves in the country.
These banks included:
1. Global Trust Bank
2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank
A majority of Indian citizens shifted to online or net banking. 
List of Public Sector Banks and Private Sector Banks in India are:
1. Axis Bank
2. Bank of Baroda 
3. Bank of India 
4. Bandhan Bank 
5. Bank of Maharashtra 
6. Canara Bank 
7. Central Bank of India 
8. City Union Bank 
9. Dhanlaxmi Bank 
10. Federal Bank 
11. HDFC Bank 
12. IDBI Bank 
13. Indian Bank 
14. Indian Overseas Bank 
15. ICICI Bank 
16. IDFC Bank 
17. Indusind Bank 
18. Karnataka Bank 
19. Karur Vysya Bank
20. Kotak Mahindra Bank 
21. Lakshmi Vilas Bank 
22. Punjab National Bank 
23. Punjab & Sind Bank 
24. RBL Bank 
25. State Bank of India 
26. South Indian Bank 
27. UCO Bank 
28. Union Bank of India 
29. Yes Bank 
List of Small Finance Banks in India:
1. Capital Small Finance Bank 
2. Equitas Small Finance Bank 
3. Utkarsh Small Finance Bank 
4. Suryoday Small Finance Bank 
5. Ujjivan Small Finance Bank 
6. ESAF Small Finance Bank 
7. Au Small Finance Bank 
8. Fincare Small Finance Bank 
9. North East Small Finance Bank 
10. Jana Small Finance Bank 
List of payment banks in India:
1. Airtel Payment Bank Ltd. 
2. Paytm Payments Bank 
3. Fino Payments Bank 
4. Jio Payments Bank 
5. Aditya Birla Idea Payments Bank 
6. India Post Payment Bank

The banks have revolutionized over the years. The Banking sector is extremely
important for a country’s economy. In order to keep the system to thrive, estimated
interval changes and modifications are to be made. 

Structure of Banking in India

The existing  banking  structure in India evolved over several decades, is elaborate
and has been serving the credit and banking services needs of the economy. There are
multiple layers in today’s banking structure to cater to the specific and varied
requirements of different customers and borrowers. The structure of banking in India
played a major role in the mobilization of savings and promoting economic
development. In the post-financial sector reforms (1991) phase, the performance and
strength of the banking structure improved perceptibly. Financial soundness of the
Indian commercial banking system compares favorably with most of the advanced
and emerging countries.

A bank is a financial institution that provides banking and other financial services to
their customers. A bank is generally understood as an institution which provides
fundamental banking services  such as accepting deposits and providing loans. There
are also nonbanking institutions that provide certain banking services without
meeting the legal definition of a bank. Banks are a subset of the financial services
industry.

Indian banking industry  has been divided into two parts, organized and unorganized
sectors. The organized sector consists of Reserve Bank of India, Commercial Banks
and Cooperative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC
etc).

Reserve Bank of India is the Central Bank of our country. It was established on 1st
April 1935 under the RBI Act of 1934. It holds the apex position in the banking
structure. RBI performs various developmental and promotional functions. As of
now 12 public sector banks are in India and number of private sector banks are
reduced to 22. There are total 34 commercial banks in India. Public sector banks
hold near about 75% of the total bank deposits in India. The first Indian
Commercial bank which was wholly owned and managed by Indian was the
Central Bank of India. It was also called India’s truly Swadeshi Bank.
Indian Banks are classified into commercial banks and Co-operative banks.
Commercial banks comprise: (1) Schedule Commercial Banks (SCBs) and non-
scheduled commercial banks. SCBs are further classified into private, public,
foreign banks and Regional Rural Banks (RRBs); and (2) Co-operative banks
which include urban and rural Co-operative banks.

The State Bank of India is India’s oldest bank. It is the merger of Bank of
Calcutta, Bank of Bombay and Bank of Madras which was established under the
East India Company. This bank was also called the Imperial Bank.

The Indian banking industry has its foundations in the 18th century, and has had a
varied evolutionary experience since then. The initial banks in India were primarily
traders’ banks engaged only in financing activities. Banking industry in the pre-
independence era developed with the Presidency Banks, which were transformed
into the Imperial Bank of India and subsequently into the State Bank of India.

The initial days of the industry saw a majority private ownership and a highly
volatile work environment. Major strides towards public ownership and
accountability were made with Nationalisation in 1969 and 1980 which
transformed the face of banking in India. The industry in recent times has
recognised the importance of private and foreign players in a competitive scenario
and has moved towards greater liberalisation.

In the evolution of this strategic industry spanning over two centuries, immense
developments have been made in terms of the regulations governing it, the
ownership structure, products and services offered and the technology deployed.
The entire evolution can be classified into four distinct phases.

1. Phase I- Pre-Nationalisation Phase (prior to 1955)

2. Phase II- Era of Nationalisation and Consolidation (1955-1990)
3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and
Partial Liberalisation (1990-2004)
4. Phase IV- Period of Increased Liberalisation (2004 onwards)
Organisational Structure

1. Reserve Bank of India:

Reserve Bank of India is the Central Bank of our country. It was established on 1st April 1935
accordance with the provisions of the Reserve Bank of India Act, 1934. It holds the apex position
in the banking structure. RBI performs various developmental and promotional functions.
It has given wide powers to supervise and control the banking structure. It occupies the pivotal
position in the monetary and banking structure of the country. In many countries central bank is
known by different names.

For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and Reserve Bank of
India in India. Central bank is known as a banker’s bank. They have the authority to formulate
and implement monetary and credit policies. It is owned by the government of a country and has
the monopoly power of issuing notes.

2. Commercial Banks:
Commercial banks form a prominent part of the country’s Financial Institution System.
Commercial Banks are those profit making institutions which accept deposits from general
public and gives money (loan) to individuals like household, entrepreneurs, businessmen etc.
The prime objective of these banks is to earn profit in the form of interest, commission etc.
The operations of all these commercial banks are regulated by the Reserve Bank of India,
which is the central bank and supreme financial authority in India.
 The main source of income of a commercial bank is the difference between these two rates
which they charge to borrowers and pay to depositors. Some commercial banks in India are –
ICICI Bank, State Bank of India, Axis Bank, and HDFC Bank, Punjab national bank, Central bank of
India.

A commercial bank is a kind of financial institution that carries all the operations related to deposit and
withdrawal of money for the general public, providing loans for investment, and other such activities. These
banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the
deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to
the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the
lending rate.

Commercial bank is an institution that accepts deposit, makes business loans and offer related
services to various like accepting deposits and lending loans and advances to general customers
and business man.

These institutions run to make profit. They cater to the financial requirements of industries and
various sectors like agriculture, rural development, etc. it is a profit making institution owned by
government or private of both.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions 

 Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus
balances collected from the firm and individuals are lent to the temporary requirements of the commercial
transactions.

Provides loan and advances : Another critical function of this bank is to offer loans and advances to
the entrepreneurs and business people , and collect interest. For every bank, it is the primary source of making
profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining
amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a
bank account is opened for the customer and then the money is transferred to the account. This process
allows the bank to create money.

(b) Secondary functions 

 Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid
against the goods purchased at a given point of time in the future. The amount can also be cleared before the
quoted time through a discounting method of a commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the
given limit.

 Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the
securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents
safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of
exchange.

Role of commercial banks in India

Besides performing the usual commercial banking functions, banks in developing

countries play an effective role in their economic development. The majority of
people in such countries are poor, unemployed and engaged in traditional
agriculture.

1. Mobilising Saving for Capital Formation:

The commercial banks help in mobilising savings through network of branch
banking. People in developing countries have low incomes but the banks
induce them to save by introducing variety of deposit schemes to suit the
needs of individual depositors. They also mobilise idle savings of the few rich.
By mobilising savings, the banks channelise them into productive
investments. Thus they help in the capital formation of a developing country.

2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways. They
provide short-term, medium-term and long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term

financing of small scale industries, and also provide hire- purchase finance.
Besides, they underwrite the shares and debentures of large scale industries.
Thus they not only provide finance for industry but also help in developing the
capital market which is undeveloped in such countries.

3. Financing Trade:
The commercial banks help in financing both internal and external trade. The
banks provide loans to retailers and wholesalers to stock goods in which they
deal. They also help in the movement of goods from one place to another by
providing all types of facilities such as discounting and accepting bills of
exchange, providing overdraft facilities, issuing drafts, etc. Moreover, they
finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.

4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries
in a number of ways. They provide loans to traders in agricultural commodities.
They open a network of branches in rural areas to provide agricultural credit.
They provide finance directly to agriculturists for the marketing of their produce,
for the modernisation and mechanisation of their farms, for providing irrigation
facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep
breeding, poultry farming, pisciculture and horticulture. The small and marginal
farmers and landless agricultural workers, artisans and petty shopkeepers in
rural areas are provided financial assistance through the regional rural banks in
India. These regional rural banks operate under a commercial bank. Thus the
commercial banks meet the credit requirements of all types of rural people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not
possess sufficient financial resources to buy durable consumer goods. The
commercial banks advance loans to consumers for the purchase of such items as
houses, scooters, fans, refrigerators, etc. In this way, they also help in raising the
standard of living of the people in developing countries by providing loans for
consumptive activities.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing
countries. They provide loans for the education of young person’s studying in
engineering, medical and other vocational institutes of higher learning. They
advance loans to young entrepreneurs, medical and engineering graduates, and
other technically trained persons in establishing their own business. Such loan
facilities are being provided by a number of commercial banks in India. Thus the
banks not only help inhuman capital formation but also in increasing
entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully
following the monetary policy of the central bank. In fact, the central bank
depends upon the commercial banks for the success of its policy of monetary
management in keeping with requirements of a developing economy.

Thus the commercial banks contribute much to the growth of a developing

economy by granting loans to agriculture, trade and industry, by helping in
physical and human capital formation and by following the monetary policy of
the country.

Commercial bank includes public sector, private sector, foreign banks and regional rural
banks:

3. Public Sector Banks:

These are those banks in which majority of stake is held by the government. Currently there are 12
Nationalised banks in India. The public sector accounts for 75 percent of total banking business
in India and State Bank of India is the largest commercial bank in terms of volume of all
commercial banks.

from April 1, 2017 all the 5 associate banks of SBI and Bhartiya Mahila Bank are merged with
State Bank of India. After this merger now SBI is counted among the top 50 largest banks of the
world.

Nationalised Banks in India are

1. Allahabad Bank
2. Andhra Bank
3. Bank of India
4. Bank of Baroda
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab & Sindh Bank
14. Punjab National Bank
15. State Bank of India
16. Syndicate Bank
17. UCO Bank
18. Union Bank of India
19. United Bank of India
20. Vijaya Bank
4. Private Sector Banks:  
The private-sector banks in India represent part of the Indian banking sector that is made up
of both private and public sector banks. The "private-sector banks" are banks where greater
parts of stake or equity are held by the private shareholders and not by government.

List of Private Sector Banks is:

Banks Established
1. Axis Bank (earlier UTI Bank)  1993(as 5. Foreign Banks:
UTI Bank) A foreign bank with the
2. Bank of Punjab (actually an old generation   obligation of following the
private bank since it was not founded under post- regulations of both its home
1993 new bank licensing regime) and its host countries. Loan
limits for these banks are
3. Centurion Bank Ltd. (Merged in Bank of based on the capital of the
Punjab in late 2005 to become Centurion Bank of  1994 parent bank, thus allowing
Punjab, acquired by HDFC Bank Ltd. in 2008) foreign banks to provide
4. Development Credit Bank (Converted from more loans than other
 1995 subsidiary banks.
Co-operative Bank, now DCB Bank Ltd.)
5. ICICI Bank (previously ICICI and then both Foreign banks are those
merged;total merger SCICI+ICICI+ICICI Bank  1996 banks, which have their
Ltd) head offices abroad. CITI
6. IndusInd Bank  1994 bank, HSBC, Standard
Chartered etc. are the
7. Kotak Mahindra Bank  2003 examples of foreign bank in
8. Yes Bank  2005 India. Currently India has 36
foreign banks.
9. Balaji Corporation Bank Limited  2010
10. HDFC bank  1994 6. Regional Rural Bank
(RRB):
11. Bandhan bank  2015 The government of India set
12. IDFC Bank  2015 up Regional Rural Banks
(RRBs) on October 2, 1975.
The banks provide credit to the weaker sections of the rural areas, particularly the small and
marginal farmers, agricultural labourers, and small entrepreneurs. Regional Rural Banks are
the Scheduled Commercial banks in India conducting banking activities for the rural
regions at the state level. There were established with an objective of providing easily
accessible banking and credit services to the rural population and mobilising
financial resources from the urban areas to rural districts of India. 

. NABARD holds the apex position in the agricultural and rural development. As of 1 April 2020,
there are 43 RRBs in India. The Reserve Bank of India, which is the central bank of the country is
responsible for regulating Regional Rural Banks in India.

7. Co-operative Bank:

Co-operative bank was set up by passing a co-operative act in 1904. They are organised and
managed on the principal of co-operation and mutual help. The main objective of co-operative
bank is to provide rural credit.

The cooperative banks in India play an important role even today in rural co-operative financing.
The enactment of Co-operative Credit Societies Act, 1904, however, gave the real impetus to the
movement. The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to
broad basing it to enable organisation of non-credit societies.

Name of some co-operative banks India are:

1. Andhra Pradesh State Co-operative Bank Ltd
2. The Bihar State Co- operative Bank Ltd.
3. Chhatisgarh Rajya Sahakari Bank Maryadit
4. The Gujarat State Co-operative Bank Ltd.
5. Haryana Rajya Sahakari Bank Ltd.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
iii. Primary cooperative banks and the base or local level.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the RBI Act, 1934.
These banks have a paid-up capital and reserves of an aggregate value of not less than Rs. 5
lakhs, they have to satisfy the RBI that their affairs are carried out in the interest of their
depositors.

All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are
scheduled banks.

Non- scheduled banks are those which are not included in the second schedule of the RBI Act,
1934. At present these are only three such banks in the country.

Major Difference between Scheduled Banks and Non-Scheduled Banks

  A Scheduled bank is a banking company with a paid-up capital of Rs. 5
lakhs or more. Non-scheduled banks, on the other hand, are those that
are unable to comply with the RBI's requirements.
 Scheduled banks are those regulated by the Reserve Bank's second
schedule, while non-scheduled banks are those not bound by the
Reserve Bank's second schedule.
 The Reserve Bank requires scheduled banks to present or send periodic
returns. Non-scheduled banks, on the other hand, are not required to
submit periodic returns to the central bank.
 The Reserve Banks will lend to scheduled banks. Non-scheduled banks,
on the other hand, do not have this flexibility. They'll only be able to do
that with the help of other eager banks or only in case of emergency,
RBI will help.
 Non-scheduled banks are not qualified to enroll in the clearinghouse
like scheduled banks.

RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India is now the apex financial institution of the country which is entrusted
with the task of controlling, supervising, promoting, developing and planning the financial
system. RBI is the queen bee of the Indian financial system which influences the commercial
banks’ management in more than one way. The RBI influences the management of commercial
banks through its various policies, directions and regulations. Its role in banking is quite unique.
In fact, the RBI performs the four basic functions of management, viz., planning, organizing,
directing and controlling in laying a strong foundation for the functioning of commercial banks.

RBI possesses special status in our country. It is the authority to regulate and control monetary
system of our country. It controls money market and the entire banking system of our country.

Management

The Reserve Bank's affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of India Act. The
organization structure of RBI consists of a Central Board and Local Board.

Central Board: The general supervision and control of the bank’s affairs is vested in the Central
Board of Directors which consists of 20 member team including a Governor, 4 Deputy
Governors and 15 Directors (of which 4 are from local boards, and one is a finance secretary of
Central Government). All these persons are appointed or nominated by Central Govt. The
chairman of the Board and its Chief Executive authority is the Governor. Governors and Deputy
Governors hold office for such a period as fixed by Central Government not exceeding 5 years
and are eligible for reappointment. Directors hold office for 4 years and their retirement is by
rotation. As a matter of practical convenience, the Board has delegated some of its functions to a
committee called the Committee of the Central Board. It meets once in a week, generally
Wednesdays. There are sub committees to assist committees such as building committee and
staff sub-committee.

Local Board: For each regional areas of the country viz., Western, Eastern, Northern and
Southern, there is a Local Board with head quarters at Bombay, Calcutta, New Delhi and
Madras. Local boards consist of 5 members each appointed by the Central Government. The
functions of the local boards are to advise the central board on local matters and to represent
territorial and economic interests of local cooperative and indigenous banks; advice on such
matters that may generally be referred to them and perform such duties as the Central Board may
delegate to them. The Central office of the RBI, located at Mumbai is divided into several
specialized departments.

The main departments are:

1. Issue Department: - It arranges for the issue and distribution of currency notes among the
different centers of the country.

2. Banking Department: - It deals with Government transactions and maintains the cash reserves
of the commercial banks.

3. Department of Banking development:- It is concerned with the development of banking

facilities in the unbanked and rural areas in the country.

4. Department of Banking operations: - This department supervises and controls the working of
the banking institutions in the country.

5. Non-Banking Companies Department: - It regulates the activities of non-banking financial

companies existing in the country.

6. Agricultural credit Department: - This department studies the problems connected with the
agricultural credit in the country.

7. Industrial finance Department: - It is concerned with the provision of finance to the industrial
units in the country.

8. Exchange control Department: - The entire business of sale and purchase of foreignexchange
is conducted by this department.

9. Legal Department: - The main function of this department is to give legal advices to the other
departments of RBI.

10. Department of Research and Statistics: - This department is concerned with conducting
research on problems relating to money, credit, finance, production etc.

Objectives of RBI

Prior to the establishment of the Reserve Bank, the Indian financial system was totally
inadequate on account of the inherent weakness of the dual control of currency by the Central
Government and of credit by the Imperial Bank of India. The Preamble to the Reserve Bank of
India Act, 1934 spells out the objectives of the Reserve Bank as: “to regulate the issue of Bank
notes and the keeping of reserves with a view to securing monetary stability in India and
generally to operate the currency and credit system of the country to its advantage.”

The important objectives are:

1. To act as Monetary Authority: Formulates, implements and monitors the monetary policy to
maintain price stability and ensuring adequate flow of credit to productive sectors.

2. To Regulate and supervise the financial system of the country: It prescribes broad parameters
of banking operations within which the country's banking and financial system functions. It helps
to maintain public confidence in the system, protect depositors' interest and provide cost-
effective banking services to the public.

3. To Manage the Exchange Control: Manages the Foreign Exchange Management Act, 1999 to
facilitate external trade and payment and promote orderly development and maintenance of
foreign exchange market in India.

4. To issue currency: Issues and exchanges or destroys currency and coins not fit for circulation
to give the public adequate quantity of supplies of currency notes and coins and in good quality.

5. To undertake developmental role: RBI performs a wide range of promotional functions to

support national objectives.

6. To undertake related Functions by acting as: Banker to the Government: performs merchant
banking function for the central and the state governments; also acts as their banker. Banker to
banks: maintains banking accounts of all scheduled banks. Owner and operator of the depository
(SGL-Subsidiary General Ledger account) and exchange (NDS) Negotiated Dealing System is
an electronic platform for facilitating dealing in Government Securities and Money Market
Instruments that will facilitate electronic submission of bids/application for government bonds.

Reserve Bank of India (RBI)

The RBI is the Central Bank of our country. It is the open Institution of India Financial and
monetary system. RBI came into existence on 1st April, 1935 as per the RBI act 1935. But the
bank was nationalised by the government after Independence. It became the public sector bank
from 1st January, 1949. Thus, RBI was established as per the Act 1935 and empowerment took
place in banking regulation Act 1949. RBI has 4 local boards basically in North, South, East and
West – Delhi, Chennai, Calcutta, and Mumbai.

Functions of Reserve Bank of India (RBI)

I. Traditional Functions :Traditional functions are those functions which every central bank of
each nation performs all over the world. Basically these functions are in line with the objectives
with which the bank is set up. It includes fundamental functions of the Central Bank. They
comprise the following tasks.
1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency notes
are legal tender issued by the RBI. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500,
and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these
currency notes for other denominations. It issues these notes against the security of gold bullion,
foreign securities, rupee coins, exchange bills and promissory notes and government of India
bonds.

2. Banker to other Banks: The RBI being an apex monitory institution has obligatory powers to
guide, help and direct other commercial banks in the country. The RBI can control the volumes
of banks reserves and allow other banks to create credit in that proportion. Every commercial
bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in
urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort.

3. Banker to the Government: The RBI being the apex monitory body has to work as an agent
of the central and state governments. It performs various banking function such as to accept
deposits, taxes and make payments on behalf of the government. It works as a representative of
the government even at the international level. It maintains government accounts, provides
financial advice to the government. It manages government public debts and maintains foreign
exchange reserves on behalf of the government. It provides overdraft facility to the government
when it faces financial crunch.

4. Exchange Rate Management: It is an essential function of the RBI. In order to maintain

stability in the external value of rupee, it has to prepare domestic policies in that direction. Also
it needs to prepare and implement the foreign exchange rate policy which will help in attaining
the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand
and supply of the foreign currency (U.S Dollar) close to each other.

5. Credit Control Function: Commercial bank in the country creates credit according to the
demand in the economy. But if this credit creation is unchecked or unregulated then it leads the
economy into inflationary cycles. On the other credit creation is below the required limit then it
harms the growth of the economy. As a central bank of the nation the RBI has to look for growth
with price stability. Thus it regulates the credit creation capacity of commercial banks by using
various credit control tools.

6. Supervisory Function: The RBI has been endowed with vast powers for supervising the
banking system in the country. It has powers to issue license for setting up new banks, to open
new branches, to decide minimum reserves, to inspect functioning of commercial banks in India
and abroad, and to guide and direct the commercial banks in India. It can have periodical
inspections an audit of the commercial banks in India.

II. Developmental / Promotional Functions of RBI

Along with the routine traditional functions, central banks especially in the developing
country like India have to perform numerous functions. These functions are country specific
functions and can change according to the requirements of that country. Some of the major
development functions of the RBI are given below.
1. Development of the Financial System: The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient financial system
is a precondition of the rapid economic development of the nation. The RBI has encouraged
establishment of main banking and non-banking institutions to cater to the credit requirements of
diverse sectors of the economy.

2. Development of Agriculture: In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It has successfully
rendered service in this direction by increasing the flow of credit to this sector. It has earlier the
Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National
Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

3. Provision of Industrial Finance: Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small, medium and
large industry is very significant. In this regard the RBI has always been instrumental in setting
up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

4. Provisions of Training: The RBI has always tried to provide essential training to the staff of
the banking industry. The RBI has set up the bankers' training colleges at several places.
National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of
Agriculture Banking i.e CAB are few to mention.

5. Collection of Data: Being the apex monetary authority of the country, the RBI collects
process and disseminates statistical data on several topics. It includes interest rate, inflation,
savings and investments etc. This data proves to be quite useful for researchers and policy
makers.

Publication of the Reports: The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the economy. The reports and bulletins
are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report
on Trend and Progress of Commercial Banks India., etc. This information is made available to
the public also at cheaper rates.

7. Promotion of Banking Habits: As an apex organization, the RBI always tries to promote the
banking habits in the country. It institutionalizes savings and takes measures for an expansion of
the banking network. It has set up many institutions such as the Deposit Insurance Corporation-
1962, UTI-1964, IDBI-1964, NABARD- 1982, NHB-1988, etc. These organizations develop and
promote banking habits among the people. During economic reforms it has taken many
initiatives for encouraging and promoting banking in India.

8. Promotion of Export through Refinance: The RBI always tries to encourage the facilities
for providing finance for foreign trade especially exports from India. The Export-Import Bank of
India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are
supported by refinancing their lending for export purpose.

III. Supervisory Functions of RBI

RBI has authority to regulate and administer the entire banking and financial system. Some of its
supervisory functions are given below.

1. Granting license to banks: The RBI grants license to banks for carrying its business. License
is also given for opening extension counters, new branches, even to close down existing
branches.

2. Bank Inspection: The RBI grants license to banks working as per the directives and in a
prudent manner without undue risk. In addition to this it can ask for periodical information from
banks on various components of assets and liabilities.

3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the working
of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time
regarding their functioning. Through periodic inspection, it can control the NBFIs.

4. Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit Insurance
Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits
below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit
Insurance Scheme in case of a bank failure.

Role of RBI in Credit Control (Tools and techniques of credit control / weapons of RBI for
credit control)

Probably the most important of all the functions performed by a central bank are that of
controlling the credit operations of commercial banks. In modern times, bank credit has become
the most important source of money in the country, relegating coins and currency notes to a
minor position. Moreover, it is possible for commercial banks to expand credit and thus intensify
inflationary pressure or contract credit and thus contribute to a deflationary situation. It is, thus,
of great importance that there should be some authority which will control the credit creation by
commercial banks. As controller of credit, the central bank attempts to influence and control the
volume of Bank credit and also to stabilize business condition in the country.

I) General / Quantitative Credit Control Methods:- In India, the legal framework of

RBI’s control over the credit structure has been provided Under Reserve Bank of
India Act, 1934 and the Banking Regulation Act, 1949. Quantitative credit controls
are used to maintain proper quantity of credit of money supply in market. Some of the
important general credit control methods are:-

1. Bank Rate Policy:- Bank rate is the rate at which the Central bank lends money to
the commercial banks for their liquidity requirements. Bank rate is also called
discount rate. In other words bank rate is the rate at which the central bank
rediscounts eligible papers (like approved securities, bills of exchange, commercial
papers etc) held by commercial banks. Bank rate is important because it is the pace
setter to other market rates of interest. Bank rates have been changed several times by
RBI to control inflation and recession. Bank rate is 8.25% w.e.f. 03/05/2013.
2. Open market operations:- It refers to buying and selling of government securities
in open market in order to expand or contract the amount of money in the banking
 system. This technique is superior to bank rate policy. Purchases inject money into
the banking system while sale of securities do the opposite. During last two decades
the RBI has been undertaking switch operations. These involve the purchase of one
loan against the sale of another or, vice-versa. This policy aims at preventing
unrestricted increase in liquidity.
3. Cash Reserve Ratio (CRR) The Cash Reserve Ratio (CRR) is an effective
instrument of credit control. Under the RBl Act of, l934 every commercial bank has
to keep certain minimum cash reserves with RBI. The RBI is empowered to vary the
CRR between 3% and 15%. A high CRR reduces the cash for lending and a low CRR
increases the cash for lending. Cash Reserve Ratio (CRR) is the share of a bank’s
total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained
with the latter as reserves in the form of liquid cash. Under cash reserve ratio (CRR),
the commercial banks have to hold a certain minimum amount of deposit as reserves
with the central bank. The percentage of cash required to be kept in reserves as against
the bank's total deposits, is called the Cash Reserve Ratio. The cash reserve is either
stored in the bank’s vault or is sent to the RBI.

In simple terms, the Cash reserve ratio is a certain percentage of cash that all

banks have to keep with the RBI as a deposit. This percentage is fixed by the RBI and is changed

from time to time by the central bank itself.

Currently, the CRR is fixed at 4%. (As on August 26). This means that for every Rs 100 worth of

deposits, the bank has to keep Rs 4 with the RBI.

4. Statutory Liquidity Ratio (SLR) Under SLR, the government has imposed an obligation
on the banks to; maintain a certain ratio to its total deposits with RBI in the form of liquid
assets like cash, gold and other securities. Statutory Liquidity Ratio or SLR is a minimum
percentage of deposits that a commercial bank has to maintain in the form of liquid cash,
gold or other securities. It is basically the reserve requirement that banks are expected to
keep before offering credit to customers. The SLR is fixed by the RBI. . However, these
deposits are maintained by the banks themselves and not with the RBI or
Reserve Bank of India. SLR refers to the percentage of the aggregate deposits that
commercial banks have to invest in liquid assets. Current SLR rate is 18%.

Difference between CRR and SLR

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)

In the case of SLR, banks are asked to have The CRR requires banks to have
reserves of liquid assets, which include cash, only cash reserves with the RBI
government securities and gold.

Banks earn returns on money parked as SLR Banks don’t earn returns on money
parked as CRR

SLR is used to control the bank’s leverage for credit The Central Bank controls the
expansion. It ensures the solvency of banks liquidity in the Banking system
through CRR

In the case of SLR, the securities are kept with the In CRR, the cash reserve is
banks themselves, which they need to maintain in maintained by the banks with the
the form of liquid assets. Reserve Bank of India

5. Repo and Reverse Repo Rates: In determining interest rate trends, the repo and reverse
repo rates are becoming important. Repo means Sale and Repurchase Agreement. Repo is
a swap deal involving the immediate Sale of Securities and simultaneous purchase of
those securities at a future date, at a predetermined price.
Repo rate refers to the rate at which commercial banks borrow money by selling their
securities to the Central bank of our country i.e Reserve Bank of India (RBI) to maintain
liquidity, in case of shortage of funds or due to some statutory measures. It is one of the
main tools of RBI to keep inflation under control.Current repo rate is 3.35%

Repo rate helps commercial banks to acquire funds from RBI by selling securities and
also agreeing to repurchase at a later date.
Reverse repo rate is the rate that banks get from RBI for parking their short term
excess funds with RBI. Repo and reverse repo operations are used by RBI in its
Liquidity Adjustment Facility. RBI contracts credit by increasing the repo and reverse
 repo rates and by decreasing them it expands credit. Repo rate was 6.75% in March
2011 and Reverse repo rate was 5.75% for the same period. On May 2011 RBI
announced Monetary Policy for 2011-12. To reduce inflation it hiked repo rate to
7.25% and Reverse repo to 6.25% w.e.f 03/05/2013

II) Selective / Qualitative Credit Control Methods:- Under Selective Credit

Control, credit is provided to selected borrowers for selected purpose, depending
upon the use to which the control tries to regulate the quality of credit - the direction
towards the credit flows. The Selective Controls are:-
1. Ceiling on Credit The Ceiling on level of credit restricts the lending capacity of a
bank to grant advances against certain controlled securities.
2. Margin Requirements A loan is sanctioned against Collateral Security. Margin
means that proportion of the value of security against which loan is not given. Margin
against a particular security is reduced or increased in order to encourage or to
discourage the flow of credit to a particular sector. It varies from 20% to 80%. For
agricultural commodities it is as high as 75%. Higher the margin lesser will be the
loan sanctioned.
3. Discriminatory Interest Rate (DIR) Through DIR, RBI makes credit flow to certain
priority or weaker sectors by charging concessional rates of interest. RBI issues
supplementary instructions regarding granting of additional credit against sensitive
commodities, issue of guarantees, making advances etc. .
4. Directives The RBI issues directives to banks regarding advances. Directives are
regarding the purpose for which loans may or may not be given.
5. Direct Action It is too severe and is therefore rarely followed. It may involve
refusal by RBI to rediscount bills or cancellation of license, if the bank has failed to
comply with the directives of RBI.
6. Moral Suasion Under Moral Suasion, RBI issues periodical letters to bank to
exercise control over credit in general or advances against particular commodities.
Periodic discussions are held with authorities of commercial banks in this respect.

Origin of Banking in India

Banking in India is indeed as old as the Himalayas. But, the banking functions became an effective
force only after the first decade of 20th century. Banking is an ancient business in India with some
of oldest references in the writings of Manu. Bankers played an important role during the Mogul
period. During the early part of East India Company era, agency houses were involved in banking.
Modern banking (i.e. in the form of joint-stock companies) may be said to have had its beginnings
in India as far back as in 1786, with the establishment of the General Bank of India.

Banking System

The structure of banking system differs from country to country depending upon their economic
conditions, political structure, and financial system. Banks can be classified on the basis of the
volume of operations, business pattern and areas of operations. They are termed as a system of
banking. The commonly identified systems are:
Unit Banking

Unit banking is originated and developed in the U.S.A. In this system, small independent banks are
functioning in a limited area or in a single town . It has its own board of directors and stockholders.
It is also called as “localized Banking”. Unit Banking is a system of banking wherein a bank
operates in a limited area, does not open any branches in other places and is more responsive to
local needs. These independent and isolated units have to take care of the entire banking operations
and maintain good health. They thus have to raise their capital and deposits locally. They are more
efficient as they have a limited scale and lack of any gap between decision-makers and executives.

In the unit banking system, the banking operations are carried through a single

office and confined to a particular area. The banks maintain no branches. Unit
Banks, offer all their services from one office, though a small number of services (such as
taking deposits or casing checks may be offered from limited service facilities, such as
drive in windows, automated teller machines, and retail store pint of sale terminals that
are linked to the bank’s computer system. These organizations are common in U.S.
banking today.

Branch Banking

The Banking system of England originally offered an example of the branch banking system, where
each commercial bank has a network of branches spread throughout the country. Branch
Banking refers to a system in which a bank provides banking services through a
wide network of branch offices. If a bank has ten branches in a city, account-
holders can choose a nearby branch to make deposits, withdrawals and avail of
other services.

Branch Banking is a system of banking where a relatively big commercial bank

undertakes banking activities with a network of branches. A bank under a branch
banking system may open branches both within and outside the country of its
origin.
Thus branch banking is a de-localized banking system where banking has its
presence throughout the country and even outside the country.
A) There is a separation of ownership and management of the banks
-ownership lies with the shareholders and the management lies with the single
board of directors.
B) The bank under this system has a head office and the Head Office controls
the activities of all the branches.
C) There is a branch manager for each of the branches of the bank who is
responsible for managing the affairs of the branches.
D) In the matter of preparation of financial statements, the assets and
liabilities of the head office and the branches are arranged.
Correspondent Banking
The correspondent banking system is developed to remove the difficulties in the unit banking
system. The smaller banks deposit their cash reserve with bigger banks.

Therefore, correspondent banks are intermediaries through which all unit banks are linked with
bigger banks in financial centers. Through correspondent banking, a bank can carry-out business
transactions in another place where it does not have a branch.

A Correspondent Bank is a financial institution that offers services to a customer

on behalf of any other bank or financial institution, usually in a foreign country.
The correspondent bank performs several services for the other banks, such as
accepting deposits, collecting documents and more. Such a network of banks,
collectively called Correspondent banking plays a crucial role in
supporting international trade.

Group Banking

Group Banking is the system in which two or more independently incorporated banks are brought
under the control of a holding company. The holding company may or may not be a banking
company. Under group banking, the individual banks may be unit banks, or banks operating
branches or a combination of the two. Group banking is a system of banking under which there will be
holding company controlling the subsidiary companies which carry out banking business.

Group Bank is a system of banking under which there will be holding company controlling the
subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary
companies may carry out banking business. An example in India is SBI which has many subsidiary banks
such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and
Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other
operations such as leasing, merchant banking and so on.

Chain Banking:

Chain Bank is a system under which different banks come under a common control through common
shareholders or by the inter-locking of directors. An example in India is KarurVysya Bank and Lakshmi
Vilas Bank having their head offices located in the same place, viz., Karur and sharing common directors
by which they may have common management policy.

Pure Banking and Mixed Banking

On the basis of lending operations of the bank, banking is classified into:

(a) Pure Banking
(b) Mixed Banking
(a) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to
industry, trade, and commerce. They specialize in short-term finance only. This type Of banking is
popular in U.K.
(b) Mixed Banking: Mixed banking is that system of banking under which the commercial banks
perform the dual function of commercial banking and investment banking. Commercial banks
usually offer both short-term as well as medium-term loans. The German banking system is the best
example of mixed Banking.

Relationship Banking

It refers to the efforts of a bank to promote personal contacts and to keep continuous touch with
customers who are very valuable to the bank. In order to retain such profitable accounts with the
bank or to attract new accounts, it is necessary for the bank to serve their needs by maintaining a
close relationship with such customers.

Narrow Banking

A bank may be concentrating only on the collection of deposits and lend or invest the money within
a particular region or certain chosen activity like investing the funds only in Government Securities.
This type of restricted minimum banking activity is referred to as ‘Narrow Banking’.

A bank may be concentrating only on collection of deposits and lend or invest the money within a
particular region or certain chosen activity like investing the funds only in Government Securities. This
type of restricted minimum banking activity is referred to 'Narrow Banking’.

Key Features of Narrow Banks

1. No lending of deposits. It reduces risk significantly at the cost of low return on investment for
depositors and shareholder.
2. Investment in extremely high liquidity typically in short-term assets e.g. government bonds.
3. Extremely high asset security.
4. Lower interest rates are paid to depositors as a result of no lending to borrowers.
5. Possibly specific regulatory framework with higher level of scrutiny and operational or investing
restrictions.
6. No off balance sheet assets.
7. No derivatives are there is narrow banking.
8. High degree of institutional transparency e.g. regular real time disclosure of financial records.

Universal Banking

As Narrow Banking refers to restricted and limited banking activity Universal Banking refers to
broad-based and comprehensive banking activities. Universal banking is a system in which
banks provide a wide variety of comprehensive financial services, including those
tailored to retail, commercial, and investment services.

Universal banking can be defined as a banking system that offers a wide range of
banking and financial services (like insurance, development banking, investment
banking, commercial banking, and other financial services) in comparison to traditional
banking institutions; in simple terms, it can also be understood as a combination of all
three services that is retail banking, investment banking, and wholesale banking. This
system offers services like asset management, deposits, payment processing, investment
advisory, underwriting, securities transactions, financial analysis, merchant banking,
factoring, mutual funds, credit cards, auto loans, insurance, housing finance, retail loans,
etc.

Universal bank services

Universal banks offer three main services:

Retail banking
Retail banking services members of the public and small and medium-size businesses. It
focuses on looking after customers’ money as well as offering loans and mortgages.

Retail banking includes the following services: savings accounts, checking accounts (UK:
current accounts), overdrafts, personal loans, and mortgages.

Wholesale banking
Wholesale banking involves borrowing and lending money on a very large scale. Retail banks deal
with relatively small amounts per customer. Wholesale banks, on the other hand, deal with massive
amounts.

Wholesale banks’ customers include pension funds, giant companies, governments, and other
financial institutions.

Investment banking
Investment banks focus on services for major investors and companies. They specialize, for
example, in the investment requirements of pension funds.

Investment banks do not take deposits. In the UK, Ireland, and some other Commonwealth
countries, people call them merchant banks.

The main activities of investment banks are asset management, M&A, raising capital, securities
trading, and securities underwriting. M&A stands for Mergers and Acquisitions.

Regional Banking
 In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas,
Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly
with State Governments and some Commercial Banks.

Local Area Banks

With a view to bringing about a competitive environment and to overcome the deficiencies of
Regional Banks, Government has permitted the establishment of one type of regional banks in rural
and semi-urban centers under private sector known as “Local Area Banks”.

Local Area Banks are set up in District Towns and are required to
function within their own area which in normal case does not exceeds three
district towns. These banks can be set up by any individual, Corporate house,
Trust Or Society etc. with minimum paid up capital of Rs. 5 Crores.

Local Area Banks (LAB) can be defined as banks that were set up by the
Government of India solely with the purpose of enabling the local institutions to
pool and mobilize the rural savings and ensuring that these savings are made
available for investment concerning needs or in other words, these banks help in
bridging the existing gaps with respect to the credit availability and thus,
strengthening the credit mechanism in the local areas (rural as well as semi-urban
areas).

Features of LAB
The features of a local area bank are provided and discussed as follows-

 LABs are registered under the Companies Act, 1956, as a public limited
entity.
 A LAB is licensed under the BRA or Banking Regulation Act, 1949. This
means that the LAB will have to operate as per the Banking Regulation Act, 1949.
 A LAB is subjected to accounting policies, prudential norms, and other
policies as laid by the Reserve Bank of India.
 A LAB is currently one and only type of Non-scheduled bank in India.
 Each LAB is granted with permission to open a branch in a single urban
center in each district and remaining branches to be opened in rural and semi-
urban centers.
 Local area bank is set up as a private limited entity under the private sector
in order to respond to the credit as well as other financial needs and
requirements of the locals and that too in a competitive form.
 The banking activities of LAB are regulated and monitored by the RBI or
the Reserve Bank of India.
 LAB offers loans to locals for the purpose of agricultural and other similar
activities.
 A corporate house sets up LAB, individual, trust, society, etc. with a paid-up
capital of at least INR 5 Crores.
 LABs are usually set up in a district town. These are required to operate
within their pre-determined area, which in normal cases includes a maximum of 3
contiguous district towns.
 In a local area bank system, the promoters can be firms, societies, or
individuals.

Wholesale Banking

Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of
maintaining thousands of small accounts and incurring huge transaction costs, under wholesale
banking, the banks deal with large customers and keep only large accounts. These are mainly
corporate customer.

Private Banking

Private or Personal Banking is banking with people — rich individuals instead of banking with
corporate clients. It attends to the need of individual customers, their preferences and the products
or services needed by them. This may include all-around personal services like maintaining
accounts, loans, foreign currency requirements, investment guidance, etc.

Retail Banking

Retail banking is a major form of commercial banking but mainly targeted to consumers rather than
corporate clients. It is the method of banks’ approach to the customers for sale of their products.

TYPES OF BANKS IN INDIA

RBI is the apex body that governs and monitors bank across India. It is responsible for regulating
the monetary policy in the country.
BANK CLASSIFICATION IN INDIA
There are two broad categories under which banks are classified in India- SCHEDULED AND
NON-SCHEDULED BANKS.
The scheduled banks include COMMERCIAL BANKS AND COOPERATIVE BANKS. The
commercial banks include REGIONAL RURAL BANKS, SMALL FINANCE BANK,
FOREIGN BANKS, PRIVATE SECTOR BANKS, and PUBLIC SECTOR
BANKS. PAYMENTS BANK is a new introduction to the category.
Cooperative banks include URBAN AND RURAL BANKS.

Let us understand the nomenclature better;

SCHEDULED BANKS are the banks which are covered under the second schedule of the
Reserve Bank of India Act, 1934. To qualify for being a scheduled bank, a minimum of 5 lakh
paid-up capital is required on the bank’s behalf. The RBI lends loan to these banks at bank rate
as and when required.
COMMERCIAL BANKS are regulated and managed under the Banking Regulation Act, 1949.
These are profit making banks based on their business model. Granting loans to the government,
general public, and corporate and accepting deposits counts as the primary function.

There are four types of commercial banks:

PUBLIC SECTOR BANKS

These banks for more than 75% of the total banking business in the nation. They are called
nationalized banks. The government holds the majority stakes at these banks. Post-merger, SBI is
the largest public sector banks by volume. It also ranks amongst the top 50 banks in the world.
There are 21 nationalized banks in India, they are:
1. STATE BANK OF INDIA
2. BANK OF INDIA
3. ALLAHABAD BANK
4. BANK OF MAHARASHTRA
5. CANARA BANK
6. INDIAN OVERSEAS BANK
7. IDBI BANK
8. ORIENTAL BANK OF COMMERCE
9. CENTRAL BANK OF INDIA
10. CORPORATION BANK
11. ANDHRA BANK
12. UCO BANK
13. BANK OF BARODA
14. UNION BANK OF INDIA
15. UNITED BANK OF INDIA
16. VIJAYA BANK
17. DENA BANK
18. INDIAN BANK
19. PUNJAB & SIND BANK
20. PUNJAB NATIONAL BANK
21. SYNDICATE BANK

PRIVATE SECTOR BANKS

Private shareholders hold majority stakes in private sector banks. Reserve Bank of India lays
down all the rules and regulations. Following are the private sector banks in India:
1. HDFC BANK
2. ICICI BANK
3. AXIS BANK
4. YES BANK
5. INDUSIND BANK
6. KOTAK MAHINDRA BANK
7. DCB BANK
8. BANDHAN BANK
9. IDFC BANK
10. CITY UNION BANK
11. TAMILNAD MERCANTILE BANK
12. NAINITAL BANK
13. CATHOLIC SYRIAN BANK
14. FEDERAL BANK
15. JAMMU AND KASHMIR BANK
16. KARNATAKA BANK
17. DHANALAXMI BANK
18. SOUTH INDIAN BANK
19. LAKSHMI VILAS BANK
20. RBL BANK
21. KARUR VYSYA BANK

FOREIGN BANKS
A bank operating as a private entity in India but headquartered in a Foreign country is a foreign
bank. They are governed by both the country they are located in as well the country they have
headquarters in. Some of these are:
1. CITI BANK
2. STANDARD CHARTERED BANK
3. HSBC BANK

REGIONAL RURAL BANKS

These banks were established mainly to support the weaker and lesser fortunate section of the
society like marginal farmers, laborers, small enterprises etc. they mainly operate at regional
levels at different states and may have branches in urban areas as well. Their main features are:
1. Supporting rural and semi-urban region financially
2. Pension distribution and Wage disbursement of MGNREGA workers
3. Added banking facilities like locker, cards-debit, and credit

SMALL FINANCE BANKS

These banks cater to a niche segment in the society and help with financial inclusion of sections
which are not taken care of by other leading banks. They look after micro industries,
unorganized sector, small farmers etc. RBI and FEMA are the governing bodies of these banks.
These are:
1. AU SMALL FINANCE BANK
2. CAPITAL SMALL FINANCE BANK
3. FINCARE SMALL FINANCE BANK
4. EQUITAS SMALL FINANCE BANK
5. ESAF SMALL FINANCE BANK
6. SURYODAY SMALL FINANCE BANK
7. UJJIVAN SMALL FINANCE BANK
8. UTKARSH SMALL FINANCE BANK
9. NORTHEAST SMALL FINANCE BANK
10. JANA SMALL FINANCE BANK

COOPERATIVE BANKS
Run by the elected members of a managing committee and registered under the Cooperative
Societies Act, 1912 are the cooperative banks. These are no-profit, no-loss banks and mainly
serve entrepreneurs, industries, small businesses, and self-employment.

PAYMENTS BANK
This is a new and upcoming model of banking in India. It has been conceptualized and signed-
off by RBI with restricted operations. Maximum of Rs. One Lakh is acceptable per customer by
these banks. Like other banks, they also offer para-banking services like ATM cards, Debit-
Credit cards, net-banking, mobile banking etc.
A payments bank is like any other bank, but operating on a smaller scale without involving any credit
risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit
cards. It can accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile
payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third
party fund transfers.

The Reserve Bank of India has formed Payment Banks to facilitate more
transaction and savings accounts for the underserved population who lack
banking access. Payment Banks will assist those who have little or no banking
access. One of the most recent trends in the online payment world is digital
payment banks. It operates differently than conventional retail banks when it
comes to features and services. The Reserve Bank of India granted the
following 11 applicants the 'in-principle' permission to set up the country's
payment banks on 27 November 2014. Only 6 banks are currently operating.

Features of Payment Banks

1) Payments Bank has a deposit limit of up to Rs 1 lakh rupees. At no point in

time should banks go over the limit. They can accept demand deposits that
are, current deposits and savings bank deposits.
2) Individuals, small companies, and other organizations can make demand
deposits and bank deposits.

3) Payment Banks also offer debit card facilities along with money
transactions on electronic platforms such as ECS, NEFT, and RTGS.

4) They can make payments of utility bills on behalf of customers and the
general public.

5) Mobile banking can be accessed through these payment banks.

The following is the list of active payments banks: [20]

1. Airtel Payments Bank

2. India Post Payments Bank
3. Fino Payments Bank
4. Jio Payments Bank[21]
5. Paytm Payments Bank
6. NSDL Payments Bank

A financial system is an important tool for a country that wants to develop economically. The reason
is that it helps in the creation of wealth by a way of investments. That is why there are different types
of financial services available to facilitate the requirement.
One of the most important areas of economic reform lies in the financial system .On one hand , finance is the
‘brain’ of the economy , and the skill of the financial system shapes the efficiency of translation of gross capital
formation into GDP growth. Economic growth and development of a nation depends upon the efficiency of a
developed financial system. There are two different viewpoints regarding the relationship between financial
development and economic growth. According to first view point, an efficient financial system effectively
mobilises the financial resources and after that invest them in the best possible manner with the help of market
mechanism which leads to economic development. According to other view point, economic development and
financial development are complimentary to each other. At present, the Indian financial sector has been able to
expand its outreach to remote and distant areas through bank branches, ATMs, financial intermediaries and
branchless banking solutions. In order to make financial system more effective and efficient, there is a need of
effective management and control among the different components of the Indian Financial System. Also there
is a need for proper governance and regulation for the efficient working of the financial system. At last, it can be
concluded that a developed financial system leads the economic growth and development of the country.
Hence, there is a positive and direct correlation between the growth in financial system and economic
development