MODULE 3.

TYPES OF BANKS & BANKING PRODUCTS

Banking structure – Types of banks

 TYPES OF BANKING GROUPS IN INDIA

 Scheduled and non-scheduled banks

 Public sector banks

 Private sector and foreign banks

 Co-operative banks

 Small finance banks

 Payments banks

 Shadow banks and neo banks

Indian banking system is regulated by RBI

WHAT IS A SCHEDULED BANK?

 Banks listed in 2nd Schedule of RBI Act, 1934.

 Reserve Bank of India in turn includes only those
banks in this schedule which satisfy the criteria
mentioned on section 42 (6) (a) of the Reserve Bank of
India Act 1934.
 RBI may direct the inclusion in the Second Schedule
of any bank not already so included which carries on
the business of banking in India and which
 has a paid-up capital and reserves of an aggregate value of
not less than five lakhs of rupees, and
 satisfies the Bank that its affairs are not being conducted
in a manner detrimental to the interests of its depositors,
and
 is a State co-operative bank or a company as defined in 4
[section 3 of the Companies Act, 1956 (1 of 1956), or an
institution notified by the Central Government in this
behalf] or a corporation or a company incorporated by or
under any law in force in any place outside India;
TYPES OF SCHEDULED BANKS

 Public sector banks

 SBI and Nationalized banks
 Holding of GOI is more than 50%
 Regional Rural Banks
 Small localized banks operating in rural areas
 Owned by GOI, State Government and Sponsor PSB
TYPES OF SCHEDULED BANKS
(CONTD.)
 Private sector and foreign banks
 Private sector banks
 Old generation private banks
 Ownership held by business houses

 New generation private sector banks incorporated post –

1994
 Ownership held in diversified form (increase in cap from

15% to 26% for promoters over a period of 15 years)

 Foreign banks
 Incorporated abroad but granted license by RBI to conduct
banking business in India

Commercial banks are registered

under Banking Regulation Act /
Companies Act and regulated by RBI
CO-OPERATIVE BANKS
 Rural and urban co-operative banks
 Rural co-operative banks
 Meet financial needs of agriculture and allied activities in rural areas.
The rural co-operative banks (RCBs) in India are primarily
responsible for ensuring credit flow to the agriculture sector. It is made
up of both short-term and long-term cooperative credit structures. The
short-term cooperative credit structure is divided into three levels:
village-level Primary Agricultural Credit Societies
(PACS), district-level Central Cooperative Banks (DCCBs),
and state-level State Cooperative Banks (SCBs).
 Urban co-operative banks
 Meet financial needs of small-size trade and commerce activities in
urban areas. The term Urban Co-operative Banks (UCBs), though not
formally defined, refers to primary cooperative banks located in urban
and semi-urban areas. These banks were traditionally centred around
communities, localities work place groups. They essentially lent to
small borrowers and businesses. Today, their scope of operations has
widened considerably.
 Co-operative banks are registered under Registrar of Co-
operatives
 Main regulator is the State Government (or Central
Government in case of the banks operating in more than 1
state)
 Based on co-operative principles
SMALL FINANCE BANKS

 The small bank shall be registered as a public limited company under the
Companies Act, 2013. It will be licensed under Section 22 of the Banking
Regulation Act, 1949
 The objectives of setting up of small banks will be for furthering financial
inclusion by (i) provision of savings vehicles to underserved and unserved
sections of the population, and (ii) supply of credit to small business units,
small farmers, micro and small industries, and other unorganised sector
entities, in their limited areas of operations, through high technology-low
cost operations.
 The area of operations of the small bank will normally be restricted to
contiguous districts in a homogenous cluster of States/Union Territories so
that the bank has the “local feel” and culture.
 The minimum paid up voting equity capital for small banks shall be Rs.
200 crore.
 The promoters’ minimum initial contribution to the paid up voting equity
capital of such small bank shall at least be 40 per cent which shall be
locked in for a period of five years from the date of commencement of
business of the bank.
 It shall be required to maintain a minimum capital adequacy ratio of 15
per cent of its risk weighted assets (RWA) on a continuous basis
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1090GLS1114.pdf
ARE SMALL FINANCE BANKS
SCHEDULED BANKS?
 AU Small Finance gets scheduled commercial bank status
 January 09, 2018 - Updated 01:18 am IST | New Delhi, Nov 2

 AU Small Finance Bank has received Reserved Bank of India (RBI) approval to operate as
Scheduled Commercial Bank. This bank's name has now been included in the Second Schedule of
Reserve Bank of India Act, 1934.
 Post acquiring scheduled commercial bank status, AU Small Finance Bank will be able to do
borrowing and lending with RBI under Liquidity Adjustment Facility (LAF) and Marginal
Standing Facility (MSF) .
 Also, it will help AU Small Finance Bank to acquire business from public sector undertakings
(PSUs), corporates, banks, mutual funds, insurance companies and other market participants
which can transact with scheduled banks only to comply either regulatory or internal guidelines.
 It will also enable AU Small Finance Bank to issue Certificate of Deposits (CDs) on competitive
interest rates in market to get liquidity.
 Commenting on the development, Sanjay Agarwal, MD & CEO, AU Small Finance Bank said, “We
are extremely thankful to the central bank for extending Schedule Commercial Bank status to us.
It will significantly help us to broaden our liabilities and treasury operations and shall provide
more liquidity avenues. It will also help AU Small Finance to widen its market perspective in
terms of government business and acquire liability business at relatively lower costs.”
 AU Small Finance Bank started its banking operation from April 19 this year. The development
will not only widen the reach for AU Bank’s services and liability capabilities but also influence its
growth prospects in future, a statement issued by the bank said..
 Prior to becoming a bank, as Au Financiers (India) Ltd (an Asset Finance NBFC), the company had
gained over 20 years of experience in financing the unbanked and underbanked segment in rural
and semi urban areas.
PAYMENTS BANKS
 The objectives of setting up of payments banks will be to further financial inclusion
by providing (i) small savings accounts and (ii) payments/remittance services to
migrant labour workforce, low income households, small businesses, other
unorganised sector entities and other users.
 Scope of activities
 Acceptance of demand deposits. Payments bank will initially be restricted to holding a
maximum balance of Rs. 200,000 per individual customer.
 Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.
 Payments and remittance services through various channels.
 Business Correspondent (BC) of another bank, subject to the Reserve Bank guidelines on BCs.
 Distribution of non-risk sharing simple financial products like mutual fund units and
insurance products, etc.
 Deployment of funds :
 The payments bank cannot undertake lending activities.
 Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank
on its outside demand and time liabilities, it will be required to invest minimum 75
per cent of its "demand deposit balances" in Statutory Liquidity Ratio (SLR) eligible
Government securities/treasury bills with maturity up to one year and hold maximum
25 per cent in current and time/fixed deposits with other scheduled commercial banks
for operational purposes and liquidity management.
 The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.
 India currently has 6 Payment Banks namely, Airtel Payment Bank, India Post
Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment
Bank.

https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1089PBR1114.pdf
CAN CO-OP BANKS BE SCHEDULED
BANKS?
 1. All banks which are included in the Second
Schedule to the Reserve Bank of India Act, 1934 are
Scheduled Banks. These banks comprise Scheduled
Commercial Banks and Scheduled Co-operative
Banks.
 2. Scheduled Commercial Banks in India are
categorised into five different groups according to
their ownership and / or nature of operation. These
bank groups are (i) State Bank of India and its
Associates, (ii) Nationalised Banks, (iii) Private Sector
Banks, (iv) Foreign Banks, and (v) Regional Rural
Banks.
 3. Scheduled Co-operative Banks consist of Scheduled
State Co-operative Banks and Scheduled Urban Co-
operative Banks.
BUSINESS CORRESPONDENT SERVICES

 Business Correspondents are retail agents engaged by banks for

providing banking services at locations other than a bank
branch/ATM. Banks are required to take full responsibility for the
acts of omission and commission of the BCs that they engage and
have, therefore, to ensure thorough due diligence and additional
safeguards for minimizing the agency risk. Basically, BCs enable a
bank to expand its outreach and offer limited range of banking
services at low cost, as setting up a brick and mortar branch may not
be viable in all cases. BCs, thus, are an integral part of a business
strategy for achieving greater financial inclusion.
 BCs are permitted to perform a variety of activities which include
identification of borrowers, collection and preliminary processing of
loan applications including verification of primary information/data,
creating awareness about savings and other products, education and
advice on managing money and debt counselling, processing and
submission of applications to banks, promoting, nurturing and
monitoring of Self Help Groups/ Joint Liability Groups, post-sanction
monitoring, follow-up of recovery. They can also attend to collection of
small value deposit, disbursal of small value credit, recovery of
principal / collection of interest, sale of micro insurance/ mutual fund
products/ pension products/ other third party products and receipt
and delivery of small value remittances/ other payment instruments.
ARE PAYMENT BANKS SCHEDULED
BANKS?
 After a choppy IPO debut, Paytm received the RBI nod to operate as a
scheduled payments bank. How does it change things for the company? This
report makes sense of Paytm Payments Bank's new status

 Billionaire Vijay Sekhar Sharma’s Paytm Payments Bank has been upgraded
to a scheduled bank by the Reserve Bank of India. Scheduled banks refer to
those banks which have been included in the Second Schedule of Reserve Bank
of India Act, 1934.
 This is expected to help the four-and-a-half years old bank expand its financial
services operations as this makes it eligible to partner in government-run
financial inclusion schemes. Other payments banks that have been added to
the Second Schedule include Fino Payments Bank and India Post Payments
Bank.
 As a scheduled bank, Paytm Payments Bank can take part in Request
for Proposals issued by the government and other large corporations,
primary auctions, fixed-rate and variable rate repos, and reverse
repos, along with participation in marginal standing facility.
 It now becomes eligible for refinancing facility from the RBI at the
bank rate, acquires membership to the clearing house, and gets access
to currency storage facility.
 Banks which satisfy the RBI that their affairs are not being conducted in a
manner detrimental to the interests of their depositors are included in the
second schedule.
ARE PAYMENTS BANKS PROFITABLE?
 Payment banks have had a bit of a scattershot past. India's experiment with differentiated banking
licences—like small finance banks and payment banks—began seven years ago but seems to have
faltered, especially for the latter. Launched with the idea of furthering financial inclusion, they’ve
managed to gain customers, but their revenue streams have a scaling problem. Of the 11 entities
granted in-principle licences to run payment banks in 2015, only six remain operational today.

 Long gestation periods to profitability, thin margins, and intense competition were among the
factors cited by the entities that withdrew. Cholamandalam, for instance, cited "competition and
other factors, including a long gestation period for payment banks to become profitable," when it
decided to surrender its license.

 The likes of Paytm Payments Bank, Airtel Payments Bank, and Fino Payments Bank have also
been penalised by the RBI in the past due to failures in their know-your-customer processes. India
Post Payments Bank, on the other hand, has also had its share of struggles as it failed to meet a
key licencing condition requiring a partial transfer of deposits from the Indian Post. Even as
payment banks have

 With the exception of Fino, other payment banking units haven’t really taken off, according to
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.

 All in all, while payment banks began with a commendable intention, their business models appear
to have hamstrung them. Although an eventual transition to a universal bank may have been part
of their vision, it also exposes them to bigger, better competitors who have made substantial
investments in their technological capabilities and aren't likely to cede any ground.

 Read more at: https://www.bqprime.com/economy-finance/seven-years-on-payment-banks-survive-

on-thin-margins
PAYMENTS BANKS – CURRENT STATUS

 The Reserve Bank of India (RBI) in March 2022 had barred Paytm Payments
Bank from onboarding new customers, citing “material supervisory concerns”
observed at the bank. The regulator has also directed the bank to appoint an
information technology (IT) audit firm to conduct a comprehensive system
audit of its IT system.
 Airtel Payments Bank has access to over 1 million telecom retailers servicing
an user base of more than 350 million. It provides banking services to one in
every six villages across the country. “A new business needs time to scale. This
is especially true for fintech-oriented models such as payments banks which
are based on providing services at one-tenth the cost of traditional banking.
Airtel Payments Bank has focused on building scale to serve India well, for the
urban digital and rural underbanked segments. Today, the bank has turned
profitable at scale, touching millions of lives in India and Bharat,” says a senior
official at Airtel Payments Bank who didn’t wish to be named.
 An asset-light, merchant-driven model has helped Fino Payments Bank report
profits. “Our business is volume driven on a low margin. We are providing
banking services through grocery shops, photocopiers, telecom operators and
Internet service providers. Our cost to income ratio has drastically come down.
We have built a scalable business model,” says Rishi Gupta, MD and CEO.
Mumbai-based Fino Payments Bank recorded a second year of profitability in
FY22 after stating that its profit after tax (PAT) grew by 109% year-on-year
(YoY) to INR 42.74 Cr as opposed to INR 20.4 Cr in FY21.
NBFCS, SHADOW BANKS AND NEO
BANKS
 What is a NBFC?
 A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government
or local authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business but does
not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any
goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-
banking institution which is a company and has principal
business of receiving deposits under any scheme or arrangement
in one lump sum or in instalments by way of contributions or in
any other manner, is also a non-banking financial company
(Residuary non-banking company).
 Financial activity as principal business is when a company’s
financial assets constitute more than 50 percent of the
total assets and income from financial assets constitute more
than 50 percent of the gross income. A company that fulfils
both these criteria will be registered as NBFC by RBI.
DIFFERENCE BETWEEN NBFCS AND
BANKS
 NBFCs lend and make investments and hence
their activities are akin to that of banks; however
there are a few differences as given below:
 NBFC cannot accept demand deposits;
 NBFCs do not form part of the payment and
settlement system and cannot issue cheques drawn
on itself;
 Deposit insurance facility of Deposit Insurance and
Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks.
ARE ALL FINANCE COMPANIES
REGULATED BY RBI?
 Does the Reserve Bank regulate all financial companies?
 No. Housing Finance Companies, Merchant Banking Companies, Stock
Exchanges, Companies engaged in the business of stock-broking/sub-broking,
Venture Capital Fund Companies, Nidhi Companies, Insurance companies and
Chit Fund Companies are NBFCs but they have been exempted from the
requirement of registration under Section 45-IA of the RBI Act, 1934 subject to
certain conditions.
 Housing Finance Companies are regulated by National Housing Bank,
Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock
brokers/sub-brokers are regulated by Securities and Exchange Board of India,
and Insurance companies are regulated by Insurance Regulatory and
Development Authority. Similarly, Chit Fund Companies are regulated by the
respective State Governments and Nidhi Companies are regulated by Ministry
of Corporate Affairs, Government of India. Companies that do financial
business but are regulated by other regulators are given specific exemption by
the Reserve Bank from its regulatory requirements for avoiding duality of
regulation.
 It may also be mentioned that Mortgage Guarantee Companies have been
notified as Non-Banking Financial Companies under Section 45 I(f)(iii) of the
RBI Act, 1934. Core Investment Companies with asset size of less than ₹ 100
crore, and those with asset size of ₹ 100 crore and above but not accessing
public funds are exempted from registration with the RBI.
SHADOW BANKING

 The shadow banking system describes financial

intermediaries that participate in creating credit but
are not subject to regulatory oversight in the same
manner as banks.
 The shadow banking system consists of lenders,
brokers, and other credit intermediaries who fall
outside the realm of traditional regulated banking.
 Shadow banking is generally unregulated and not
subject to the same kinds of risk, liquidity, and
capital restrictions as traditional banks are.
 Shadow banking has grown in importance to rival
traditional deposit banking, and was a factor in
the subprime mortgage crisis of 2007–2008 and
the global recession that followed.
WHAT IS SHADOW BANKING?
 The term ’shadow banking system‘ was first used in 2007, and gained
popularity during and after the recent financial crisis, as it
highlighted the bank-like functions performed by entities outside the
regular banking system. The more comprehensive definition, as
adopted by the Financial Stability Board (FSB), i.e., ‘credit
intermediation involving entities and activities (fully or partially)
outside the regular banking system’ has been globally accepted. This
definition has two important components: First, non bank financial
entities or entities outside the banking system that engage in the
‘bank like’ activities of maturity transformation, undertaking credit
risk transfer and using direct or indirect financial leverage. Second,
activities such as securitization, securities lending and repo
transactions that act as important sources of funding for non bank
entities. Thus, shadow banks comprise entities which conduct
financial intermediation directly, such as finance companies or
NBFCs, and entities which provide finance to such entities, such as
mutual funds. Globally, shadow banking entities could be covered
under the broad heads of (i) Money Market Funds, (ii) Credit
investment Funds, Hedge Funds, etc. (iii) Finance Companies
accepting deposits or deposit like funding, (iv) Securities brokers
dependent on wholesale funding, (v) Credit insurers, financial
guarantee providers and (vi) Securitisation vehicles.
BENEFITS OF SHADOW BANKING
 Shadows do not necessarily mean dark and sinister. In fact, shadow
banking activities constitute a very useful part of the financial system.
 Ability to lower transaction costs of their operations, their quick decision-
making ability, customer orientation and prompt provision of services. In
India, we have always maintained that Non Banking Finance Companies
(NBFCs), a significant segment of shadow banking system, play a crucial
role in broadening access to financial services, and enhancing competition
and diversification of the financial sector.
 While NBFCs are, sometimes, seen as akin to banks in terms of the
products and services offered, this comparison is strictly not accurate, as
more often NBFCs play a range of roles that complement banks. They
have carved out niche areas of businesses, such as auto financing, which
enables them to address specific needs of the people more efficiently.
 In addition to complementing banks, NBFCs add to economic strength to
the extent they enhance the resilience of the financial system to economic
shocks. They can act as backup financial institutions should the primary
form of intermediation come under stress, thereby constituting an
important avenue for risk diversification away from the banking system.
 Other non banking finance entities such as mutual funds, insurance
companies, etc. provide alternatives to bank deposits and constitute
alternative funding for the real economy, which is particularly useful
when traditional banking or market channels become temporarily
impaired.
RISKS OF SHADOW BANKING
 Notwithstanding the complementary role played by shadow banks to the banking system,
their activities, on the flip side, create risks which can assume a systemic dimension, due to
their complexity, cross jurisdictional nature, as well as their interconnectedness with the
banking system. The risks emanating from shadow banking could be primarily of four types
viz., (i) liquidity risk, (ii) leverage risk, (iii) regulatory arbitrage and (iv) contagion
risk
 Liquidity risk – This is one of the most common risks faced by shadow banks, as these entities
undertake maturity transformation i.e., funding long term assets with short term liabilities.
The risk of ALM mismatch leading to liquidity problems is quite high. In India, we had a
situation during the height of global crisis in 2008 when some NBFCs ran into severe
liquidity problems as they were using short term liabilities such as CPs (commercial paper)
and NCDs (Non-Convertible Debentures) to fund their long term lending or investment.
 Leverage risk – As shadow banks do not usually have prudential limits on borrowings, they
can become highly leveraged. High leverage exacerbates the stress in the financial system
and the real economy during the downturn adversely affecting financial stability.
 Regulatory arbitrage – Credit intermediation is, traditionally, a banking activity. Regulations
applied to banks in this regard can be circumvented by transferring components of the credit
intermediation function to shadow banks which are subject to less stringent regulation.
Transfer of risks outside the purview of banking supervision played an important role in the
build-up to the global financial crisis.
 Contagion risk - Shadow banking entities have close interlinkages with the banking sector
both from the asset as well as the liabilities side, and also with other segments of the
financial system, which can lead to contagion risk in times of loss of confidence and
uncertainty.
NEO BANKING

 Neobanks are digital-only banking platforms that

operate solely online. Simply put, they do not have a
physical presence.
 They provide digital, mobile-first financial solutions
for payments, money transfers, lending, and more.
 They allow customers to make deposits and withdraw
money. They offer debit cards, investment facilities,
and more. They even provide credit and lending
services.
 However, most neobanks do not have a banking
license and cannot operate stand-alone — most
neobanks partner with licensed banks to provide
financial services.
 With the rising popularity of neobanking, there are
more and more such new-age banks everyday. The top
few are Fi Money, Jupiter, Freo, Instapay and
HOW DO NEO BANKS FUNCTION?
 Neo banks have no physical branches, locations, or employees at their offices.
The tangibility aspect of neo-banking is, thus, noticeably absent in contrast to
traditional banking facilities.
The first and foremost function of neo banks, just like all other banks, is to
provide credit and deposit opportunities; to put it simply.
● Neo banking typically works with established banks to offer new-age banking
services through sleek, user-friendly apps.
● Neo banks manage customer service, end-to-end customer acquisition, and
client servicing while running the app and distributing the product.
● The banking partner offers to keep the customer's funds while also providing
access to funds for lending.
● Neo banks are very data-driven. To better understand client behaviour and
provide them with improved services, they gather and analyze customer data,
seeking to enhance the customer journey based on the current consumer actions.
 Neo banking generally offers the following features, among many others, to the
customers:
● electronic money transfers,
● online bill payments
● direct deposit remotely
● mobile check deposits;

Some of these fintech companies in neo-banking also provide tools to aid in saving
money and creating budgets. As such, no banks fulfil the role of personalized
financial advisers and money management as well.
NEO BANKS – PROS AND CONS
HOW ARE NEO BANKS DIFFERENT
FROM DIGITAL BANKS?
 Digital banks should not be confused with neo banks,
a common error many newbies commit. Both are
distinct types of financial entities, despite certain
similarities.
● Neo banks are completely online fintech
organizations without physical branch networks, as
opposed to digital banks, which are typically a
derivative of traditional banks with physical branch
networks.
● Neo banks offer services in places where the digital
banking system is insufficiently present; and at stress-
free, no cost.
● Digital banks offer their consumers a wider range of
services, including loans, than neo-banking.
●
PAYMENT BANKS VERSUS
PAYMENT AGGREGATORS
 RBI grants payment aggregator licence to 32 entities:
Here's the full list – BusinessToday
 PAs are entities that facilitate e-commerce sites and
merchants to accept various payment instruments from the
customers for completion of their payment obligations
without the need for merchants to create a separate
payment integration system of their own. PAs facilitate
merchants to connect with acquirers. In the process, they
receive payments from customers, pool and transfer them
on to the merchants after a time period.
 PGs are entities that provide technology infrastructure to
route and facilitate processing of an online payment
transaction without any involvement in handling of funds.
 Reserve Bank of India - Notifications (rbi.org.in)
 Payment Aggregator in India: Meaning, How It Works,
Types, and More (paytm.com)
PAYMENT GATEWAYS
 PGs are entities that provide technology
infrastructure to route and facilitate processing
of an online payment transaction without any
involvement in handling of funds.
 PGs shall be considered as ‘technology providers’
or ‘outsourcing partners’ of banks or non-banks,
as the case may be.
CONCEPT OF INTEREST
CALCULATION
 How do Banks Calculate Interest on Savings
accounts & FD in India? (groww.in)
 Savings Account Interest Rate Calculation: How
savings account interest rate is calculated - The
Economic Times (indiatimes.com)
 Calculation of Interest on Savings Deposits
 In view of the satisfactory level of computerization in
commercial bank branches, scheduled commercial
banks were advised to calculate interest on savings
bank accounts on a daily product basis with effect
from April 1, 2010.
 How to Calculate Interest on Savings Account |
DBS Bank