STRUCTURE OF BANKS IN INDIA

Banks can be classified into scheduled and non- scheduled banks based on
certain factors

(a) Scheduled Banks: Scheduled Banks in India are the banks which are listed
in the Second Schedule of the Reserve Bank of India Act 1934. The
scheduled banks enjoy several privileges as compared to non- scheduled
banks. Scheduled banks are entitled to receive refinance facilities from the
Reserve Bank of India. They are also entitled for currency chest facilities.
They are entitled to become members of the Clearing House. Besides
commercial banks, cooperative banks may also become scheduled banks if
they fulfil the criteria stipulated by RBI.

(b) Non-scheduled banks: These are those banks which are not included in the
Second Schedule of the Reserve Bank of India. Usually those banks which do
not conform to the norms of the Reserve Bank of India within the meaning of
the RBI Act or according to specific functions etc. or according to the
judgement of the Reserve Bank, are not capable of serving and protecting the
interest of depositors are classified as non-scheduled banks.
Constituents of the Indian Banking System The constituents of the Indian

Banking System can be broadly listed as under :

(a) Commercial Banks- (i) Public Sector Banks (ii) Private Sector Banks (iii)
Foreign Banks
(b) Cooperative Banks- (i) Short term agricultural institutions (ii) Long term
agricultural credit institutions (iii) Non-agricultural credit institutions
(c) Development Banks - (i) National Bank for Agriculture and Rural
Development (NABARD) (ii) Small Industries Development Bank of
India (SIDBI) (iii) EXIM Bank (iv) National Housing Bank.

A. COMMERCIAL BANKS

1. Public Sector Banks

The term ‘public sector banks’ by itself connotes a situation where the
major/full stake in the banks are held by the Government. Till July,1969, there
were only 8 Public Sector Banks (SBI & its 7 associate banks). When 14
commercial banks (total 20 banks) were nationalized in 1969, 100% ownership
of these banks were held by the Government of India. Subsequently, six more
private banks were nationalized in 1980. However, with the changing in time
and environment, these banks were allowed to raise capital through IPOs and
there by the share holding pattern has changed. By default the minimum 51%
shares would be kept by the Government of India, and the management control
of these nationalized banks is only with Central Government. Since all these
banks have ownership of Central Government, they can be classified as public
sector banks. Apart from the nationalized banks, State Bank of India, and its
associate banks, IDBI Bank and Regional Rural Banks are also included in
the category of Public Sector banks.

2. Private Sector Banks

The major stakeholders in the private sector banks are individuals and
corporate. When banks were nationalized under two tranches (in 1969 and in
1980), all banks were not included. Those non nationalized banks which
continue operations even today are classified as Old Generation Private
Sector Banks.. like The Jammu &Kashmir Bank Ltd, The Federal Bank, The
Laxmi Vilas Bank etc. In July 1993 on account of banking sector reforms the
Reserve Bank of India allowed many new banks to start banking operations.
Some of the leading Lesson 1 Overview of Banking System 7 banks which were
given licenses are: UTI bank (presently called Axis Bank) ICICI Bank, HDFC
Bank, Kotak Mahindra Bank, Yes Bank etc., These banks are recognized as
New Generation Private Sector Banks. Ten banks were licensed on the basis
of guidelines issued in January 1993. The guidelines were revised in January
2001 based on the experience gained from the functioning of these banks, and
fresh applications were invited.
Of the 10 licences issued in 1993, four banks merged with other lenders over a
period of time. Times Bank merged with HDFC Bank, while Global Trust Bank
was amalgamated with the state-owned Oriental Bank of Commerce. Centurion
Bank took over Bank of Punjab to become Centurion Bank of Punjab, which
merged with HDFC Bank in 2008. On account of these new generation private
sector banks, a new competitive environment was created in the Indian Banking
System. These banks were having competitive advantages over their
counterparts (of the existing old private banks, public sector banks) in their IT
support system, innovative products, and pricing of their products. Private
sector banks have been rapidly increasing their presence in the recent times and
offering a variety of newer services to the customers and posing a stiff
competition to the group of public sector banks. Total private sector banks as on
31st March 2013 were 22. Besides these, four Local Area Banks are also
categorized as private banks.

3. Foreign Banks
The other important segment of the commercial banking is that of foreign
banks. Foreign banks have their registered offices outside India, and through
their branches they operate in India. Foreign banks are allowed on reciprocal
basis. They are allowed to operate through branches or wholly owned
subsidiaries. These foreign banks are very active in Treasury (forex) and Trade
Finance and Corporate Banking activities. These banks assist their clients in
raising External Commercial Borrowings through their branches outside India
or foreign correspondents. They are active in loan syndication as well. Foreign
banks have to adhere to all local laws as well as guidelines and directives of
Indian Regulators such as Reserve Bank of India, Insurance and Regulatory
Development Authority, Securities Exchange Board of India. The foreign banks
have to comply with the requirements of the Reserve Bank of India in respect to
Priority Sector lending, and Capital Adequacy ratio and other norms. Total
foreign banks as on 31st March 2013 were 43 having 331 branches. Besides
these, 46 foreign banks have their representative offices in India as on 31st
March 2013.

B. CO-OPERATIVE BANKING SYSTEM

Cooperative banks play an important role in the Indian Financial System,

especially at the village level. The growth of Cooperative Movement
commenced with the passing of the Act of 1904. A cooperative bank is a
cooperative society registered or deemed to have been registered under any
State or Central Act. If a cooperative bank is operating in more than one State,
the Central Cooperative Societies Act is applicable. In other cases the State laws
are applicable. Apart from various other laws like the Banking Laws
(Application to Co-operative Societies) Act, 1965 and Banking Regulation
(Amendment) and Miscellaneous Provisions Act, 2004, the provisions of the
RBI Act, 1934 and the BR Act, 1949 would also be applicable for governing the
banking activities. These cooperative banks cater to the needs of agriculture,
retail trade, small and medium industry and self employed businessmen usually
in urban, semi urban and rural areas. In case of co-operative banks, the
shareholders should be members of the co-operative banks. The share linkage to
borrowing is a distinctive feature of a co-operative bank. Rural cooperative
sector in India plays a vital role in fulfilling the credit requirements of rural
agricultural sector of India. At recent times, the rural credit flow through rural
cooperative sector has risen substantially in order to keep pace with the growing
demand for credit in the rural parts of India. The Cooperative rural Credit
Structure in our country are of following types:

1. Short Term Agricultural Credit institutions

The short term credit structure consists of the Primary Agricultural Credit
Societies at the base level, which are affiliated at the district level into the
District Central Cooperative bank and further into the State Cooperative Bank 8
PP-BL&P at the State level. Being federal structures, the membership of the
DCCB comprises all the affiliated PACS and other functional societies and for
the SCB, the members are the affiliated DCCBs. The DCCB being the middle
tier of the Cooperative Credit Structure, is functionally positioned to deal with
the concerns of both the upper and lower tiers. This very often puts the DCCB
in a position of balancing competing concerns. While the SCB may managing
District Central Cooperative wish the DCCB to prioritize its task in a particular
manner, the PACs may have their own demands on the DCCB. Balancing these
competing concerns could often be a dilemma for the DCCBs. There are 30
State Cooperative Banks. These banks support and guide 372 District Central
Cooperative Banks (DCCBs) in India which have 13478 branches as on March,
2013. These DCCBs are providing finance to more than 35 lakhs farmers
through about 1.15 lacs Primary Agricultural Cooperative Societies (PACS).

2. Long Term Agricultural Credit Institutions

The long term cooperative credit structure consists of the State Cooperative
Agriculture & Rural Development Banks (SCARDBs) and Primary
Cooperative Agriculture & Rural Development Banks (PCARDBs)
which are affiliated to the SCARDBs. The total No. of SCARDB’s are 19; of
which 10 have Federal Structure, 7 have Unitary Structure and 2 have Mixed
Structure (i.e. operating through PCARDBs as well as its own
branches).Loans are given to members on the mortgages of their land usually
up to 50% of their value in some states or up to 30 times the land revenue
payable in other states, duly taking into account their need and repayment
capacity.

3. Urban Cooperative Banks

The term Urban Cooperative Banks (UCBs), although not formally defined,
refers to the primary cooperative banks located in urban and semi-urban
areas. These banks, until 1996, were allowed to lend money only to non-
agricultural purposes. This distinction remains today. These banks have
traditionally been around communities, localities working out in essence,
loans to small borrowers and businesses. Today their scope of operation has
expanded considerably. The urban co-operative banks can spread operations
to other States and such banks are called as multi state cooperative banks.
They are governed by the Banking Regulations Act 1949 and Banking Laws
(Cooperative Societies) Act, 1965. The total number of UCBs stood at 1,618
as on 31st March 2012. Scheduled UCBs are banks included in the Second
Schedule of the RBI Act, 1934 and include banks that have paid-up capital
and reserves of not less than `5 lacs and carry out their business in the
interest of depositors to the satisfaction of the Reserve Bank.
DEVELOPMENT BANKS

History of development Banking in India can be traced to the establishment

of the Industrial Finance Corporation of India in 1948. Subsequently,
with the passing of State Financial Corporation Act,1951, several SFCs
came into being. With the introduction of financial sector reforms, many
changes have been witnessed in the domain of development banking. There
are more than 60 Development Banking Institutions at both Central and State
level. We are discussing here below the major four development banks
which assist in extending long term lending and re-finance facilities to
different areas of economy for the economic development pertaining to
Small Scale and Medium industries, Agricultural Sector and Housing Sector.
These financial institutions plays crucial role in assisting different segments
including the rural economic development.

National Bank for Agriculture and Rural Development (NABARD)

National Bank for Agriculture and Rural Development (NABARD) was
established in July 1982 by an Act of Parliament based on the
recommendations of CRAFICARD. It is the apex institution concerned with
the policy, planning and operations in the field of agriculture and other rural
economic activities. NABARD has evolved several refinance and
promotional schemes over the years and has been making constant efforts to
liberalize, broad base and refine/ rationalize the schemes in response to the
field level needs. The refinance provided by NABARD has two basic
objectives:
(i) Supplementing the resources of the cooperatives banks and RRBs for
meeting the credit needs of its clientele, and
(ii) Ensuring simultaneously the buildup of a sound, efficient, effective
and viable cooperative credit structure and RRBs for purveying credit.
NABARD undertakes a number of inter-related activities/services
which fall under three broad categories

(a) Credit Dispensation : NABARD prepares for each district annually a

potential linked credit plan which forms the basis for district credit plans. It
participates in finalization of Annual Action Plan at block, district and state
levels and monitors implementation of credit plans at above levels. It also
provides guidance in evolving the credit discipline to be followed by the
credit institutions in financing production, marketing and investment
activities of rural farm and non-farm sectors.
(b) Developmental & Promotional
The developmental role of NABARD can be broadly classified as:- –
Nurturing and strengthening of - the Rural Financial Institutions (RFIs) like
SCBs/SCARDBs, CCBs, RRBs etc. by various institutional strengthening
initiatives. – Fostering the growth of the SHG Bank linkage programme and
extending essential support to SHPIs NGOs/VAs/ Development Agencies
and client banks. – Development and promotional initiatives in farm and
non-farm sector. – Extending assistance for Research and Development. –
Acting as a catalyst for Agriculture and rural development in rural areas.

(c) A Supervisory Activities As the Apex Development Bank, NABARD

shares with the Central Bank of the country (Reserve Bank of India) some of
the supervisory functions in respect of Cooperative Banks and RRBs.

Small Industries Development Bank of India (SIDBI)

Small Industries Development Bank of India (SIDBI) was established in
October 1989 and commenced its operation from April 1990 with its Head
Office at Lucknow as a development bank. It is the principal and exclusive
financial institution for the promotion, financing and development of the
Micro, Small and Medium Enterprise (MSME) sector and for co-ordination
of the functions of the institutions engaged in similar activities. It is a central
government undertaking. The prime aim of SIDBI is to support MSMEs by
providing them the valuable factor of production finance. Many institutions
and commercial banks supply finance, both long-term and short-term, to
small entrepreneurs. SIDBI coordinates the work of all of them. 10 PP-
BL&P SIDBI has evolved a strategy to analyze the problems faced by
MSMEs and come out with tailor-made solutions. It has covered around 600
MSME clusters, through a pan-India network of 85 branches, 50 Credit
Advisory Centres, and partnerships with cluster-level industry associations
as on January 31, 2013. A unique scheme of the credit guarantee for Micro
and Small Enterprises called CGTMSE has provided coverage to about 1
million with guarantee covers for an aggregate loan amount of over ` 48,000
crore. Functions of Small Industries Development Bank of India (SIDBI):
Over the years, the scope of promotional and developmental activities of
SIDBI has been enlarged to encompass several new activities. It performs a
series of functions in collaboration with voluntary organisations,
nongovernmental organisations, consultancy firms and multinational
agencies to enhance the overall performance of the small scale sector. The
important functions of SIDBI are discussed as follows: (i) Initiates steps for
technology adoption, technology exchange, transfer and up gradation and
modernisation of existing units. (ii) SIDBI participates in the equity type of
loans on soft terms, term loan, working capital both in rupee and foreign
currencies, venture capital support, and different forms of resource support
to banks and other institutions. (iii) SIDBI facilitates timely flow of credit
for both term loans and working capital to MSMEs in collaboration with
commercial banks. (iv) SIDBI enlarges marketing capabilities of the
products of MSMEs in both domestic and international markets. (v) SIDB1
directly discounts and rediscounts bills with a view to encourage bills culture
and helping the SSI units to realise their sale proceeds of capital goods /
equipments and components etc. (vi) SIDBI promotes employment oriented
industries especially in semi-urban areas to create more employment
opportunities so that rural-urban migration of people can be checked.
National Housing Bank (NHB) National Housing Bank was set up in July,
1988 as the apex financing institution for the housing sector with the
mandate to promote efficient, viable and sound Housing Finance Companies
(HFCs). Its functions aim at to augment the flow of institutional credit for
the housing sector and regulate HFCs. NHB mobilizes resources and
channelizes them to various schemes of housing infrastructure development.
It provides refinance for direct housing loans given by commercial banks
and non-banking financial institutions. The NHB also provides refinance to
Housing Finance Institutions for direct lending for construction/purchase of
new housing/dwelling units, public agencies for land development and
shelter projects, primary cooperative housing societies, property developers.
At present, it is a wholly owned subsidiary of Reserve Bank of India which
contributed the entire paid-up capital. RBI has proposed to transfer its entire
shareholding to Government of India to avoid conflict of ownership and
regulatory role. For this transfer, the central bank will pay RBI, in cash, an
amount equal to the face value of the subscribed capital issued by the RBI.
The outstanding portfolio of NHB at ` 33,083 crores as on 31st December
2012 is almost equally divided between the commercial banks and the HFCs.
Export Import Bank of India (EXIM Bank)
Export-Import Bank of India was set up in 1982 by an Act of Parliament for
the purpose of financing, facilitating and promoting India’s foreign trade. It
is the principal financial institution in the country for coordinating the
working of institutions engaged in financing exports and imports. Exim
Bank is fully owned by the Government of India and the Bank’s authorized
and paid up capital are ‘ 10,000 crore and ‘ 2,300 crore respectively. Exim
Bank lays special emphasis on extension of Lines of Credit (LOCs) to
overseas entities, national governments, Lesson 1 Overview of Banking
System 11 regional financial institutions and commercial banks. Exim Bank
also extends Buyer’s credit and Supplier’s credit to finance and promote
country’s exports. The Bank also provides financial assistance to export-
oriented Indian companies by way of term loans in Indian rupees or foreign
currencies for setting up new production facility, expansion/modernization or
up gradation of existing facilities and for acquisition of production
equipment or technology. Exim Bank helps Indian companies in their
globalization efforts through a wide range of products and services offered at
all stages of the business cycle, starting from import of technology and
export product development to export production, export marketing, pre-
shipment and post-shipment and overseas investment. The Bank has
introduced a new lending programme to finance research and development
activities of exportoriented companies. R&D finance by Exim Bank is in the
form of term loan to the extent of 80 per cent of the R&Dcost. In order to
assist in the creation and enhancement of export capabilities and
international competitiveness of Indian companies, the Bank has put in place
an Export Marketing Services (EMS) Programme. Through EMS, the Bank
proactively assists companies in identification of prospective business
partners to facilitating placement of final orders. Under EMS, the Bank also
assists in identification of opportunities for setting up plants or projects or
for acquisition of companies overseas. The service is provided on a success
fee basis. Exim Bank supplements its financing programmes with a wide
range of value-added information, advisory and support services, which
enable exporters to evaluate international risks, exploit export opportunities
and improve competitiveness, thereby helping them in their globalisation
efforts.