Indian Banking System: Structure and
other Details (with Diagrams)
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Indian Banking System: Structure and other Details!
Bank is an institution that accepts deposits of money from the public.
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Anybody who has account in the bank can withdraw money. Bank also lends money.
Indigenous Banking:
The exact date of existence of indigenous bank is not known. But, it is certain that the old
banking system has been functioning for centuries. Some people trace the presence of
indigenous banks to the Vedic times of 2000-1400 BC. It has admirably fulfilled the
needs of the country in the past.
However, with the coming of the British, its decline started. Despite the fast growth of
modern commercial banks, however, the indigenous banks continue to hold a prominent
position in the Indian money market even in the present times. It includes shroffs, seths,
mahajans, chettis, etc. The indigenous bankers lend money; act as money changers and
finance internal trade of India by means of hundis or internal bills of exchange.
Defects:
The main defects of indigenous banking are:
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(i) They are unorganised and do not have any contact with other sections of the banking
world.
(ii) They combine banking with trading and commission business and thus have
introduced trade risks into their banking business.
(iii) They do not distinguish between short term and long term finance and also between
the purpose of finance.
(iv) They follow vernacular methods of keeping accounts. They do not give receipts in
most cases and interest which they charge is out of proportion to the rate of interest
charged by other banking institutions in the country.
Suggestions for Improvements:
(i) The banking practices need to be upgraded.
(ii) Encouraging them to avail of certain facilities from the banking system, including the
RBI.
(iii) These banks should be linked with commercial banks on the basis of certain
understanding in the respect of interest charged from the borrowers, the verification of
the same by the commercial banks and the passing of the concessions to the priority
sectors etc.
(iv) These banks should be encouraged to become corporate bodies rather than continuing
as family based enterprises.
Structure of Organised Indian Banking System:
The organised banking system in India can be classified as given below:
Reserve Bank of India (RBI):
The country had no central bank prior to the establishment of the RBI. The RBI is the
supreme monetary and banking authority in the country and controls the banking system
in India. It is called the Reserve Bank’ as it keeps the reserves of all commercial banks.
Commercial Banks:
Commercial banks mobilise savings of general public and make them available to large
and small industrial and trading units mainly for working capital requirements.
Commercial banks in India are largely Indian-public sector and private sector with a few
foreign banks. The public sector banks account for more than 92 percent of the entire
banking business in India—occupying a dominant position in the commercial banking.
The State Bank of India and its 7 associate banks along with another 19 banks are the
public sector banks.
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, hey 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.
Regional Rural Banks:
The Regional Rural Banks (RRBs) the newest form of banks, came into existence in the
middle of 1970s (sponsored by individual nationalised commercial banks) with the
objective of developing rural economy by providing credit and deposit facilities for
agriculture and other productive activities of al kinds in rural areas.
The emphasis is on providing such facilities to small and marginal farmers, agricultural
labourers, rural artisans and other small entrepreneurs in rural areas.
Other special features of these banks are:
(i) their area of operation is limited to a specified region, comprising one or more districts
in any state; (ii) their lending rates cannot be higher than the prevailing lending rates of
cooperative credit societies in any particular state; (iii) the paid-up capital of each rural
bank is Rs. 25 lakh, 50 percent of which has been contributed by the Central
Government, 15 percent by State Government and 35 percent by sponsoring public sector
commercial banks which are also responsible for actual setting up of the RRBs.
These banks are helped by higher-level agencies: the sponsoring banks lend them funds
and advise and train their senior staff, the NABARD (National Bank for Agriculture and
Rural Development) gives them short-term and medium, term loans: the RBI has kept
CRR (Cash Reserve Requirements) of them at 3% and SLR (Statutory Liquidity
Requirement) at 25% of their total net liabilities, whereas for other commercial banks the
required minimum ratios have been varied over time.
Cooperative Banks:
Cooperative banks are so-called because they are organised under the provisions of the
Cooperative Credit Societies Act of the states. The major beneficiary of the Cooperative
Banking is the agricultural sector in particular and the rural sector in general.
The cooperative credit institutions operating in the country are mainly of two kinds:
agricultural (dominant) and non-agricultural. There are two separate cooperative agencies
for the provision of agricultural credit: one for short and medium-term credit, and the
other for long-term credit. The former has three tier and federal structure.
At the apex is the State Co-operative Bank (SCB) (cooperation being a state subject in
India), at the intermediate (district) level are the Central Cooperative Banks (CCBs) and
at the village level are Primary Agricultural Credit Societies (PACs).
Long-term agriculture credit is provided by the Land Development Banks. The funds of
the RBI meant for the agriculture sector actually pass through SCBs and CCBs.
Originally based in rural sector, the cooperative credit movement has now spread to
urban areas also and there are many urban cooperative banks coming under SCBs.
