Classification of Modern Indian Banks
Detailed study of the structure of the Indian banking system: Commercial Banks (Public, Private, Foreign), Regional Rural Banks (RRBs), Cooperative Banks (State, Central/District, Primary), and Specialized Financial Institutions.
Expert Answer & Key Takeaways
Detailed study of the structure of the Indian banking system: Commercial Banks (Public, Private, Foreign), Regional Rural Banks (RRBs), Cooperative Banks (State, Central/District, Primary), and Specialized Financial Institutions.
1. Scheduled vs Non-Scheduled Banks
The Indian banking system is broadly regulated by the Reserve Bank of India.
Scheduled Banks:
These are banks that are listed in the Second Schedule of the RBI Act, 1934. To qualify for this schedule, a bank must possess a minimum paid-up capital of ₹5 lakh and satisfy the RBI that its affairs are not conducted in a manner detrimental to depositors.
Privileges: They are eligible for loans from the RBI at bank rate and have automatic membership of the clearinghouse.
Non-Scheduled Banks:
Banks not listed in the Second Schedule. They must maintain their Cash Reserve Ratio (CRR) with themselves, not with the RBI (though recent amendments have modified this), and they cannot borrow from the RBI for normal banking purposes, only in emergencies. Today, practically all commercial banks in India are Scheduled Banks.
2. Commercial Banks
Commercial banks operate on a profit motive. They accept deposits from the public and advance loans to businesses, agriculture, and individuals. They are categorized into:
A) Public Sector Banks (PSBs):
Banks where the Government of India holds the majority stake (more than 50%).
- Following the mega-mergers in 2019-2020, there are currently 12 PSBs in India.
- SBI is the largest PSB (and the largest bank in India overall). Other major PSBs include Punjab National Bank (PNB), Bank of Baroda (BoB), and Canara Bank.
B) Private Sector Banks:
Majority of share capital is held by private individuals and corporations.
- Old Private Banks: Existed before the 1991 reforms (e.g., Federal Bank, South Indian Bank, Karur Vysya Bank).
- New Private Banks: Granted licenses post-1993 reforms (e.g., HDFC Bank, ICICI Bank, Axis Bank). HDFC is currently the largest private bank by market capitalization and assets.
C) Foreign Banks:
Banks incorporated outside India but operating branches in India (e.g., Standard Chartered, Citibank, HSBC). They operate either through branch presence or as Wholly Owned Subsidiaries (WOS).
3. Regional Rural Banks (RRBs)
RRBs were established in 1975 under the RRB Act, 1976 on the recommendation of the M. Narasimham Working Group. Their primary objective is to provide credit and other banking facilities to small/marginal farmers, agricultural laborers, artisans, and small entrepreneurs in rural areas.
Key Features:
- Prathama Bank, sponsored by Syndicate Bank in Moradabad (UP), was the first RRB (established on Oct 2, 1975).
- Ownership Structure (Fixed ratio):
- Central Government: 50%
- State Government: 15%
- Sponsor Bank (a PSB): 35%
- Regulation and Supervision: Regulated by RBI, but supervised by NABARD (National Bank for Agriculture and Rural Development).
- Priority Sector Lending (PSL): RRBs have a very high PSL target of 75% of their total outstanding advances (compared to 40% for normal commercial banks).
4. Cooperative Banks
Cooperative banks are financial entities established on a cooperative basis and belonging to their members. This means that the customers of a cooperative bank are also its owners. They operate on the principle of "No Profit, No Loss".
Dual Control:
Traditionally, cooperative banks face dual regulation:
- Administrative and managerial functions: Registrar of Cooperative Societies (State or Central government).
- Banking functions (licensing, capital requirements): Reserve Bank of India under Banking Regulation Act.
Structure of Rural Cooperative Credit:
It has a 3-tier structure:
- State Cooperative Bank (StCB): The apex level at the state.
- District Central Cooperative Bank (DCCB): At the intermediate/district level.
- Primary Agricultural Credit Societies (PACS): At the village/grassroots level. (PACS are directly not regulated by RBI as they do not possess a banking license).
Urban Cooperative Banks (UCBs):
Operate in urban and semi-urban areas. Based on deposits, they are classified into Tier-I, II, III, and IV (following recent RBI revised regulatory frameworks) to subject larger UCBs to stricter regulation.
5. Differentiated Banks (Niche Banks)
Introduced by RBI in 2015 to further financial inclusion.
A) Payment Banks:
Target unbanked and under-banked individuals, migrant labourers, and small businesses.
- What they CAN do: Accept demand deposits (Savings & Current accounts) up to a maximum balance of ₹2,00,000 per customer. Issue Debit cards. Offer internet banking and remittances.
- What they CANNOT do: They cannot issue credit cards and cannot advance loans. They cannot accept NRI deposits.
- Examples: Airtel Payments Bank (India's first), India Post Payments Bank, Paytm Payments Bank, Fino.
B) Small Finance Banks (SFBs):
Target small business units, micro and small industries, and unorganized sector entities.
- What they CAN do: Perform all basic banking activities including accepting all types of deposits and giving loans.
- Restrictions: 75% of their loans must go to the Priority Sector. At least 50% of their loan portfolio must constitute loans and advances of up to ₹25 lakh.
- Examples: Capital SFB (India's first), Equitas SFB, Ujjivan SFB, AU SFB.
6. All India Financial Institutions (AIFIs)
These are specialized institutions set up by the government/RBI to meet the specific long-term financing needs of distinct sectors. There are currently five AIFIs regulated by RBI:
- NABARD (National Bank for Agriculture and Rural Development) - 1982: Refinances agriculture and rural development. Superintends RRBs and cooperative banks.
- SIDBI (Small Industries Development Bank of India) - 1990: Principal financial institution for MSME sector. Headquartered in Lucknow.
- EXIM Bank (Export-Import Bank of India) - 1982: Finances, facilitates, and promotes India's international trade.
- NHB (National Housing Bank) - 1988: Refinance agency for affordable housing finance companies.
- NaBFID (National Bank for Financing Infrastructure and Development) - 2021: The newest AIFI, established as a Development Financial Institution (DFI) to support long-term infrastructure financing.
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