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Banking & Types of Banking
Points of discussion:
1) Introduction to Banking System in India
2) RBI & its functions
3) Schedule & Non-Schedule Banks
4) Commercial Banks
5) RRBs, LABs, Foreign Banks & Co-operative Banks
6) Specialised/Differentiated Banks: SFBs & Payments Banks
Introduction
The banking sector is the lifeline of any modern economy. It is one of the essential pillars of
the financial sector, which plays a vital role in the functioning of an economy. It is critical for
the economic development of a country that its financing requirements of trade, industry
and agriculture are met with a higher degree of commitment and responsibility. Thus, the
development of a country is integrally linked with the development of banking.
Banks are financial institutions which act as an intermediary between depositors and
borrowers.
Banking System in India
Reserve Bank of India (RBI)
• The Reserve Bank of India was established on April 1, 1935, in accordance with the
provisions of the Reserve Bank of India Act, 1934.
• The Central Office of the Reserve Bank was initially established in Kolkata but was
permanently moved to Mumbai in 1937.
• The Central Office is where the Governor sits and where policies are formulated.
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• Though formerly privately owned, since nationalisation in 1949, the Reserve Bank is
wholly owned by the Government of India.
• 1st RBI Governor- Sir Osborne Smith
• 1st Indian Governor of RBI- CD Deshmukh
• Present Governor of RBI- Shaktikanta Das
Functions of RBI
1. Monetary Policy and Market Operations
2. Regulation of Financial System- Commercial Banks, Co-operative Banks, Non-Banking
Financial Companies (NBFCs), Financial Markets
3. Currency Management
4. Banker to Banks and Government: Lender of last resort
5. Public Debt Management
6. Foreign Exchange (Forex) Management
7. Consumer Education and Protection
8. Financial Inclusion and Development
9. Research, Surveys and Reports Publication
Scheduled Banks
• Any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is
considered a scheduled bank.
• The list includes the State Bank of India and its subsidiaries (like State Bank of
Travancore), all nationalised banks (Bank of Baroda, Bank of India etc.), regional rural
banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative
banks.
• These also include private sector banks, both classified as old (Karur Vysya Bank) and
new (HDFC Bank Ltd).
• To qualify as a scheduled bank, the paid-up capital and collected funds of the bank
must not be less than Rs 5 lakh.
• Scheduled banks are eligible for loans from the Reserve Bank of India at bank rate
and are given membership to clearing house.
Non-Scheduled Banks
• Non-scheduled banks are those which are not listed in the 2nd schedule of the RBI
Act, 1934.
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• Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled
banks.
• Unlike scheduled banks, they are not entitled to borrow from the RBI for regular
banking purposes, except, in emergency or "abnormal circumstances."
• Jammu & Kashmir Bank is an example of a non-scheduled commercial bank.
Commercial Banks
• According to the RBI, "Commercial Banks refer to both scheduled and non-scheduled
commercial banks which are regulated under the Banking Regulation Act, 1949."
• Commercial banks operate on a 'for-profit' basis.
• They primarily engage in the acceptance of deposit and extend loans to the general
public, businesses and the government.
• Priority Sector Lending Norms- Minimum 40 per cent of Adjusted Net Bank Credit
Regional Rural Banks
• Regional Rural Banks (RRBs) were set up to develop the rural economy by providing
credit and other facilities, particularly to the small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs.
• The equity of the RRBs was contributed by the Central Government, concerned State
Government and the sponsor bank in the proportion of 50:15:35.
• The function of financial regulation over RRBs is exercised by Reserve Bank, and the
supervisory powers have been vested with NABARD.
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• Prominent examples include the Maharashtra Gramin Bank (sponsored by the Bank
of Maharashtra) and the Himachal Gramin Bank (sponsored by Punjab National
Bank).
Local Area Banks (LABs)
• Local Area Banks (LABs) were conceived as low-cost structures which would provide
efficient and competitive financial intermediation services in a limited area of
operation comprising three contiguous districts, primarily in the rural and semi-
urban areas.
• The Local Area Bank Scheme introduced in 1996 envisaged to bridge the gaps in
credit availability and strengthen the institutional credit framework in the rural and
semi-urban areas by mobilising rural savings by local institutions and making them
available for investments in the local areas.
• LABs are required to have a minimum capital of Rs. 5 crores.
Foreign Banks
• Foreign banks have been operating in India for more than a century and a half.
• Foreign banks are permitted to operate in India either as branches or Wholly Owned
Subsidiaries (WOS).
• India's commitment to WTO guides permission for the opening of branches by
foreign banks in India.
• Example-Bank of America, Citi Bank, HSBC
Co-operative Banks
• Co-operative banks operate in both urban and non-urban areas.
• All banks registered under the Cooperative Societies Act, 1912 are considered co-
operative banks.
• These are banks run by an elected managing committee with provisions of members'
rights and a set of "communally developed and approved bylaws and amendments."
• These are classified into Urban Co-operative Banks and Rural Co-operative Banks.
Specialised/Differentiated Banks
Based on Nachiket Mor Committee recommendations (2013-14), Small Finance Banks and
Payment Banks were approved as specialised banks to achieve financial inclusion, promote
competition and innovate new banking products.
Small Finance Banks (SFBs)
• Small finance banks are aimed towards financial inclusion by the provision of savings
vehicles, and supply of credit to small business units, small and marginal farmers,
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micro and small industries and other unorganised sector entities, through high
technology-low cost operations.
• Minimum Paid-up Equity Capital: Rs 200 crores (revised; previously Rs 100 crores)
• Eligible Promoter: Resident individuals/professionals with 10 years of experience in
banking and finance
• Small finance banks are subject to all prudential norms and regulations of RBI as
applicable to existing commercial banks, including the requirement of maintenance
of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• Small finance banks are required to extend 75 per cent of its Adjusted Net Bank
Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL)
by RBI.
• SFBs needs to open at least 25% of its banking outlets in unbanked rural centres.
• At least 50 per cent of its loan portfolio should constitute loans and advances of upto
Rs. 25 lakhs.
• These can issue both credit and debit cards.
• Examples: Ujjivan Small Finance Bank, Janalakshmi Small Finance Bank.
• Recently, RBI has released guidelines for on-tap licensing of small finance banks.
• An "on-tap" facility means that the RBI will accept applications and grant licences for
banks throughout the year.
Payments Banks
• 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.
• Minimum Paid-up Equity Capital: Rs 100 crore
• Payments banks will have to deposit the amount in the form of a Cash Reserve Ratio
(CRR) with RBI as other commercial banks do.
• Payments Banks will have to invest a minimum of 75% of its demand deposits in
government treasury/securities bills with maturity up to one year and hold a
maximum of 25 % in current and fixed deposits with other commercial banks for
operational purposes.
• Payments banks cannot accept deposits from the Non-Resident Indians (NRIs).
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Conclusion:
In this chapter, we learned about the classification of banking system in India, RBI & its
functions, Schedule & Non-Schedule Banks, Commercial Banks, RRBs, LABs, Foreign Banks &
Co-operative Banks, and Specialised/Differentiated Banks.
