Department of Commerce

FIM-Financial Institutions & Markets

UNIT 4
COMMERCIAL BANKS IN INDIA
INTRODUCTION
Commercial banks in India form the backbone of the country's financial system, playing a crucial role in
supporting economic growth and development. These banks primarily focus on accepting deposits,
providing loans, and offering a wide range of financial services to individuals, businesses, and
governments. Commercial banks are regulated by the Reserve Bank of India (RBI), which ensures the
stability and efficiency of the banking system.
MEANING OF BANK
A bank is a financial institution that is licensed to accept deposits, provide loans, and offer a variety of
financial services. The primary functions of a bank include safeguarding money for individuals and
businesses, providing credit to support economic activities, and facilitating transactions like payments and
transfers.
MEANING OF COMMERCIAL BANKS
A commercial bank is a type of financial institution that provides a broad range of financial services to
individuals, businesses, and governments, primarily focusing on accepting deposits and offering loans.
The key role of a commercial bank is to act as an intermediary between savers and borrowers, facilitating
the flow of money in the economy.
STRUCTURE OF COMMERCIAL BANKS IN INDIA
 Department of Commerce
FIM-Financial Institutions & Markets

I SCHEDULED BANKS
in India are banks that are included in the Second Schedule of the Reserve Bank of India (RBI) Act,
1934. These banks must fulfill certain criteria laid down by the RBI, making them eligible for certain
privileges and facilities, such as access to loans and refinancing from the RBI, and the ability to maintain
accounts with the RBI.

Benefits of Being a Scheduled Bank:

● Access to RBI’s Financial Support: They can borrow money from the RBI at the bank rate.
● Government Transactions: They are eligible for conducting government-related banking
transactions.
● Liquidity Facilities: They have access to improved liquidity facilities, such as those provided by
the RBI during financial distress.
● Recognition and Stability: Being listed in the Second Schedule adds credibility and trust to the
bank's operations.

TYPES OF SCHEDULED BANKS

1. Public Sector Banks (PSBs):

● These banks are majority-owned by the Government of India.
● The government holds more than 50% stake, and they play a significant role in the Indian banking
sector.
● Examples: State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB).

Characteristics:

● They operate in both urban and rural areas.

● They have a broad customer base and provide a wide range of banking services.
2. Private Sector Banks:
● These banks are owned and controlled by private individuals or corporations, though they are
still regulated by the RBI.
● Examples: HDFC Bank, ICICI Bank, Axis Bank.
 Department of Commerce
FIM-Financial Institutions & Markets

Characteristics:

● They are known for their efficiency, technological innovation, and customer-centric approach.
● They focus more on urban markets but also have a presence in rural areas.
3. Foreign Banks:
● These are banks that are headquartered outside India but have branches or subsidiaries within
India.
● Examples: Citibank, HSBC, Standard Chartered.

Characteristics:

● They cater primarily to international clients, large corporations, and high-net-worth individuals.
● They operate under stringent RBI guidelines while offering global banking services.

II. NON-SCHEDULED BANKS

are banks in India that are not listed in the Second Schedule of the Reserve Bank of India (RBI) Act,
1934. These banks do not meet certain criteria set by the RBI to qualify as scheduled banks, and therefore,
they do not enjoy the privileges that scheduled banks

Privileges Not Available to Non-Scheduled Banks:

● They are not eligible for direct refinancing from the RBI in case of emergencies or liquidity
crises.
● They cannot participate in clearinghouses directly (they may have to route their transactions
through scheduled banks).
● They do not handle government transactions, such as managing government accounts, issuing
government bonds, or participating in auctions of government securities.
● They may not have access to some of the technological infrastructure and operational advantages
that scheduled banks enjoy.
 Department of Commerce
FIM-Financial Institutions & Markets

Differences Between Scheduled Banks and Non-Scheduled Banks

Criteria Scheduled Banks Non-Scheduled Banks

Inclusion in RBI Listed in the Second Schedule of the Not listed in the Second Schedule
Schedule RBI Act

Capital & Reserve Minimum ₹5 lakh No specific minimum required

Requirement

Access to RBI Facilities Eligible to borrow from the RBI Not eligible to borrow directly
from the RBI

CRR Maintenance Required to maintain CRR with the Not required to maintain CRR with
RBI the RBI

Scale of Operations Large, with nationwide or significant Smaller, usually localized or

regional regional
reach

Participation in Clearing Can directly participate in Must use scheduled banks for
clearinghouses clearing services

Government Eligible to conduct government Not eligible for handling

Transactions business government
transactions

TYPES OF BANKS IN INDIA

In India, commercial banks play a crucial role in the financial system by providing a variety of services
such as accepting deposits, offering loans, and facilitating trade. They can be broadly classified into
several categories based on their ownership, functions, and areas of operation.
 Department of Commerce
FIM-Financial Institutions & Markets

1. Public Sector Banks

Public sector banks are those in which the government holds a major stake (more than 50%). These banks
are considered more stable as they are backed by the government.

● Examples: State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda.
● Features:
○ They focus on providing services to both rural and urban populations.
○ Tend to be more conservative in lending and investment practices.
○ Offer a wide range of services, including savings accounts, personal loans, and
agricultural financing.

2. Private Sector Banks

Private sector banks are owned, controlled, and managed by private shareholders rather than the
government. The ownership stake by private individuals or corporations is higher than that of the
government.

● Examples: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank.
● Features:
○ More customer-centric and often more technologically advanced than public sector
banks.
○ Focus on profitability and business growth.
○ Offer a range of innovative products and services such as mobile banking, credit cards,
and insurance.

3. Foreign Banks

These are banks that are headquartered outside India but operate branches in the country. They are
governed by both the Reserve Bank of India (RBI) regulations and the regulations of their home
countries.

● Examples: Citibank, HSBC, Standard Chartered Bank.

● Features:
○ Often focus on high-net-worth individuals and large corporate clients.
 Department of Commerce
FIM-Financial Institutions & Markets

○ Provide specialized services like international trade financing, foreign exchange, and
offshore banking.
○ Have fewer branches compared to domestic banks but offer global banking services.

4. Regional Rural Banks (RRBs)

RRBs were established to serve rural areas with basic banking and financial services. They aim to develop
rural economies by supporting agriculture, small industries, and other sectors in rural regions.

● Examples: Prathama Bank, Karnataka Vikas Grameena Bank.

● Features:
○ These banks are sponsored by public sector banks but are regionally focused.
○ Their primary objective is financial inclusion and supporting small and marginal farmers,
artisans, and rural entrepreneurs.
○ Operate mainly in rural and semi-urban areas.

5. Cooperative Banks

Cooperative banks are financial entities established under the Cooperative Societies Act, and they operate
based on the principles of cooperative governance. They are primarily established to provide financial
assistance to small businesses, agriculture, and individual borrowers.

● Examples: Saraswat Bank, Cosmos Cooperative Bank.

● Features:
○ Owned and operated by members (depositors and borrowers), with decisions made
democratically.
○ Serve both urban and rural areas but with a strong focus on smaller-scale lending.
○ Often charge lower interest rates on loans compared to commercial banks.

6. Small Finance Banks (SFBs)

Small Finance Banks are niche banks aimed at serving smaller sections of society, especially small
businesses, marginal farmers, micro-enterprises, and unorganized sector entities.

● Examples: Ujjivan Small Finance Bank, AU Small Finance Bank.

 Department of Commerce
FIM-Financial Institutions & Markets

● Features:
○ Their primary purpose is to promote financial inclusion by providing banking services to
underserved and unbanked populations.
○ Provide basic banking services like deposits and loans, but their focus is on small-ticket
loans and financial products for low-income individuals and businesses.

7. Payments Banks

Payments banks are a new category of banks aimed at increasing financial inclusion by providing limited
banking services. They primarily focus on small savings accounts, payment and remittance services.

● Examples: Airtel Payments Bank, Paytm Payments Bank.

● Features:
○ They can accept deposits of up to ₹2 lakh per customer.
○ They cannot issue loans or credit cards.
○ Focus on low-income households, small businesses, and migrant laborers to encourage
digital transactions and cashless banking.

8. Development Banks

Development banks in India are financial institutions that provide long-term capital for the development
of industries, agriculture, and infrastructure. Although they are not considered "commercial banks" in the
traditional sense, they play an important role in India's banking system.

● Examples: National Bank for Agriculture and Rural Development (NABARD), Small Industries
Development Bank of India (SIDBI).
● Features:
○ Focus on long-term project financing rather than traditional commercial banking services.
○ Provide financial assistance for infrastructure development, industrial growth, and
agriculture.
 Department of Commerce
FIM-Financial Institutions & Markets

Summary of Key Types

Bank Type Ownership Primary Focus

Public Sector Banks Government-owned General banking, national development

Private Sector Banks Privately owned Profitability, customer-centric services

Foreign Banks International High-net-worth individuals, corporate

clients

Regional Rural Banks Government & Rural development, agriculture financing

(RRBs) Sponsored

Cooperative Banks Member-owned Small businesses, agriculture

Small Finance Banks (SFBs) Privately owned Financial inclusion, small loans

Payments Banks Privately owned Small savings accounts, payment services

Development Banks Government & Private Long-term infrastructure and industry

growth

FUNCTIONS OF COMMERCIAL BANKS IN INDIA

Commercial banks in India perform several critical functions that contribute to the stability and growth of
the economy. These functions can be broadly categorized into primary functions and secondary functions.

I. PRIMARY FUNCTIONS

1. Accepting Deposits

Commercial banks accept various types of deposits from individuals, businesses, and institutions. These
deposits are crucial for the banks to mobilize funds for lending and investment. The main types of
deposits include:
 Department of Commerce
FIM-Financial Institutions & Markets

● Savings Accounts: These accounts allow individuals to save money while earning interest. They
provide liquidity and are accessible on demand.
● Current Accounts: Designed for businesses, these accounts allow for frequent transactions and
do not typically earn interest. They are useful for managing daily cash flow.
● Fixed Deposits (FDs): Customers deposit a lump sum for a fixed term at a predetermined interest
rate. These accounts generally offer higher interest rates than savings accounts but restrict
withdrawals until maturity.

2. Providing Loans and Advances

One of the core functions of commercial banks is to provide loans to individuals, businesses, and
government entities. Banks assess the creditworthiness of borrowers before lending. The main types of
loans include:

● Personal Loans: Unsecured loans for personal use, such as for education, medical expenses, or
travel.
● Home Loans: Loans provided for purchasing, constructing, or renovating residential properties.
● Business Loans: Loans aimed at supporting business operations, such as working capital loans
and equipment financing.
● Agricultural Loans: Loans specifically designed to support farmers for purchasing seeds,
fertilizers, or equipment.

3. Credit Creation

Commercial banks have the ability to create credit through the process of lending. When a bank gives a
loan, it doesn’t simply lend out existing deposits; it creates new deposits in the process. This is known as
the credit creation process, which helps in increasing the money supply in the economy.

4. Facilitating Payments and Remittances

Commercial banks provide payment and remittance services, making it easier for individuals and
businesses to transfer money. This includes:

● Electronic Funds Transfer (EFT): Services like NEFT, RTGS, and IMPS facilitate quick
electronic transfers.
 Department of Commerce
FIM-Financial Institutions & Markets

● Cheque Clearing: Banks handle the clearing of cheques between different banks, ensuring that
payments are settled efficiently.
● Mobile and Internet Banking: These services allow customers to conduct transactions, pay bills,
and manage their accounts online.

5. Foreign Exchange Transactions

Commercial banks deal in foreign exchange, facilitating international trade and investments. They offer
services like:

● Currency Exchange: Banks provide facilities for exchanging domestic currency for foreign
currencies.
● Foreign Currency Accounts: Banks allow customers to hold accounts in foreign currencies.
● International Trade Services: Banks assist in issuing letters of credit and handling
export-import transactions.

6. Agency Functions

Commercial banks act as agents for their customers, performing various functions such as:

● Collecting Deposits: Banks collect savings from individuals and businesses, serving as
custodians of these funds.
● Collecting Cheques: They facilitate the collection of cheques and other negotiable instruments
on behalf of customers.
● Representing Customers: Banks may represent their customers in transactions, such as
purchasing and selling securities or commodities.

7. Investment in Government Securities

Commercial banks invest in government securities as part of their asset management strategy. This serves
multiple purposes:

● Safety: Government securities are considered low-risk investments.

● Liquidity: They can be easily sold in the market if banks need to meet withdrawal demands.
 Department of Commerce
FIM-Financial Institutions & Markets

● Regulatory Compliance: Banks are required to maintain a certain percentage of their assets in
government securities to comply with regulations.

secondary functions
which can be classified into two main categories: General Utility Functions and Agency Functions.

General Utility Functions

General utility functions refer to the additional services that commercial banks provide to enhance
customer convenience and support economic activities. These functions include:

1. Safety Vaults and Safe Deposit Boxes:

○ Banks offer secure storage facilities for valuables, important documents, and jewelry
through safe deposit boxes. Customers pay a fee for this service, which ensures the safety
of their possessions.
2. Banker to the Government:
○ Commercial banks act as bankers to the central and state governments, managing their
accounts and handling government transactions, such as revenue collections, payments,
and public sector loans.
3. Credit Rating and Advisory Services:
○ Many banks provide credit rating services to assess the creditworthiness of individuals
and businesses. They also offer advisory services on investments, mergers, and
acquisitions.
4. Insurance Services:
○ Some commercial banks offer insurance products, including life insurance, health
insurance, and general insurance, either directly or through tie-ups with insurance
companies. This allows customers to access financial protection alongside their banking
services.
5. Mutual Fund Services:
○ Banks facilitate investments in mutual funds, allowing customers to invest in a diversified
portfolio of assets. They provide information, advice, and transaction services for mutual
fund investments.
6. Foreign Exchange Services:
 Department of Commerce
FIM-Financial Institutions & Markets

○ Commercial banks offer foreign exchange services for travel, trade, and investment. This
includes currency exchange, remittances, and international money transfers.
7. Payment and Settlement Services:
○ Banks provide various payment systems, such as credit and debit cards, mobile payments,
and electronic fund transfers, facilitating smooth financial transactions for customers.
8. Financial Literacy and Education:
○ Many banks engage in initiatives to promote financial literacy by organizing workshops
and seminars to educate customers about banking products, services, and financial
management.

Agency Functions

Agency functions refer to the various services that banks perform on behalf of their customers, acting as
intermediaries. These functions include:

1. Collection of Cheques and Bills:

○ Banks collect cheques, promissory notes, and bills of exchange on behalf of customers.
This involves presenting these instruments for payment and crediting the proceeds to the
customer's account.
2. Payment of Bills:
○ Banks can make payments on behalf of customers for utilities, loans, and other expenses.
They offer services like standing instructions for automatic bill payments.
3. Representation in Securities Transactions:
○ Banks act as agents for customers in buying and selling securities in the stock market.
They provide brokerage services and help customers manage their investment portfolios.
4. Real Estate Services:
○ Some banks offer services related to real estate transactions, including property valuation,
documentation, and financing.
5. Custodial Services:
○ Banks provide custodial services for safekeeping and administration of financial assets,
such as stocks, bonds, and other securities, on behalf of institutional investors.
6. Travel and Forex Services:
 Department of Commerce
FIM-Financial Institutions & Markets

○ Banks assist customers with travel arrangements, including issuing traveler's cheques and
providing foreign currency for travel purposes.
7. Providing Letters of Credit and Guarantees:
○ Banks issue letters of credit and guarantees for businesses engaging in international trade.
This helps facilitate transactions and provides assurance to sellers.
8. Facilitating Loans and Credit Facilities:
○ Banks help customers secure loans and credit facilities by acting as intermediaries
between borrowers and lenders.

ROLE OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT

1. Mobilization of Savings

Commercial banks encourage savings by offering various deposit products like savings accounts, fixed
deposits, and recurring deposit schemes. By mobilizing savings from individuals and businesses, banks
provide a pool of funds that can be used for investments.

2. Providing Credit

Banks are crucial in providing credit to various sectors, including agriculture, industry, and services. By
offering loans and advances, they enable businesses to expand, invest in infrastructure, and promote
entrepreneurship, leading to economic growth.

3. Supporting Small and Medium Enterprises (SMEs)

Commercial banks often provide tailored financial products for small and medium enterprises, facilitating
access to capital for these businesses. By supporting SMEs, banks help generate employment and foster
innovation, which contributes to economic development.

4. Facilitating International Trade

Commercial banks support international trade by providing services such as letters of credit, foreign
exchange transactions, and trade finance. This enables businesses to engage in export and import
activities, boosting economic growth.
 Department of Commerce
FIM-Financial Institutions & Markets

5. Financial Inclusion

Banks play a critical role in promoting financial inclusion by extending banking services to underserved
and unbanked populations, including rural areas. By providing access to credit, savings, and insurance,
banks help improve the financial well-being of these communities.

6. Investment in Infrastructure

Commercial banks often finance infrastructure projects such as roads, bridges, and power plants, which
are essential for economic development. By supporting infrastructure investment, banks help enhance
productivity and connectivity in the economy.

7. Promoting Entrepreneurship

Banks provide not only financial support but also advisory services for entrepreneurs, helping them start
and grow their businesses. By fostering entrepreneurship, banks contribute to innovation, job creation,
and economic diversification.

8. Enhancing Payment Systems

Commercial banks facilitate efficient payment systems, including electronic fund transfers, mobile
banking, and payment gateways. By providing a reliable payment infrastructure, banks enhance the ease
of doing business and promote economic transactions.

9. Stabilizing the Economy

Banks play a role in stabilizing the economy by managing monetary policy and regulating the money
supply. By acting as intermediaries, banks help control inflation, manage liquidity, and provide stability in
financial markets.

10. Promoting Social Development

Many commercial banks engage in corporate social responsibility (CSR) initiatives, investing in
education, health care, and community development projects. By supporting social development, banks
contribute to the overall well-being and quality of life in society.
 Department of Commerce
FIM-Financial Institutions & Markets

Conclusion

In summary, commercial banks are essential players in the economic development of a country. Through
their various functions, they mobilize savings, provide credit, support entrepreneurship, and facilitate
trade, thereby fostering economic growth and improving living standards. Their role in promoting
financial inclusion and stability further underscores their significance in achieving sustainable economic
development.

RECENT TRENDS IN BANKING SYSTEM

1. Digital Transformation

The shift towards digital banking is one of the most significant trends. Banks are investing heavily in
technology to offer online and mobile banking services, allowing customers to perform transactions,
access account information, and apply for loans without visiting a branch.

2. Fintech Collaboration

Banks are increasingly partnering with fintech companies to enhance their service offerings. These
collaborations help banks leverage innovative technologies like AI, blockchain, and big data analytics to
improve customer experience and streamline operations.

3. Neo banking refers to a new wave of digital banking services that operate exclusively online, without
traditional physical branches. These banks provide a range of financial services primarily through mobile
apps and websites, offering a more streamlined, user-friendly experience compared to traditional banks.

3. Artificial Intelligence and Machine Learning

AI and machine learning are being used for various applications, including risk assessment, fraud
detection, and personalized customer service. Chatbots and virtual assistants are also becoming common
for customer support.
 Department of Commerce
FIM-Financial Institutions & Markets

4. Mobile/online Banking and Payments

The use of mobile banking apps has surged, enabling customers to make payments, transfer money, and
manage finances from their smartphones. Contactless payments and digital wallets are gaining popularity,
especially post-COVID-19.

5. Blockchain Technology

Banks are exploring blockchain for various purposes, including cross-border payments, trade finance, and
smart contracts. This technology enhances transparency, security, and efficiency in financial transactions.

6. Regulatory Changes

Recent changes in regulations, such as the implementation of the Basel III framework and various
compliance requirements, are affecting capital management and risk assessment in banks. Regulatory
bodies are also focusing on consumer protection and data privacy.

7. Sustainable and Green Banking/ESG

There is a growing emphasis on sustainability in banking. Banks are increasingly funding

environmentally friendly projects and adopting sustainable practices in their operations. Green loans and
sustainable investment products are gaining traction.

8. Open Banking

Open banking is becoming more prevalent, allowing third-party developers to build applications and
services around financial institutions. This trend promotes competition, enhances customer experience,
and leads to more personalized banking solutions.

9. Cybersecurity Focus

With the rise of digital banking, cybersecurity has become a top priority for banks. Financial institutions
are investing in advanced security measures to protect customer data and prevent cyberattacks.

10. Personalization of Services

 Department of Commerce
FIM-Financial Institutions & Markets

Banks are leveraging data analytics to provide personalized banking experiences. By analyzing customer
behavior and preferences, banks can offer tailored products and services, improving customer satisfaction
and loyalty.

11. Decentralized Finance (DeFi)

The rise of decentralized finance platforms is challenging traditional banking models. DeFi aims to
provide financial services through blockchain technology, enabling users to lend, borrow, and trade
without intermediaries.

12. Focus on Customer Experience

Banks are increasingly prioritizing customer experience by enhancing service delivery through
user-friendly interfaces, responsive customer service, and streamlined processes. Feedback mechanisms
and customer engagement initiatives are also on the rise.

Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptography for security. They operate on
decentralized networks based on blockchain technology, which is a distributed ledger that records all
transactions across a network of computers.

Conclusion

These trends reflect the dynamic nature of the banking sector as it adapts to technological advancements
and changing customer expectations. As banks embrace innovation and enhance their offerings, they play
a crucial role in shaping the future of financial services.

********************************************************************