Introduction
The Indian banking sector is a diverse and multi-tiered structure comprising various types of banks with different ownerships, purposes, and regulatory oversight. These institutions together ensure financial inclusion, capital mobilization, economic stability, and sector-specific development.
They are governed primarily by:
- Banking Regulation Act, 1949
- Reserve Bank of India Act, 1934
- Companies Act, 2013
- Other sector-specific legislations like Rural Banking Acts, Cooperative Societies Act, etc.
Classification of Banks in India
Banks can be broadly classified into the following categories:
A. Based on Ownership
1. Public Sector Banks (PSBs)
- Majority shareholding (more than 50%) with the Government of India.
- Examples: State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda.
- Key Characteristics:
- Accountable to Parliament
- Often used for implementing government schemes
2. Private Sector Banks
- Majority shareholding held by private individuals/institutions.
- Examples: HDFC Bank, ICICI Bank, Axis Bank.
- Efficient and technologically advanced
- Subject to RBI regulations
3. Foreign Banks
- Incorporated outside India but operating in India through branches or subsidiaries.
- Examples: HSBC, CitiBank, Standard Chartered.
- Regulated by RBI and home-country regulations
- Limited outreach but offer specialized financial services
B. Based on Functionality
1. Commercial Banks
- Provide general banking services like deposits, loans, and remittances.
- Can be public or private sector.
- Governed by the Banking Regulation Act, 1949
2. Cooperative Banks
- Registered under the Cooperative Societies Act and partly governed by BR Act (since 2020 Amendment).
- Owned and operated by members for mutual benefit.
- Urban and rural types.
- Examples: Saraswat Bank, Gujarat State Cooperative Bank
3. Regional Rural Banks (RRBs)
- Set up under the RRB Act, 1976
- Jointly owned by the Central Government, State Government, and Sponsor Bank.
- Focused on rural lending and agricultural finance.
- Example: Prathama UP Gramin Bank
4. Development Banks
- Provide long-term finance for industrial and infrastructure projects.
- Do not accept public deposits.
- Examples:
- SIDBI (Small Industries Development Bank of India)
- NABARD (National Bank for Agriculture and Rural Development)
- EXIM Bank
C. Based on Niche Services
1. Small Finance Banks (SFBs)
- Target the unserved and underserved sections.
- Regulated by RBI under BR Act.
- Must open 25% of branches in unbanked rural areas.
- Example: AU Small Finance Bank, Equitas
2. Payments Banks
- Can accept deposits (up to ₹2 lakh per customer) but cannot lend.
- Focused on financial inclusion, mobile banking, and small payments.
- Examples: Paytm Payments Bank, India Post Payments Bank
3. Universal Banks
- Offer a wide range of financial services: retail, corporate, investment, insurance.
- E.g., ICICI Bank, HDFC Bank
4. Differentiated Banks
- A broader category that includes SFBs and Payments Banks.
- Serve specific customer needs rather than offering all-in-one services.
Legal and Regulatory Bodies
- Reserve Bank of India (RBI): Regulatory authority for all scheduled banks
- NABARD: Regulates regional rural and cooperative banks
- Ministry of Finance: Policy oversight for PSBs
- Registrar of Cooperative Societies: Supervises cooperative banks at the state level
Recent Developments
- RBI’s Revised Licensing Framework (2021): Merged norms for universal and small finance banks
- Privatisation Push: Government aims to privatize certain PSBs
- Digital-first banks (Neobanks): Emerging fintech-based institutions, though not officially licensed yet
- Increased RBI Oversight: Post PMC Bank failure, RBI has greater powers over cooperative banks
Mind Map (Text Format)
Indian banks are classified by ownership (public, private, foreign), by function (commercial, cooperative, RRBs), and by services (SFBs, Payments Banks). Key regulators include RBI, NABARD, and the Ministry of Finance. Recent reforms promote privatisation, fintech integration, and rural financial inclusion. Specialised institutions like SIDBI and NABARD support long-term sectoral growth.
Situation-Based Questions
Q1. A rural entrepreneur needs a loan for dairy farming. Which bank is most suitable?
A1. A Regional Rural Bank or Cooperative Bank would be appropriate due to their rural lending focus and agricultural schemes.
Q2. Can a Payments Bank issue a home loan to a customer?
A2. No. Payments Banks are not permitted to lend under RBI regulations.
Q3. An MNC wants international trade finance in India. Which type of bank should it approach?
A3. A Foreign Bank or Commercial Bank with international operations like HSBC or ICICI Bank would be ideal.
Q4. A new startup wants to serve only gig workers with banking solutions. What type of license should it pursue?
A4. It should consider applying for a Small Finance Bank license or function under a fintech platform until RBI guidelines allow further innovation (e.g., neobanks).
Frequently Asked Questions (FAQs)
Q1. What is the difference between a Commercial Bank and a Cooperative Bank?
Commercial banks are profit-driven institutions regulated mainly by RBI, while cooperative banks are member-owned, socially driven institutions governed under the Cooperative Societies Act and RBI (post-2020).
Q2. Why were Small Finance Banks introduced?
To extend credit and banking services to micro-industries, small businesses, and the unbanked population, especially in rural and semi-urban areas.
Q3. Can Foreign Banks operate like Indian private banks?
Yes, but they face regulatory restrictions and are often limited to large cities or business-focused services.
Q4. What is the role of NABARD in banking?
NABARD supports rural and agricultural banking by refinancing rural lending institutions like RRBs and cooperative banks.
Q5. Are Neobanks legal in India?
Neobanks are not currently licensed as banks by RBI. They operate through partnerships with licensed banks and are subject to evolving regulatory frameworks.
