Structure of Banking System in India

Banking System in India

General Classification 

Indian banking system can be classified as:

1. Organized banking: Institutions that are controlled by Central Regulator like RBI, SEBI, IRDA comes under organized banking. Institutions under the purview of organized sector: Small Industries Development Bank of India National Bank for Agriculture and Rural Development, National Housing Bank, Export-Import Bank of India (EXIM Bank). Organized sector is classified into:
   • Banking institutions
   • Non-banking financial institutions.
2. Unorganised banking: Indigenous bankers are included in the unorganized sector. Indigenous bankers include individuals and banks that accept deposits or depend on credit to run their business. Short-term credit instruments are main purpose of unorgansied banking. They are the major sources of funds for small borrowers on account of simple documentation and funds are made available to the borrowers at any time during a day.

Structural Division of Banking System in India

1. Central Bank (Reserve Bank of India): Reserve Bank of India is the Central Bank of our country. It holds the apex position in the banking structure.

• It has given wide powers to supervise and control the banking structure.
• Reserve Bank of India (RBI) was established on 1st April 1935 under the RBI Act of 1934. It holds the apex position in the banking structure.
• RBI performs various developmental and promotional functions.
• It also regulates the credit and currency system in India

2. Commercial Banks: Commercial bank is an institution that accepts deposit, makes business loans and offer related services to various like accepting deposits and lending loans and advances to general customers and businessman. It is further divided into 3 subdivision: 

• Public Sector Banks: The public sector accounts for 75% of total banking business in India and State Bank of India is the largest commercial bank in terms of volume of all commercial banks. 
• Private Sector Banks: The private-sector banks in India represent part of the Indian banking sector that is made up of both private and public sector banks. The "private-sector banks" are banks where greater parts of stake or equity are held by the private shareholders and not by government. For ex – ICICI Bank, HDFC Bank, Axis Bank, etc. The minimum capital requirement for to set up Private Bank is Rs. 500 crore. At present, the aggregate foreign investment limit is 74 per cent.
• Foreign Banks: A foreign bank with the obligation of following the regulations of both its home and its host countries.

3. Regional Rural Bank (RRB): The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs. The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively.

4. Co-operative Bank: Co-operative bank was set up by passing a co-operative act in 1904. The main objective of co-operative bank is to provide rural credit.

5. Domestic Systemically Important Banks (DSIBs): The Reserve Bank of India released the list of Domestic Systemically Important Banks (D-SIBs) on 14th March 2019. As per the notification, SBI, ICICI Bank, and HDFC Bank continue to be identified as Domestic Systemically Important Banks (D-SIBs), under the same bucketing structure as last year. 

• These banks are identified by Central Bank of the country.
• DSIB need to fulfil with higher capital requirements
• They are known as 'Too Big to Fail'.

6. Small Finance Banks:

• Small Finance Banks are aimed to provide financial inclusion to sections of the society that are not served by other banks.
• The main customers of small finance banks include micro industries, small and marginal farmers, unorganized sector entities and small business units.
• These are licensed under Section 22 of the Banking Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934 and FEMA.
• Here is the list of Small Finance Banks in India:
  • Au Small Finance Bank Ltd.
  • Capital Small Finance Bank Ltd
  • Fincare Small Finance Bank Ltd.
  • Equitas Small Finance Bank Ltd
  • ESAF Small Finance Bank Ltd.
  • Suryoday Small Finance Bank Ltd.
  • Ujjivan Small Finance Bank Ltd.
  • Utkarsh Small Finance Bank Ltd.
  • North East Small finance Bank Ltd
  • Jana Small Finance Bank Ltd

7. Payments Bank

• It was conceptualised by the Reserve Bank of India and allowed to accept a restricted deposit.
• They also offer services like ATM cards, debit cards, net-banking and mobile-banking.
• Payment Banks operate on a smaller scale as compared to the commercial banks
• They cannot issue loans and credit cards.
• They can accept a restricted deposit, currently limited to ₹1,00,000 per customer at the end of the day
• 7 entities that have started their operation as Payment Banks are:
  • Airtel Payments Bank 
  • Paytm Payments Bank
  • India Post Payments Bank
  • Fino Payment Bank
  • Aditya Birla Idea Payments Bank
  • Jio Payments Banks
  • NSDL Payments Bank 

8. Co-operative Banks

• Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee.
• Work on no-profit no-loss basis and mainly serve entrepreneurs, small businesses, industries and self-employment in urban areas.

Classification of Banks based on the schedule of RBI Act 1934

All banks (Commercial Banks, RRB, Cooperative Banks) can be classified into scheduled and non-scheduled banks.

1. Scheduled Banks

• Eligible for obtaining loans from RB on Bank Rate.
• Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934.
• A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors.
• A bank should be a corporation rather than a sole-proprietorship or partnership firm

2. Non- Scheduled Banks

• Non-scheduled banks refer to the local area banks which are not listed in the Second Schedule of Reserve Bank of India.
• Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with them.

List of Public Sector Banks

After merger, there are currently 12 Public sector Banks in India.

List of Private Sector Banks