How Banking System works in India?

indian banking system

The banking industry is an important part of the economic sector of any nation which handles all financial services needed by any individual or corporate banks are the institutional bodies that accept deposits from those who have disposable money with them and provide this money to those who need it by way of granting looms. Apart from this primary function, the bank also provides other armillary services according to the specific requirements of the financial sector. In developing economy like India, banks are kept under the strict control of govt. through Reserve Bank of India and ministry of finance. They are the apex bodies who regulate and monitor the functioning of the Indian Banking sector.

Structure and classification of banks in India

Primary banks are classified into scheduled bank and non-scheduled banks. Scheduled Banks are further classified into commercial and cooperative banks, Further commercial banks are divided into the public sector, private sector, foreign banks, and Regional Rural Bank categories. The cooperative banks are further categorized as urban and rural. Recently a new category of payment bank is also added to the banking system in India.

Scheduled Bank

Scheduled banks are covered under the 2nd schedule of RBI act 1934. A scheduled bank has a capital of 5.00 lacs EURO and above.

These banks are eligible to take loans from RBI at bank rate which is also called “Repo-rate”. On the other hand, the rate at which RBI accepts deposits from Scheduled Bank is called “Reserve Repo-Rate”

Commercial Bank
Commercial Banks are regulated under banking regulation act 1949. Their basic model is based on to make a profit from their primary banking operation. This primary function involves accepting deposits and grant loans to the general public, corporate and government.


Public Sector Bank – These are part of the commercial banks. These are also known as a nationalized bank as the majority or working capital is provided by the government. The public sector banks account for more than 75% of the total banking business in the country. The State Bank of India is the largest public sector bank in India and after the merger of 5 of its associated banks with it. It stands among the top 50 banks in the world. At present, there are 19 public sector banks functioning in India after the merger of Dena Bank and Vijaya Bank in Bank of Baroda in March 2019.

Private Sector Banks – These include banks in which major stake or equity is held by the private sector as shareholders. However, the Reserve Bank of India keeps the overall control on these banks also in respect of their operations and basic rules and regulations. There are around more than 20 major private sector banks working in India.

Foreign Bank – A foreign bank is one that has its headquarter in a foreign country but operates in India as a private entity. These banks are also required to follow the basic guidelines of the ministry of finance, Govt. of India along with the rules and regulations of their home country. CITI Bank, Standard Charted Bank, and HSBC are some of the leading foreign bank having their operation in India.

Regional Rural Bank – These are also part of a scheduled commercial bank but they are established with the main objective of providing credit to the weaker section of society with a rural background like farmers, agricultural labors, marginal farmers and small indirect agricultural enterprises. They usually operate at regional rural levels in different states of India and also may have branches in the select Urban area also. The working capital of RRB’s is shared by State Govt., Central Govt. and the sponsor bank which it’s generally a nationalized bank designated by the Reserve Bank of India under the guidelines of Ministry of Finance. The important function carried out by RRB’s includes.

  1. Providing banking and financial services to rural and semi-urban areas.
  2. Government operations like payment under MANREGA scheme workers in notified areas.
  3. Para Banking facilities like debit cards, credit cards, and locker facilities.

Small Finance Banks – This is a related new banking segment in the country. It is aimed to provide financial assistance and functional inclusion to the section of society that is not served by other Banks. The main segment of their customers includes micro industries, small and marginal farmers, unorganized small business entities and urban labor class. These are licensed under the Banking Regulation Act 1949 in section 22 and are governed under the RBI Act 1934 and FEMA (Foreign Exchange Management Act). At present, there are around 10 major small finance banks operatively in India financial sector.

Co-operative Banks – Co-operative banks are registered under the cooperative society Act 1912 and they are run by the elected public managing committee and other notified government representatives. They work on no-profit no loss basis and mainly serve small businesses, entrepreneurs, small industries and self-employed individuals in urban areas. In rural areas, they mainly finance agro-based activities like farming and live stocks.

Payment Banks – It is a new model of banking recently introduced in Indian Banking Industry by RBI. They are allowed to accept a restricted deposit which is limited to 1.00 lac Euro per customer. They offer other services like ATM debit cards, credit card and net banking and mobile banking.

Role of Indian Banking System in the Indian Economy – All the nationalized bank operating in India are under obligation to strictly follow the guidelines of RBI and Ministry of Finance. They are required to submit regular returns and disclosures in relation to the details of the operation. Their prime objective is not merely to earn profit but the social objectives of the nation by directing the necessary resources to the eligible and needy section of the society. Apart from this, a substantial part of their working capital is directly under to control of the govt. as a part of the security with them. So that the govt. can guarantee the safety of the money which the public gives or places with these banks.

Leave a Reply

Your email address will not be published. Required fields are marked *