flowchart TB B[Indian Banking System] --> CB[Commercial<br/>Banks] B --> CO[Cooperative<br/>Banks] B --> DB[Development<br/>Banks] CB --> PSU[Public Sector<br/>Banks] CB --> PVT[Private Sector<br/>Banks] CB --> FOR[Foreign Banks] CB --> RRB[Regional Rural<br/>Banks] CB --> SFB[Small Finance<br/>Banks] CB --> PB[Payments Banks] style B fill:#E8F0FE,stroke:#1A73E8 style CB fill:#FFF3E0,stroke:#EF6C00
60 Types of Banks
60.1 What is a Bank?
A bank is a financial institution that accepts deposits from the public, repayable on demand or otherwise, and lends or invests those funds (khan2022?; rbi2024?). Section 5(b) of the Banking Regulation Act, 1949 defines banking as “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”.
Three working characteristics:
- Acceptance of deposits.
- Lending or investment of those deposits.
- Repayable on demand or after notice; withdrawable by cheque or order.
60.2 Functions of Banks
TipFunctions of Banks
| Family | Functions |
|---|---|
| Primary | Accept deposits; advance loans; create credit |
| Secondary | Agency services (collection, payment, transfer of funds, e-banking, demat, investment advisory) |
| General utility | Issue letters of credit, lockers, traveller’s cheques, dealer in foreign exchange, underwriting |
| Social | Priority-sector lending, financial inclusion, government scheme implementation |
60.3 Classification of Banks in India
TipTwo Statutory Categories of Banks (Banking Regulation Act, 1949)
| Category | Working content |
|---|---|
| Scheduled banks | Listed in the Second Schedule of the RBI Act, 1934; meet specified capital and reserve criteria |
| Non-scheduled banks | Not in the Second Schedule; smaller, with limited regulatory privileges |
60.4 Commercial Banks
Commercial banks operate for profit and serve the general public.
TipSub-Types of Commercial Banks
| Sub-type | Working content | Examples |
|---|---|---|
| Public-sector banks (PSBs) | Government holds ≥ 51 % | SBI, PNB, BoB, Canara, Union, Indian, BoM, BoI, Central, Indian Overseas, UCO, Punjab & Sind |
| Private-sector banks | Privately owned | HDFC, ICICI, Axis, Kotak Mahindra, IndusInd, Yes, IDFC First, Federal, IDBI |
| Foreign banks | Headquartered abroad, branches in India | Citibank, HSBC, Standard Chartered, DBS, Deutsche, JPMorgan |
| Regional Rural Banks (RRBs) | Sponsored by GoI, State, sponsor commercial bank | NABARD oversight |
| Small Finance Banks (SFBs) | Niche micro-banking; granted licences from 2015 | AU SFB, Equitas, Ujjivan, Suryoday, ESAF |
| Payments Banks | Limited banking — deposits ≤ ₹2 lakh, no lending | Airtel Payments Bank, Paytm Payments Bank (suspended), India Post, Fino, Jio |
The State Bank of India is the largest Indian bank — successor to the Imperial Bank of India (1921), nationalised in 1955.
60.5 Bank Nationalisation in India
- 1955 — Imperial Bank converted to State Bank of India.
- 1959 — SBI’s seven subsidiaries created (since merged with SBI in 2017).
- 1969 — Nationalisation of 14 major banks with deposits ≥ ₹50 crore, by Indira Gandhi.
- 1980 — Six more banks nationalised (deposits ≥ ₹200 crore).
- 1991 onwards — Liberalisation; new private banks (HDFC, ICICI, Axis, etc.) licensed.
- 2017–20 — Mergers consolidated 27 PSBs into 12.
60.6 Cooperative Banks
Cooperative banks operate on the principles of cooperation — self-help, mutual aid.
TipStructure of Cooperative Banking
| Tier | Coverage | Regulator |
|---|---|---|
| Urban Cooperative Banks (UCBs) | Urban areas | RBI + Registrar of Cooperative Societies |
| State Cooperative Banks (StCBs) | State apex | RBI + NABARD |
| District Central Cooperative Banks (DCCBs) | District | NABARD + RBI |
| Primary Agricultural Cooperative Societies (PACS) | Village | State Govt; refinance from NABARD |
60.7 Development Banks
Development banks provide long-term capital and project finance in priority areas.
TipMajor Indian Development Banks
| Institution | Year | Purpose |
|---|---|---|
| NABARD — National Bank for Agriculture and Rural Development | 1982 | Agriculture and rural development |
| SIDBI — Small Industries Development Bank of India | 1990 | MSME finance |
| EXIM Bank — Export-Import Bank of India | 1982 | Foreign-trade finance |
| NHB — National Housing Bank | 1988 | Housing finance |
| NaBFID — National Bank for Financing Infrastructure and Development | 2021 | Long-term infrastructure finance |
| IFCI | 1948 | Industrial finance |
| ICICI — became a bank in 2002 | 1955 | Industrial credit |
| IDBI — became a bank in 2004 | 1964 | Industrial development |
60.8 Specialised Banks
TipSpecialised Banking Categories
| Type | Working content |
|---|---|
| Industrial banks | Long-term industrial finance |
| Land development banks | Long-term agricultural finance against land |
| Investment banks / Merchant banks | Capital raising, M&A advisory |
| Exchange banks | Foreign-exchange dealings (historical category) |
| Indigenous bankers | Traditional money-lenders, shroffs — outside formal banking |
60.9 Differentiated Banks — A Recent Innovation
The Nachiket Mor Committee (2013) recommended differentiated banking licences. RBI now issues:
TipDifferentiated Bank Licences
| Type | Working content |
|---|---|
| Small Finance Banks (SFBs) | Universal banking with focus on the unbanked; min 75 % of net credit to priority sector; min 50 % loan portfolio of small-ticket loans (≤ ₹25 lakh) |
| Payments Banks | Accept deposits up to ₹2 lakh per customer; no lending; can issue cards, payments, remittances |
| Local Area Banks | Confined to 3 contiguous districts (older category, few survive) |
60.10 Bank vs Non-Bank Financial Company (NBFC)
TipBank vs NBFC
| Dimension | Bank | NBFC |
|---|---|---|
| Demand deposits | Accepts | Cannot accept |
| Cheques / payments | Issues | Cannot issue |
| Lending | Yes | Yes |
| Reserve requirement (CRR / SLR) | Mandatory | Not applicable |
| Deposit insurance (DICGC) | Up to ₹5 lakh | No |
| Regulator | RBI | RBI (significant NBFCs) |
60.11 Exam-Pattern MCQs
NoteEight-question set
Q1. Section 5(b) of the Banking Regulation Act 1949 defines banking as accepting deposits for the purpose of:
A. Lending or investment B. Internal use only C. Charity D. Foreign exchange dealing only
Answer: A. The defining feature is acceptance of deposits for lending or investment.
Q2. Match each type of bank with its example:
| Type | Example | ||
|---|---|---|---|
| (i) | Public-sector bank | (a) | Airtel Payments Bank |
| (ii) | Private-sector bank | (b) | Punjab National Bank |
| (iii) | Small Finance Bank | (c) | HDFC Bank |
| (iv) | Payments Bank | (d) | AU Small Finance Bank |
A. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(c), (iv)-(b)
Answer: A.
Q3. Bank nationalisation in India in 1969 covered banks with deposits of at least:
A. ₹10 crore B. ₹50 crore C. ₹100 crore D. ₹200 crore
Answer: B. The first round of nationalisation (1969) covered 14 banks with deposits ≥ ₹50 crore.
Q4. Match each development bank with its purpose:
| Bank | Purpose | ||
|---|---|---|---|
| (i) | NABARD | (a) | MSME finance |
| (ii) | SIDBI | (b) | Foreign-trade finance |
| (iii) | EXIM Bank | (c) | Housing finance |
| (iv) | NHB | (d) | Agriculture and rural development |
A. (i)-(d), (ii)-(a), (iii)-(b), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(a), (iv)-(b) D. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
Answer: A.
Q5. Which of the following is not a permitted activity of a Payments Bank in India?
A. Accepting deposits up to ₹2 lakh per customer B. Issuing debit cards and remittance services C. Lending to individuals or businesses D. Distribution of mutual funds
Answer: C. Payments Banks cannot lend; they only accept deposits and provide payment services.
Q6. Match each cooperative-banking tier with its coverage:
| Tier | Coverage | ||
|---|---|---|---|
| (i) | StCBs | (a) | District |
| (ii) | DCCBs | (b) | Village |
| (iii) | PACS | (c) | State apex |
A. (i)-(c), (ii)-(a), (iii)-(b) B. (i)-(a), (ii)-(b), (iii)-(c) C. (i)-(b), (ii)-(c), (iii)-(a) D. (i)-(c), (ii)-(b), (iii)-(a)
Answer: A.
Q7. Arrange the following milestones in Indian banking in chronological order:
- First nationalisation
- Imperial Bank → State Bank
- Establishment of NABARD
- Differentiated bank licences (SFBs / PBs)
A. (ii), (i), (iii), (iv) B. (i), (ii), (iii), (iv) C. (iii), (iv), (ii), (i) D. (iv), (iii), (i), (ii)
Answer: A. SBI 1955 → Nationalisation 1969 → NABARD 1982 → Differentiated banks 2015.
Q8. Which of the following is not a feature distinguishing a bank from an NBFC?
A. Bank can accept demand deposits; NBFC cannot B. Bank can issue cheques; NBFC cannot C. Bank is subject to CRR / SLR; NBFC is not D. NBFCs have deposit insurance up to ₹5 lakh; banks do not
Answer: D. Banks enjoy DICGC deposit insurance up to ₹5 lakh; NBFCs do not.
ImportantQuick recall
- Banking (BR Act 1949 §5(b)): accepting deposits for lending or investment, repayable on demand, withdrawable by cheque.
- Functions: primary (deposits, loans, credit creation), secondary (agency, utility), social (priority lending, inclusion).
- Statutory categorisation: Scheduled (RBI Act, 2nd Schedule) vs Non-scheduled.
- Commercial bank sub-types: PSB, Private, Foreign, RRB, SFB (since 2015), Payments Bank.
- Bank nationalisation: 1969 (14 banks, ≥ ₹50 cr) and 1980 (6 banks, ≥ ₹200 cr).
- Cooperative tiers: StCB → DCCB → PACS; UCBs in urban areas.
- Development banks: NABARD, SIDBI, EXIM, NHB, NaBFID (2021), IFCI.
- Differentiated banks (Nachiket Mor 2013): SFBs, Payments Banks, LABs.
- Payments Banks: deposits ≤ ₹2 lakh per customer, no lending.
- Bank vs NBFC: NBFCs cannot accept demand deposits or issue cheques; no DICGC cover.
- DICGC deposit insurance: ₹5 lakh per depositor per bank (since 2020).