flowchart TB
B[Banking System] --> SCB[Scheduled Commercial Banks]
B --> COB[Cooperative Banks]
SCB --> PSB[Public Sector Banks - 12]
SCB --> PR[Private Sector Banks]
SCB --> FB[Foreign Banks]
SCB --> RRB[Regional Rural Banks]
SCB --> SFB[Small Finance Banks]
SCB --> PB[Payments Banks]
COB --> UCB[Urban Cooperative]
COB --> SCRB[State / District / Primary Coop]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
61 Types of banks: Commercial banks; Regional Rural Banks (RRBs); Foreign banks; Cooperative banks
61.1 Concept of a Bank
A bank is a financial intermediary that accepts deposits from the public and uses them for lending and investment. The Banking Regulation Act 1949 (Section 5(b)) defines banking as “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”. The Indian banking system is multi-tiered: scheduled commercial banks (PSBs, private, foreign, RRBs, SFBs, payments banks), cooperative banks (urban and rural), and local-area banks. Together they serve different segments — large corporates, MSMEs, retail customers, farmers, and the unbanked rural population.
61.2 Scheduled vs Non-Scheduled Banks
A bank is scheduled when it is included in the Second Schedule of the RBI Act 1934. To qualify:
TipConditions for Scheduled Status
- Paid-up capital and reserves — minimum prescribed (currently ₹5 lakh; though RBI prescribes higher in practice).
- Bank should be a body corporate registered under Indian law.
- Affairs should be conducted in a manner not detrimental to depositors.
Scheduled banks enjoy access to RBI’s refinance and clearing facilities and must observe statutory reserves (CRR, SLR).
61.3 Major Types of Banks in India
61.3.1 Commercial Banks
TipCommercial Banks in India
- Public Sector Banks (PSBs) — Government holds majority equity. After consolidation: 12 PSBs (post-2020). State Bank of India (SBI) is the largest.
- Private Sector Banks — Old (Federal, J&K, Karur Vysya) and New (HDFC, ICICI, Axis, Kotak Mahindra).
- Foreign Banks — incorporated abroad; branches in India (Citi, Standard Chartered, HSBC, DBS).
61.3.2 Indian Bank Nationalisation
TipBank Nationalisation Milestones
- SBI nationalised 1955 — SBI Act; formed from Imperial Bank of India.
- First wave of nationalisation — 19 July 1969 — 14 banks (deposits > ₹50 cr) nationalised.
- Second wave — 15 April 1980 — 6 more banks nationalised (deposits > ₹200 cr).
- 2017-20 consolidation — many PSBs merged.
61.3.3 Regional Rural Banks (RRBs)
TipRRB Highlights
- Set up under RRB Act 1976 based on Narasimham Committee on RRBs (1975).
- First RRB — Prathama Bank (Moradabad, 2 October 1975).
- Shareholding: Central Government 50 %, Sponsor Bank 35 %, State Government 15 %.
- Purpose: provide credit to small farmers, agricultural labourers, artisans, rural small businesses.
- Regulated by RBI; supervised by NABARD.
- Consolidation — RRBs reduced from 196 (initial) to about 43 (after recent amalgamation).
61.3.4 Cooperative Banks
TipCooperative Banking Pyramid
- State Cooperative Bank (SCB) — Apex of the three-tier rural cooperative structure.
- District Central Cooperative Bank (DCCB).
- Primary Agricultural Credit Societies (PACS) — grassroots.
- Urban Cooperative Banks (UCBs) — for urban small businesses and middle classes.
- Dual control — RBI (banking) + State Registrar of Cooperatives (cooperative aspects).
- Post-PMC Bank crisis (2019), Banking Regulation (Amendment) Act 2020 brought UCBs fully under RBI banking regulation.
61.3.5 Small Finance Banks (SFBs)
TipSmall Finance Banks
- Set up — based on Nachiket Mor Committee (2014).
- First in-principle licences — September 2015 (10 banks).
- Examples: AU SFB, Equitas, Ujjivan, Jana, ESAF, Suryoday, Capital, Fincare, Utkarsh, Unity.
- Mandate: serve under-banked sections — MSME, micro, agriculture.
- 75 % priority-sector lending required; 50 % of loans to be < ₹25 lakh.
61.3.6 Payments Banks
TipPayments Banks
- Set up — based on Nachiket Mor Committee 2014.
- First in-principle licences — August 2015.
- Examples: Airtel, Paytm, India Post, FINO, Jio, NSDL.
- Mandate: small savings and remittances for migrant workers, low-income households, small businesses.
- Cannot lend; deposit cap ₹2 lakh per customer (raised from ₹1 lakh in 2021).
- May issue debit/ATM cards; cannot issue credit cards.
61.4 Functions of Commercial Banks
TipFunctions of Commercial Banks
| Category | Working content |
|---|---|
| Primary | Accept deposits (current, savings, fixed, recurring); Lend (cash credit, overdraft, loans, bill discounting) |
| Secondary — Agency | Bill collection, dividend / interest collection, payment of taxes, executor / trustee, remittance |
| Secondary — General Utility | Letters of credit, locker facility, traveller’s cheque, foreign exchange, underwriting, demat |
| Social / DBT | Aadhaar-linked DBT, Jan Dhan accounts, PSL targets |
| Modern | Internet, mobile, UPI, debit/credit cards, RTGS/NEFT/IMPS |
61.5 Credit Creation by Banks
Banks create credit through the money multiplier. If CRR = 10 %, ₹100 deposit can support a maximum of ₹100/0.10 = ₹1,000 of total deposits in the system.
\[\text{Money multiplier} = \frac{1}{CRR + SLR \text{ approx}} \quad (\text{simplified})\]
In practice, leakages (currency holdings, excess reserves) reduce the actual multiplier.
61.6 Indian Banking — Key Reforms and Events
TipMajor Events in Indian Banking
- 1935 — RBI established.
- 1949 — Banking Regulation Act.
- 1955 — Imperial Bank → State Bank of India.
- 1969 / 1980 — Bank nationalisation.
- 1991 — Liberalisation; Narasimham Committee I.
- 1994 — New private banks (UTI, ICICI, HDFC, Axis).
- 2014 — Nachiket Mor Committee → SFBs, Payments Banks.
- 2014 — Pradhan Mantri Jan Dhan Yojana — financial inclusion drive.
- 2016 — Demonetisation; IBC.
- 2019-20 — PSB consolidation (12 PSBs).
- 2020 — UCBs fully under RBI; Privatisation announced.
NoteDistractor warning
PYQ trap: First wave of nationalisation — 19 July 1969 (14 banks); second wave — 15 April 1980 (6 banks). Payments banks cannot lend and have ₹2 lakh deposit cap.
61.7 Practice Questions
Q 01DefinitionEasy
The Banking Regulation Act defines "banking" in:
View solution
Correct Option: A
**Sec 5(b)** of BR Act 1949.
Q 02NationalisationMedium
The first wave of bank nationalisation in India (14 banks) occurred on:
View solution
Correct Option: A
**19 July 1969** — 14 banks nationalised by Indira Gandhi government.
Q 03RRBMedium
Regional Rural Banks were established in:
View solution
Correct Option: B
**RRB Act 1976**; first RRB Prathama Bank — **2 Oct 1975**.
Q 04RRB ShareMedium
RRB shareholding structure is:
View solution
Correct Option: A
**50:35:15** — Central : Sponsor Bank : State.
Q 05SFBMedium
Small Finance Banks and Payments Banks were recommended by:
View solution
Correct Option: B
**Nachiket Mor 2014** — Committee on Comprehensive Financial Services.
Q 06PB capMedium
Payments Banks' deposit cap per customer is:
View solution
Correct Option: C
**₹2 lakh** since 2021 (earlier ₹1 lakh).
Q 07PB lendMedium
Payments Banks in India:
View solution
Correct Option: B
**Payments banks cannot lend** — only deposit and payments services.
Q 08SchedMedium
A "scheduled" bank is one included in the:
View solution
Correct Option: A
**Second Schedule of RBI Act 1934**.
Q 09SBIMedium
SBI was created in 1955 from:
View solution
Correct Option: A
**Imperial Bank of India (1921) → SBI 1955** (SBI Act 1955).
Q 10PSB countMedium
After 2020 consolidation, the number of Public Sector Banks in India is:
View solution
Correct Option: C
**12 PSBs** post-consolidation.
Q 11CooperativeMedium
Urban Cooperative Banks were brought fully under RBI banking regulation through:
View solution
Correct Option: B
**BR (Amendment) Act 2020** — post PMC Bank crisis.
Q 12Coop pyramidMedium
The three tiers of the rural cooperative credit structure (top to bottom) are:
View solution
Correct Option: A
**SCB → DCCB → PACS**.
Q 13First RRBMedium
The first RRB in India was:
View solution
Correct Option: A
**Prathama Bank, Moradabad — 2 October 1975**.
Q 14PSL SFBHard
Small Finance Banks must direct what % of credit to Priority Sector?
View solution
Correct Option: C
**75 %** PSL for SFBs (vs 40 % for SCBs).
Q 15RRB SupervisorMedium
RRBs are *supervised* by:
View solution
Correct Option: B
**NABARD** supervises RRBs (RBI regulates).
Q 16Money multiplierMedium
If CRR is 10 %, an initial deposit of ₹100 can support maximum credit creation of:
View solution
Correct Option: C
100 / 0.10 = **₹1,000** maximum (simplified).
Q 17Second waveMedium
Second wave of bank nationalisation (6 banks) was in:
View solution
Correct Option: B
**15 April 1980** — 6 banks.
Q 18First PBMedium
First Payments Bank to begin operations in India was:
View solution
Correct Option: A
**Airtel Payments Bank** — operations in 2017.
Q 19Banking definitionEasy
Under BR Act 1949, banks must:
View solution
Correct Option: B
Defining feature — *deposits withdrawable by cheque/draft*.
Q 20MatchMedium
Match:
| Bank | Description | ||
| (i) | Payments Bank | (a) | 75 % PSL; max ₹25 lakh loan |
| (ii) | Small Finance Bank | (b) | Deposit cap ₹2 lakh; cannot lend |
| (iii) | RRB | (c) | 50/35/15 shareholding |
| (iv) | PSB | (d) | Government majority equity |
View solution
Correct Option: A
PB — no lending; SFB — 75 % PSL; RRB — 50/35/15; PSB — Govt majority.
61.8 Quick Recall
ImportantQuick recall
- Banking defined under BR Act 1949 Sec 5(b).
- Scheduled banks — Second Schedule of RBI Act 1934.
- Types: PSBs (12 post-2020), Private (HDFC, ICICI, Axis), Foreign, RRBs (1976; 50/35/15), SFBs (2015), Payments Banks (2015), Cooperative (SCB → DCCB → PACS; UCBs).
- Nationalisation: SBI 1955; 19 July 1969 (14); 15 April 1980 (6).
- First RRB: Prathama Bank, Moradabad (2 Oct 1975); RRBs supervised by NABARD.
- Nachiket Mor Committee 2014 → SFBs and Payments Banks.
- SFBs — 75 % PSL; loans ≤ ₹25 lakh.
- PBs — cannot lend; deposit cap ₹2 lakh (since 2021); first Airtel PB.
- BR (Amendment) Act 2020 — UCBs fully under RBI.
- Money multiplier = 1/CRR (simplified).