Commercial Banks, Meaning, Types, Examples, Functions

Commercial Banks form the backbone of India’s financial system and are the cornerstone of economic growth and stability. As important financial institutions, they mobilize savings from individuals and institutions and channel these funds toward productive investments in the economy. Their influence extends across every sector like agriculture, industry, trade, infrastructure, and services, making them indispensable to India’s development story. In this article we are going to cover about Commercial Banks, its nature, structure, types and importance of commercial banks in India while examining their regulatory framework, roles and contribution to financial inclusion and national growth.

Commercial Banks

Commercial Banks are financial institutions that accept deposits from the public, provide loans, and offer various financial services to generate profit. Unlike cooperative or development banks that have specific social or developmental objectives, commercial banks operate on a commercial basis, meaning their primary goal is to earn profits while maintaining financial stability and public trust.

They are governed by the Banking Regulation Act, 1949, and regulated by the Reserve Bank of India (RBI), which supervises their operations, ensures compliance with prudential norms, and safeguards the interests of depositors. In essence, commercial banks are intermediaries that bridge the gap between savers and borrowers mobilizing idle savings into productive use.

Read About: Difference between Scheduled and Non Scheduled Banks

Commercial Banks Structure in India

The structure of commercial banking in India is classified into two major categories:

1. Scheduled Commercial Banks (SCBs)
2. Non-Scheduled Commercial Banks (NSCBs)

This classification is based on their inclusion or exclusion from the Second Schedule of the Reserve Bank of India Act, 1934.

1. Scheduled Commercial Banks (SCBs)

Scheduled Commercial Banks are those banks that are listed in the Second Schedule of the RBI Act, 1934. To qualify as an SCB, a bank must:

• Have a paid-up capital and reserves of at least ₹5 lakh, and
• Make sure that its operations do not harm the interests of depositors.

These banks are eligible for various facilities from the RBI, such as borrowing funds and participating in the clearinghouse system. They also have to maintain a Cash Reserve Ratio (CRR) with the RBI and submit periodic reports as part of regulatory compliance.

The majority of commercial banks in India fall under this category.

2. Non-Scheduled Commercial Banks (NSCBs)

Non-Scheduled Commercial Banks are those that are not listed in the Second Schedule of the RBI Act, 1934. These banks do not meet the eligibility criteria required for inclusion in the schedule.

Unlike SCBs, NSCBs maintain their CRR independently rather than with the RBI, and they are generally smaller in size with limited operational reach. They are not entitled to borrow funds from the RBI except under exceptional circumstances.

At present, India does not have any significant NSCBs operating independently; over time, most have either merged with larger scheduled banks or ceased operations.

Read About: Indian Banks Association

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Difference between Scheduled and Non-Scheduled Commercial Banks 

Here are the differences between Scheduled and Non- Scheduled Commercial Banks:

Scheduled Commercial Banks (SCBs) Types

India’s Scheduled Commercial Banks are further classified into four categories based on ownership and operational scope:

1. Public Sector Banks (PSBs)
2. Private Sector Banks
3. Foreign Banks
4. Regional Rural Banks (RRBs)

1. Public Sector Banks (PSBs)

Public Sector Banks, also known as Nationalised Banks, are those in which the Government of India holds more than 50% ownership. These banks were established through successive phases of bank nationalisation in 1969 and 1980, aimed at promoting financial inclusion and rural credit.

PSBs form the backbone of India’s banking system, commanding the largest market share in deposits and advances. They play a crucial role in implementing government welfare schemes and reaching underserved areas.

Major Public Sector Banks include:

• State Bank of India (SBI)
• Punjab National Bank (PNB)
• Bank of Baroda (BoB)
• Canara Bank
• Union Bank of India (UBI)
• Indian Bank
• Bank of India
• Indian Overseas Bank (IOB)
• UCO Bank
• Central Bank of India
• Bank of Maharashtra
• Punjab & Sind Bank
  

Note:

• Oriental Bank of Commerce and United Bank of India merged with PNB.
• Dena Bank and Vijaya Bank merged with Bank of Baroda.

2. Private Sector Banks

Private Sector Banks are those in which private shareholders hold more than 51% of the capital. These banks are profit-driven and are known for innovation, technology adoption, and customer-centric services.

They are classified into:

• Old Private Sector Banks: Established before the 1991 reforms and were not nationalised due to their regional focus.
  Examples: Catholic Syrian Bank, Karur Vysya Bank, City Union Bank.
• New Private Sector Banks: Established after 1991 as part of the financial liberalisation policy following the LPG (Liberalisation, Privatisation, and Globalisation) reforms.
  Examples: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank.

These banks brought competition, efficiency, and technological advancement to India’s financial landscape.

3. Foreign Banks

Foreign Banks are those that have their headquarters abroad but operate in India through branches or subsidiaries. They bring global best practices, international financial expertise, and foreign capital to India’s economy.

Examples:

• Standard Chartered Bank
• Citi Bank
• HSBC
• Deutsche Bank
• BNP Paribas

Foreign banks are regulated by the RBI and must comply with both domestic and international financial regulations. They are often active in corporate banking, investment banking, and foreign exchange operations.

Read About: Differentiated Banks

4. Regional Rural Banks (RRBs)

Regional Rural Banks were established in 1975, following the recommendations of the Narasimham Working Group, to address the credit needs of the rural poor. They were formally constituted under the Regional Rural Banks Act, 1976.

RRBs have a unique ownership structure shared among:

• Central Government – 50%
• State Government- 15%
• Sponsor Bank- 35%

They aim to provide credit and banking facilities to small and marginal farmers, artisans, and rural entrepreneurs, thereby promoting rural development and reducing regional disparities.

Examples:

• Andhra Pradesh Grameena Vikas Bank
• Uttarakhand Gramin Bank
• Prathama Bank
• Paschim Banga Gramin Bank

RRBs are supervised by NABARD and regulated by the RBI. They are mandated to provide at least 75% of their total credit as priority sector lending, ensuring that rural development remains their central focus.

Commercial Banks Importance and Role in India

Commercial Banks play a multi-dimensional role in supporting the economy. Their importance extends beyond financial intermediation to include developmental, social, and technological contributions.

1. Mobilisation of Savings: Banks mobilize idle household savings into productive investments. By offering safe and interest-bearing deposit accounts, they encourage savings and channel funds into economic development projects.
2. Providing Loans and Advances: Commercial Banks provide short-term, medium-term, and long-term loans to individuals, industries, agriculture, and services sectors. This credit provision stimulates business activity, production, and employment.
3. Promoting Entrepreneurship: Through the provision of credit, project financing, and advisory services, banks promote entrepreneurship and support the growth of micro, small, and medium enterprises (MSMEs).
4. Financial Intermediation: Banks act as intermediaries between savers and borrowers, ensuring that resources flow efficiently within the economy. This financial intermediation improve capital formation and economic growth.
5. Employment Generation: By financing industries, agriculture, and services, banks contribute indirectly to large-scale employment generation. The banking sector itself is also a major employer.
6. Implementation of Government Schemes: Commercial Banks are instrumental in implementing flagship government schemes like PM-KISAN, Pradhan Mantri Mudra Yojana, Jan Dhan Yojana, and Stand-Up India, aimed at financial inclusion and poverty alleviation.
7. Digital Transformation: With the advent of digital banking, UPI, internet banking, and mobile wallets, commercial banks have revolutionized financial services in India, promoting transparency, accessibility, and convenience.
8. Rural Development: Through Regional Rural Banks and priority sector lending, commercial banks play a vital role in strengthening India’s rural economy by providing credit for agriculture, irrigation, and rural infrastructure.
9. Financial Inclusion: Commercial Banks, with their extensive branch networks, have made formal financial services accessible to millions, particularly in rural and remote regions, thereby narrowing the gap between the formal and informal financial sectors.

Commercial Banks Challenges

Despite their achievements, commercial banks face several challenges in India:

• Rising Non-Performing Assets (NPAs) affecting profitability and capital adequacy.
• Growing competition from FinTech firms and digital payment platforms.
• Need for stronger cybersecurity infrastructure due to increased digital transactions.
• Inefficiency in some PSBs due to bureaucratic procedures.
• Balancing profitability with social obligations such as priority sector lending.

Addressing these challenges requires structural reforms, technological upgrades, and a renewed focus on risk management and efficiency.

Read About: Privatisation of Public Sector Banks

Commercial Banks UPSC 

Commercial Banks are not just financial intermediaries but the lifeline of India’s economic architecture. By mobilizing savings, financing development, and promoting inclusion, they act as the primary catalyst for growth.

From the dominance of Public Sector Banks in the post-independence era to the rise of technologically advanced Private Banks and globally connected Foreign Banks, the evolution of India’s commercial banking sector reflects the nation’s economic journey itself.

As India moves toward becoming a $5 trillion economy, the role of commercial banks will continue to expand, bridging financial gaps, supporting innovation, and empowering every section of society through inclusive and sustainable banking.