Banking System in India, Types, Structure, Related Concepts

The Banking System in India forms the cornerstone of the country’s economic structure. It acts as the principal financial intermediary, channeling funds from savers to borrowers, facilitating capital formation, and ensuring the smooth flow of credit across all sectors of the economy. Beyond its traditional roles of accepting deposits and lending money, the Indian banking system also promotes financial inclusion, supports government policy implementation, and contributes to national development. Understanding the structure, classification, and working of India’s banking system is important for comprehending the broader Indian financial system. In this article, we are going to cover the Banking System in India, its components, regulatory framework, types of banks, and related concepts like Basel Norms, Development Banks, NBFCs and digital banking trends.

Banking System in India

The Banking System in India refers to the network of financial institutions that perform banking and allied functions. These institutions like the commercial banks, cooperative banks, and development banks handle deposits, provide loans, facilitate payments, and offer financial services to individuals, businesses, and governments.

Essentially, banks act as financial intermediaries, transferring surplus funds from households and institutions that save, to those that require funds for investment and consumption. This intermediation promotes productive use of money and stimulates economic activity.

The Indian banking sector not only supports private business and industry but also plays a crucial social role by implementing welfare-oriented schemes like Jan Dhan Yojana, MUDRA, and Priority Sector Lending, which ensure that credit reaches weaker sections of society.

Classification of Banks in India

Banks in India are classified into two main categories:

1. Scheduled Banks
2. Non-Scheduled Banks

This classification is based on their inclusion in the Second Schedule of the Reserve Bank of India Act, 1934

1. Scheduled Banks

Scheduled Banks are those institutions that appear in the Second Schedule of the RBI Act, 1934. Inclusion in the Schedule indicates that the bank fulfills certain conditions prescribed by the RBI and is therefore eligible for various facilities offered by it.

To qualify as a Scheduled Bank, an institution must:

• Have a paid-up capital and reserves of at least ₹5 lakh.
• Satisfy the RBI that its operations are not conducted in a manner detrimental to the interests of depositors. If a bank fails to maintain these standards, it can be de-listed from the Schedule.

Benefits of Being a Scheduled Bank

• Access to borrowings from the RBI at the Bank Rate.
• Membership of the Clearing House, enabling efficient settlement of interbank transactions.
• Eligibility to rediscount first-class exchange bills with the RBI.
• Enhanced public confidence, as inclusion in the Schedule signals stability and reliability.

2. Non-Scheduled Banks

Non-Scheduled Banks are institutions not listed in the Second Schedule of the RBI Act. They are usually small local banks that do not meet the RBI’s prescribed criteria. Though they function under the supervision of the RBI, they are subject to less stringent regulations.

These banks maintain their own cash reserves instead of depositing them with the RBI and usually operate on a smaller scale, focusing on local or regional needs.

‹ ›

Key Differences between Scheduled and Non-Scheduled Banks 

The Difference between Scheduled and Non-Scheduled Banks are:

Most banks operating in India today fall under the category of Scheduled Banks.

Banking System in India Structure

The structure of the Indian Banking System is multi-layered and includes various institutions catering to different needs ranging from large-scale commercial banks to rural cooperative societies. At the top of this structure is the Reserve Bank of India (RBI), which acts as the regulator and guardian of the entire system.

1. Reserve Bank of India (RBI)

Established in 1935, the Reserve Bank of India is the central bank and monetary authority of the country. It regulates and supervises the functioning of all banks and financial institutions in India.

Functions of RBI

• Formulation of monetary policy to ensure price stability and economic growth.
• Regulation and supervision of banking operations.
• Control of credit and liquidity in the economy.
• Issuance and management of currency.
• Acting as the banker to the government and banker’s bank.
• Maintaining financial stability and promoting economic development. The RBI thus acts as the apex institution of the banking hierarchy in India.

2. Commercial Banks

Commercial Banks are profit-oriented institutions that provide financial services to the general public, businesses, and government. They form the backbone of India’s banking network.

• Accept deposits and extend loans.
• Provide investment, insurance, and payment services.
• Operate on a profit motive while maintaining social obligations.
• Regulated by the Banking Regulation Act, 1949.

Types of Commercial Banks

1. Public Sector Banks: Majority owned by the government (e.g., SBI, Bank of Baroda).
2. Private Sector Banks: Owned by private entities (e.g., HDFC Bank, Axis Bank).
3. Foreign Banks: Branches of foreign institutions (e.g., Citi Bank, HSBC).
4. Regional Rural Banks (RRBs) : Established to serve rural credit needs (e.g., Prathama Bank).

Commercial banks play a major role in mobilizing savings, facilitating trade, and ensuring capital formation in the economy.

3. Cooperative Banks

Cooperative Banks operate on the principle of cooperation, self-help, and mutual benefit. Owned and managed by their members, these banks aim to provide affordable credit, particularly to rural and semi-urban populations.

Structure of Cooperative Banks: 

1. Primary Agricultural Credit Societies (PACS): Operate at the village level.
2. District Central Cooperative Banks (DCCBs):  Operate at the district level.
3. State Cooperative Banks (SCBs): Apex institutions at the state level.

Cooperative banks have been instrumental in promoting agricultural finance and rural development in India.

4. Development Banks

Development Banks, also known as Development Financial Institutions (DFIs) or Term-Lending Institutions (TLIs), provide long-term capital for industries and infrastructure projects.

Functions of Development Banks

• Provide long-term loans to industries and infrastructure projects.
• Promote entrepreneurship and industrialization.
• Fill gaps left by commercial banks in providing long-term finance.

Examples

• Industrial Finance Corporation of India (IFCI)
• Industrial Development Bank of India (IDBI)
• National Bank for Agriculture and Rural Development (NABARD)
• Export-Import Bank of India (EXIM Bank)

Development banks have been important in strengthening India’s industrial and rural sectors.

5. Differentiated Banks

To promote innovation and inclusion, the RBI introduced the concept of Differentiated Banks based on the Nachiket Mor Committee Report (2013).

Types of Differentiated Banks

• Payments Banks: Focus on small savings, remittances, and payments; cannot lend. Examples:  Paytm Payments Bank, India Post Payments Bank.
• Small Finance Banks (SFBs): Provide banking services to small businesses and low-income groups. Examples: AU Small Finance Bank, Ujjivan SFB.

These banks help in advancing the goal of financial inclusion by bringing underserved populations into the formal financial network.

6. Non-Banking Financial Companies (NBFCs)

NBFCs are financial institutions that perform similar functions to banks such as providing loans, advances, and investment services but do not possess a full banking license.

NBFCs Characteristics

• Cannot accept demand deposits.
• Not part of the payment and settlement system.
• Do not issue cheques drawn on themselves.
• Regulated under the Companies Act, 1956, and supervised by the RBI and other regulators.
  

NBFCs play an important role in financing small-scale industries, transport operators, and self-employed individuals segments often overlooked by commercial banks.

Difference between Banks and NBFCs 

Banks and NBFCs are different in the following ways: 

NBFCs complement traditional banks by serving niche sectors, thereby expanding financial access.

Banking System in India Basel Norms (Basel Accords)

The Basel Norms are international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) under the Bank for International Settlements (BIS), Switzerland. They aim to strengthen the regulation, supervision, and risk management of banks globally.

These norms ensure that banks maintain sufficient capital to absorb losses and remain solvent even during economic stress.

Basel I (1988)

• Focused on credit risk.
  Introduced the concept of Risk-Weighted Assets (RWA).
• Minimum capital adequacy ratio fixed at 8% of RWA.

Basel II (2004)

• Broadened the framework to include market risk and operational risk.
• Based on three pillars:
  1. Minimum Capital Requirement
  2. Supervisory Review
  3. Market Discipline

Basel III (2010)

• Introduced after the 2008 global financial crisis.
• Aimed to enhance banks’ ability to absorb shocks.
• Focused on capital adequacy, leverage, and liquidity.
• Encourages banks to build capital buffers and maintain stronger risk management practices.

Capital-to-Risk Weighted Asset Ratio (CRAR)

The Capital Adequacy Ratio (CAR) or CRAR ensures that a bank maintains sufficient capital to meet its obligations and absorb potential losses. It is calculated as:

A higher CRAR shares a stronger and more stable bank. In India, the RBI mandates a minimum CRAR of 9%, higher than the global Basel requirement, reflecting the prudential approach of Indian regulators.

Banking System in India Related Concepts

Here are a few terms and concepts related to the Banking System in India:

Domestic Systemically Important Banks (D-SIBs)

D-SIBs are banks that are considered “Too Big to Fail” due to their size, interconnectedness, and importance in the financial system. Their failure could trigger wider instability.

• Identified under RBI’s 2014 framework.
• Banks with assets exceeding 2% of India’s GDP are classified as D-SIBs.
• As of now, SBI, ICICI Bank, and HDFC Bank have been identified as D-SIBs.

These banks are required to maintain additional capital buffers to enhance resilience.

Neobanks

Neobanks are digital-only financial institutions with no physical branches. They leverage technology to offer banking services through mobile applications and websites.

Types in India: 

1. Partnered Neobanks: Collaborate with traditional banks to offer services. (e.g., Jupiter, RazorpayX)
2. Licensed Neobanks: Hold independent banking licenses (yet limited in India).

Neobanks aim to make banking more accessible, personalized, and cost-effective, especially for the tech-savvy generation.

Banking System in India UPSC

The Banking System in India is a vast, dynamic, and evolving network that underpins the country’s economic development. From the RBI at the apex to rural cooperative societies at the grassroots, every institution contributes to maintaining the flow of credit, ensuring stability, and fostering inclusive growth.

In recent years, the Indian banking sector has embraced digitalization, financial inclusion, and regulatory reforms, ensuring greater transparency and efficiency. Initiatives like Jan Dhan Yojana, UPI, and Digital Rupee signify the sector’s transformation toward a more inclusive, technology-driven future.

As India aspires to become a $5 trillion economy, the banking system will continue to play an important role not just as a financial intermediary but as a driver of sustainable and equitable growth.