Structure of banking system in India


Banking in India in the mdern sense originated in the last decades of the 18th century . The first banks were Bank of Hindustan (1770-1829) and the General Bank of India established 1786. The largest bank and the oldest still in existence, is tge State bank of India, which originated in the Bank of Calcutta in June 1806 , which almost immediately became the bank of Bengal. This was one of the three presidency banks , the other two being The Bank of Bombay and The bank of Madras , all three of which were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India , which , upon India’s independence became the State Bank of India in 1955. For many years the presidency banks acted as quasi-central banks , as did their successors until the reserve Bank of India was established in 1935 .

Reserve bank of India (RBI)

The Reserve Bank of India is India’s central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the Reserve Bank of India Act,1934 and in 1949 it was nationalized.The central office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The central office is where the Governor sits and where policies are formulated. Sir CD Deshmukh is the first Governor of RBI. The RBI has four zonal offices at Chennai, Delhi, Kolkata, Mumbai and 20 regional offices mostly located in the state capitals and 11 sub-offices. Reserve Bank of India Act,1934 is the legislative act under which the Reserve Bank of India was formed. This act along with the Comapnies Act, which was amended in 1936, were meant to provide a framework for the supervision of banking firms in india.

Scheduled and non-scheduled banks

Scheduled banks in India refer to those banks which have been included in the second schedule of Reserve Bank of India Act, 1934. Banks not under this schedule are called non-scheduled banks. In other words, Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks. Unlike scheduled Banks , they are not entitled to borrow from the RBI for normal banking purposes, except, in emergency or ‘abnormal circumstances’. Coastal local Area Bank Ltd. (Vijayawasa,AP), Capital Local Area Bank Ltd. (Phagwara, Punjab), Krishna Bhima Samrudhi Local Area Bank Ltd. (Mehbubnagar, Telangana), Subhadra Local Area Bank Ltd. (Kolhapur, Maharashtra) are the only non-scheduled banks in India.

Scheduled banks are further internally classified into commercial banks and cooperative banks.

Public Sector Banks

Public sector banks (PSBs) are banks where a majority state (ie., more than 50%) is held by a government . The shares of these banks are listed on stock exchange. There are a total of 21 PSBs in India and State Bank of India group.

  • In 1969, the Indira-Gandhi headed government nationalised 14 major commercial banks ( Allahabad Bank , Bank of Baroda , Bank of India , Bank of Maharashtra , Canara Bank , Central Bank of India , Dena Bank , Indian Bank , Indian Overseas Bank , Punjab and Sindh Bank , Punjab National Bank, Sindicate Bank , UCO Bank , United Bank of India)
  • In 1980 , a further 6 banks were nationalised (Andhra Bank , Cooperation Bank , New Bank of India , Oriental Bank of Commerce, Punjab and Sindh Bank , Vijay Bank )
  • IDBI Bank is an Indian government-owned financial service company, formarly known as industrial Development Bank of India , headquartered in Mumbai , India .It was established in 1964 and nationalised in year 2005 .

Private Sector Banks

The ‘Private- Sector’ banks are baks where greater parts of share or equity are not held by the government but by private shareholders . There are many Indian and Foreign Banks in India . HDFC Bank , ICICI Bank , Axis Bank , Kotak Mahindra Bank , Yes Bank , IDFC Bank , RBL Bank , Federal Bank , City Union Bank are the major private banks in India.

Regional Rural Banks

Regional Rural Banks were formed on October 2,1975 upon the recommendations of M. Narsimham working group during the tenure of Indira Gandhi’s government. The object behind the formation of RRBs was to serve large unserve population of rural areas and promoting financial inclusions . They have been created with a view to serve primarily the rural areas of India with basic banking and financial services. However, RRBs may have branches set up for urban operations and their area of operation may include urban areas too.

Cooperative Banks

The cooperative banks are furtger classified into:

  • State cooperative banks: These are small financial institutions which are governed by regulations like Banking Regulations Act , 1949 and Banking Laws Cooperative Socities Act ,1965 . At present there are about 33 state cooperative banks of which 19 are scheduled.
  • Urban/ Central cooperative banks: The term urban cooperative banks (UCB) refers to primary cooperative banks located in urban and semi-urban areas . These banks till 1996 , were allowed to lend money only for non-agricultural purposes. This distinction does not hold today . They essentially lent to small borrowers abd business . There are about 2,104 UCBs of which 56 were scheduled Banks. About 79 percent of these are located in 5states- Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu .
  • Primary credit Socities: Primary Credit Societies or primary agricultural credit society (PACs) is a basic unit and smallest cooperative credit institutions in India. It works on the grassroot level (Gram panchayat and village level ) . It virtually function like banks , but whose net worth is less than Rs. 1 lakh; who are not members of the payment system and to whom deposit insurance is not extended .