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Banking system in India Research Team | Posted On Saturday, November 17,2018, 04:23 PM

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Banking system in India



Indian Banking System Introduction:

In India the Reserve Bank is the central banking institution. The RBI regulates and operates the banking system in India. It supervises and administers exchange control and banking regulations and administers the government's monetary policy. The banking system in India works according to the guidelines issued by the RBI.

The banking sector is the lifeline of the modern economy. The banks play an important role in mobilization of deposits and disbursement of credit to various sectors of the economy. A bank is a financial institution whose purpose is to receive deposits and lend money to individuals and businesses, disburse payments, invest funds in securities for returns, and safeguard money. It services savings and current accounts, provides credit to borrowers in the form of loans and through credit cards, and acts as trustees of its clients.

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Banking System in India:

India has an extensive banking network. The banking system in India has four tiers:

  • Scheduled commercial banks: a scheduled bank in India refers to the bank which is listed in the second schedule of the reserve bank of India act, 1934. Scheduled banks are usually private sector banks, foreign banks and nationalized banks operating in India.
  • Regional rural banks: these banks are also called Gramin banks. These are Indian scheduled banks operating in rural areas. These banks were created to provide basic banking and financial services in rural areas. However, their areas of operation include urban areas as well.
  • Co-operative banks: these banks mainly lend to small business groups and provide finance to the agriculture sector. They are located in rural, urban and semi-urban areas. These banks are aimed only at providing basic banking services.
  • Payment banks and small finance banks: these are newly modelled small finance banks conceptualized by the RBI. There are 11 payment banks and 10 small finance banks that operate in India. These are new age banks that are aimed at strengthening the existing channel of APY distribution and provides a boost to the outreach of subscribers under APY.

Types of Banking System in India:

The different types of banks in India are as follows:

  • Commercial banks: commercial banks are the profit making institutions and are one of the most important types of banks. They collect deposits from the public and lend money to business firms, traders, farmers and consumers. Commercial banks meet the working capital needs of trade and industry and are a part of the money market.
  • Development banks: They are specialized financial institutions which supply long-term finance to large and medium industries. They also perform various promotional activities for accelerating the rate of capital formation in the country. These banks promote industrial and economic development.
  • Co-operative banks: the co-operative banks are aimed at providing credit to primary agriculture credit societies at lower interest rates.
  • Land development banks: these banks mainly fund the agricultural sector and provide long term credit to farmers for land development or for acquiring new land.
  • Investment banks: When a corporate entity wants to issue new equity or debt securities, an investment bank serves the role of an intermediary. Sometimes an investment is made in these companies through purchase of equity shares.
  • Merchant banks: A merchant bank helps a company sell its new shares in the stock market to the general public and help raise funds for the company.
  • Foreign banks: as the name suggests these are non-Indian banks. A foreign bank is obligated to follow the regulations of both the home country and the host-country. Currently there are 45 foreign banks operating in India.
  • Central banks: the RBI acts as the central regulatory bank of India. It controls the entire banking system of the country.

SEE ALSO:Nationalized Banks In India

Structure of Indian Banking System:

A bank is an institution that provides fundamental banking services like accepting deposits and providing loans. The structure of Indian banking system is given below:

  • RBI: The reserve bank supervises, control and regulates the activity of the banking sector. The Reserve Bank of India is the currency issuing authority of the country. The main functions of the RBI are given below:
  • Welfare of the public
  • To maintain the financial stability of the country.
  • To execute the financial transactions safely and effectively.
  • To develop the financial infrastructure of the country.
  • To allocate the funds effectively without any partiality
  • Scheduled commercial bank: among the banks, the commercial banks are one of the oldest in the country. There are two sub types of commercial banks based on ownership and control over management. They are:
  • Public sector banks: the public sector banks are where the government owns either 50% or more stake. Currently there are 27 commercial public sector banks operating in India.
  • Private sector banks: the private sector banks are where the majority of stake is held by the share holders of the bank. Currently there are 15 private sector banks operating in India.
  • Non-scheduled banks: The non-scheduled bank refers to the banks which are not listed in the second schedule of the RBI. The banks are required to maintain cash reserve requirements not with RBI but with themselves. There are only 4 non-scheduled commercial banks operating in India.
  • Foreign banks: the foreign banks obtain a license from RBI to operate in India. These banks besides financing foreign trade of the country, undertake normal banking business as well. Currently there are 45 foreign banks operating in India.
  • Co-operative banks: These banks are government sponsored, government supported and government subsidized financial agencies in India. Unlike commercial banks which focus on profits, cooperative banks are organized and managed on principles of cooperation, self help and mutual help.
  • Regional rural banks: the regional rural banks carry out the normal banking functions in rural areas and are primarily focussed on granting loans and advances to small/marginal farmers, agricultural farmers and labourers.

SEE ALSO: Personal Loan For Students

Classification of banks in India:

Indian banking system can be classified as:

Organized banking:  The institutions which are controlled by the central bank of the country namely RBI, SEBI, IRDA are called institutional or organized. Organized sector is classified into two categories namely – banking institutions and non-banking financial institutions. The following institutions are under the purview of organized sector:

  • Small Industries Development Bank of India
  • National Bank for Agriculture and Rural Development
  • National Housing Bank
  • Export-Import Bank of India (EXIM Bank).

Unorganised banking: In the case of the Indian Banking System, indigenous bankers are included in the unorganized sector. Indigenous bankers include those individuals and banks that accept deposits or depend on credit to run their business. They deal with short-term credit instruments for the purpose of providing financial help. The rate of interest charged fluctuates directly with the amount and time period. They are the major sources of funds for small borrowers on account of simple documentation and funds are made available to the borrowers at any time during a day.

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