Banking Structure in India
The existing banking structure in India evolved over several decades, is elaborate, and has been serving the credit and banking services needs of the economy. There are multiple layers in today’s banking structure to cater to the specific and varied requirements of different customers and borrowers. The banking structure in India played a major role in the mobilization of savings and promoting economic development.
Reserve Bank of India
The country had no central bank prior to the establishment of the RBI. The RBI is the supreme monetary and banking authority in the country and controls the banking system in India. It is called the Reserve Bank’ as it keeps the reserves of all commercial banks.
In India Banks are classified into scheduled banks and Non-scheduled banks. Scheduled banks are comprised of co-operative banks and commercial banks.
Scheduled banks are those banks, the name of which are included in the second schedule to the Reserve Banks of India act, 1934. Banks desirous of being included in the above schedule are required to fulfill the following basic requirements:
- Their paid-up capital should not be less than 5 lakh
- Their business activities should not be detrimental to their depositor’s interests.
Once a bank’s name is included in the second schedule ibid, certain facilities (borrowing, rediscounting, refinancing.,etc.) are extended to them by Reserve Bank of India and they are put under certain obligations by the Central Bank. All the scheduled banks are required to comply with various statutory provisions and guidelines/directions issued by RBI from time to time. Requirements in respect of Cash Reserve Ratio(CRR), Statutory Reserve Ratio (SLR), capital adequacy ratio, Priority Sector Lending, etc.
Scheduled banks may be further categorized into the following two groups:
- Commercial Banks
- Co-operative Banks
Banks that engage themselves in all types of banking activities, viz. acceptance of deposits, granting of loans and advances, credit creation, investment operations, various agency functions, etc. are known as commercial banks. In India, major 20 commercial banks operate as public undertakings after their nationalization; other commercial banks operate as private sector organizations.
Commercial Banks are sometimes also known as Business Banks. Commercial Banks includes:
- Public Sector Banks: A public sector bank is a bank that is owned by the government. The government owns and controls the bank’s operations. The chairman, managing director and other senior officials of the bank are answerable to the ruling government regarding their functions and operations. These bank issues share with the general public.
These can be classified into three groups:
- State Banks of India (SBI)
- Nationalized Banks
- Regional Rural Banks (RRBS).
- Private Sector Banks: Banks in which individuals have the majority stakes are called Private Sector Banks. These include
- Indian Banks: Example ICICI, HDFC, Axis Bank, etc.
- Foreign Banks: Example HSBC, Standard Chartered, JP Morgan, etc.
- Regional Rural Banks: Banks that are specially designed to cater to the credit needs of the rural and weaker sections of the society are called Regional Rural Banks. They aim to bring large strata of unbanked population of India under the ambit of the Banking Sector.
- Foreign Bank: Foreign banks are those banks which are foreign in origin and which have their head offices located outside India. These banks were known as Exchange Banks earlier. Foreign banks are not new phenomena in Indian banks in the system.
The Co-operative Banks were formed with the formation of the Co-operative Credit Societies Act,1904. It helps in bridging the gap between the banks and the small and medium-income groups. The various public and private sector banks cannot check the need for small and medium-income groups.
Types of Co-operative Banks
- Primary Agricultural Societies: These operate at the village level.
- Central Co-operative Societies: These operate at the district level and manage various primary societies.
- State Co-operative Societies: These operate at the state level and manage various central co-operative societies.