Learning Objectives
1. Introduction
2. Need for Banking Services
3. Meaning of a Bank
4. Structure of Indian Banking System
5. Functions of Banks
6. Regulation and Supervision of Banking in India
7. Recent Trends in Banking
Introduction
Indian Banking System has witnessed several developments in last two centuries.
Prior to 1955, major commercial banks were privately owned joint stock companies.
These were controlled by industrial houses, businessmen and royal families.
Major Changes in Indian Banking System
Setting up of State Bank of India and its subsidiaries
Nationalization of large banks (1969–1980)
Reforms in financial sector (1991–92)
New private banks came into existence
Inclusion of technology → improved customer service
Competition increased tremendously
Development of new products
Matching global standards
Reserve Bank of India Functions of RBI
Banker to banks
Issuer of currency
Monetary Authority
Development Functions
Regulator of Payment and Settlement
Regulator of Financial System
Banker of Government
Manages Foreign Exchange
Detection of Fake Currency
Banks offer:
Savings
Remittance
Credit
Other ancillary products
Categories of banks offering banking services:
Commercial Banks in the public and private sectors
Foreign banks
Regional Rural Banks
Urban Cooperative Banks
Local Area Banks
Small Finance Banks
Payment Banks
Primary Agricultural Cooperative
Societies federated to the Rural
Cooperative Banks, in the ShortTerm Cooperative Credit
Structure are also offering credit
related services to farmers/rural
folks, at the village level.
Non-banking financial
institutions engaged in varied
financial activities and housing
finance companies, who provide
wide range of financial services,
are also part of the Indian
Financial System.
Need for Banking Services
Today banking services are a necessity of life.
Financial needs of the excluded are varied and
distinct, they need access to savings, insurance
and most importantly credit.
They equally need counselling to prudently
access and use the financial services.
Due to the poor economic conditions, the
individual credit requirements of excluded, could
be small and initial demand for remittance and
other facilities offered by the banks may not be
much.
These accounts may not have high turnover or be
frequently operated.
This market segment is typically of low volume and
low turnover, in terms of value, but large in terms
the number.
To achieve the overall developmental goals and
ensure economic development, these people must
be given access to formal financial services.
The branch banking and electronic banking are not the appropriate models to reach out
to the excluded people. As financial inclusion involves financial education, counselling and building up close
relationships with people.
Business Correspondents (BC)/Business Facilitators (BF) model was introduced to take
baking services to the people living in unbanked and under banked areas.
The person or institutions/company appointed as BC/BF, functions as an extended arm of
the bank branch in the area
The individual appointed by the bank or a BC company, is known as Business
Correspondent Agent (BCA).
This facilitates the targeted population to easily access various financial services and
financial education from the banks, through the BCAs.
BCAs must be familiar
Basic knowledge on the functions of a bank and its operations,
The basic/general banking knowledge,
Their roles and responsibilities in financial inclusion, technical and soft skills to
perform their duties efficiently.
Meaning of a Bank
A bank is a financial institution ,
which acts as an intermediary
between the savers or investors
of funds and the users of funds.
Offers a number of financial
services and products to its
clients.
Banking Products
Savings/Current Account
Fixed Deposit
Internet/Mobile Banking
Credit/Debit Cards
Personal Loan
Business Loan
Home Loan
Vehicle Loan
Customer Care
Services Offered by Banks
Deposits
A bank accepts
deposits from the
public in the form of
Savings, Current and
Term Deposits.
Remittances
It allows a customer
to remit money from
one place to another,
in the form of
Demand Draft or
Money transfer. These
days, banks also offer
services for remitting
funds in electronic
mode.
Bill Payments
It accepts instructions
from the customer
and makes, on their
behalf, payment for
utilities, such as
electricity bill, school
fees, etc.
Tax Receipts
It accepts, on behalf
of Government, tax
payments.
Services Offered by Banks
Loans & Advances
It lends money for trade and
business, agriculture, purchase of
house, purchase of vehicles,
procuring consumer durable
items, etc.
Foreign Exchange
It transacts (buying and selling of
foreign currency) in foreign
exchange and helps business
people and others, to receive or
pay in foreign currency, for their
export or import respectively. It
buys and sells foreign currency, as
per the requirements of the
customers.
Safe Deposit
It offers safe deposit vault
facilities, for safe keeping the
valuables of he the customers.
Services Offered by Banks
ATM
It operates ATM machines, which allow the customers to
withdraw funds from their accounts, round the clock.
Cards
It offers credit/debit card facilities. Which help the
customers to make payments for their purchases. It is also
possible to effect borrowing, using th credit cards.
Other Services
Banks also sell mutual fund units and insurance products.
Primary function of banks is acceptance of money from savers of
money in the form of deposits and lending money to those who
are in need of it for their trade and business activities. A part of
these deposits are invested in bonds and securities.
Structure of Indian Banking System
Banks are classified in two categories:
• Scheduled banks
• Non-scheduled banks
If the name of a bank is included in the Second Schedule to the Reserve Bank of India
Act, 1934, it is called as a Scheduled Bank.
Other banks remain in the non-scheduled category.
Reserve Bank of India includes the name of bank in the Second Schedule, if the bank
fulfils the condition specified in Section 42 of the Reserve Bank of India Act.
According to Section 42 of the Act, the status of scheduled banks can be conferred upon
commercial banks, Regional Rural Banks, State Cooperative Banks, Urban Co-operative
Banks, Small Finance Banks, Local Area Banks and Payment Banks.
Structure of Indian Banking System
Scheduled Banks enjoy certain special stat
Scheduled Banks enjoy certain special status, such as
They can avail preferential debts/loans from RBI at Bank Rates
Avail refinance facilities from RBI system,
Participate in the clearing house, and
Are entitled to have currency storage facilities
GOI in coordination with RBI, have initiated measures over a period
of time, for establishment of various Development Financial
Institutions/ refinancing institutions, in the Indian Financial System,
for the growth of various important sectors of the economy. Such as
National Bank for Agriculture and Rural Development (for the
development of agriculture and rural sectors)
Small Industries Development Bank of India (MSME sector)
National Housing Bank (housing sector)
Exim bank of India (promoting international trade)
National Bank of Financing Infrastructure and Development
Public Sector Banks
Public sector banking reached its present position following:
Setting up of State Bank of India in the year 1955, by
converting Imperial Bank of India into a state owned bank,
Establishment of seven subsidiary banks as associate banks
of State Bank of India in the year 1959,
Nationalization of 20 commercial banks in two stages in the
year 1969 and 1980,
by converting the erstwhile Industrial Development Bank of
India (a Financial Institution) into a commercial bank.
Few recent developments in public sector banks:
In 1991, it was emphasised that India should have fewer but stronger Public Sector Banks (PSBs).
2016 onwards effective action was undertaken to consolidate Public Sector banks by amalgamation of five
Associate banks of State Bank of India (SBI) and Bharatiya Mahila Bank (BMB) into SBI. Two Associate banks were
merged earlier.
The Government of India (GoI) in 2019 announced the consolidation of 10 Public Sector Banks into 4 banks.
Further, in 2019, Life Insurance Corporation of India (LIC) acquired 51% controlling stake of IDBI Bank and
consequently, RBI has categorized "IDBI Bank" as a Private Sector Bank.
At present the country now has a total of 12 public sector banks
Public Sector Banks
Few recent developments in public sector banks:
In 1991, it was emphasised that India should have fewer but stronger Public Sector Banks (PSBs).
2016 onwards effective action was undertaken to consolidate Public Sector banks by amalgamation of five
Associate banks of State Bank of India (SBI) and Bharatiya Mahila Bank (BMB) into SBI. Two Associate banks were
merged earlier.
The Government of India (GoI) in 2019 announced the consolidation of 10 Public Sector Banks into 4 banks.
Further, in 2019, Life Insurance Corporation of India (LIC) acquired 51% controlling stake of IDBI Bank and
consequently, RBI has categorized "IDBI Bank" as a Private Sector Bank.
At present the country now has a total of 12 public sector banks.
State Bank of India
Established, as a state sponsored bank, as per the State Bank of
India Act 1955.
State Bank of India is the largest bank in the Indian Banking System,
with over 22,000 branches serving around 48+ crore customers.
State Bank of India has many financial subsidiaries
➢ SBI Life Insurance Company
➢ SBI Mutual Funds
➢ SBI Factors
➢ SBI Capital Markets
➢ SBI Cards
Nationalized Banks
Have the largest number of branches in metro/urban/semi- urban/rural
areas through-out the country.
Based on the policies pursued by GOI, many nationalized banks have been
merged to form bigger banks, in the recent period, to enable them to
compete with global financial institutions.
At present, there are 11 nationalized banks in the country.
Nationalized banks have a very large capital, deposits and assets base and
they perform varieties of functions to offer various financial services.
Major commercial banks have financial subsidiaries to cater to various
services
These are banks incorporated in India, whose shares are held by public.
Majority of these banks belong to category of old generation private banks, characterized
by small balance sheet size, regional operations, traditional style of management and
business activities.
The other category of private sector banks is the new generation banks,
incorporatedpost-1993 (post reform period).
These banks are better capitalized, technology-driven, aggressive in business
development and adopt a style of functioning, comparable to foreign banks operating in
India.
These banks adopt a variety of delivery channels.
There are 21 private sector banks as at 25th april, 2025.
Foreign Banks
These are the banks incorporated abroad, but granted license by RBI, to do
banking business
in India, through their Indian branches.
While there are many foreign banks operating in India, their branch
network is smaller and most of them operate in metropolitan cities and
State Capitals.
Their operations are technology driven and good part of their business
comprises of corporate banking, foreign exchange, export/import finance
and merchant banking etc.
There are about 43 foreign banks, having presence in India, as a 31st May,
2023
Regional Rural Banks
Regional Rural Banks have been established with a focus on rural
development under the Regional Rural Banks Act, 1976.
These banks are sponsored by public sector banks, but unlike commercial
banks, their area of operations is restricted to a few districts.
They do not offer all the financial services that are being offered by the
commercial banks.
Ownership capital is jointly provided by Central Government (50%),
concerned State Government (15%), and the Sponsoring Bank (35%).
Many RRBs sponsored by the same bank have been merged to form a
total of 43 bank in the country as on 31st May, 2023.
Local Area Banks
In 1996, Government decided to allow new local area
banks with the following objectives:
➢ Providing and institutional mechanism for
promoting rural and semi urban savings.
➢ For providing credit for viable economic activities
in the local areas.
These banks are registered as a public limited company,
under the Companies Act with a minimum paid up
capital of Rs. 5 crore and these banks are expected to
set up in district towns and the area of their operations
would be maximum of three geographically contiguous
districts where they can open their branches.
At present, there are 4 local area banks operating in the
country
Small Finance Banks
Essentially scaled down versions of commercial banks, with regard to both
deposit-taking and loan-making functions.
Required to provide at least 75% of their loans to borrowers classified as
priority sector and at least 50% of their loans must be below Rs. 25 lakhs.
SFBs are different from existing banks as they have to serve local areas to
meet credit and remittance needs of small businesses, unorganized
sector, low-income households, farmers and migrant workforce.
Required to meet the needs of Micro and Small Enterprises (MSEs)with
significant contribution to employment, value addition and exports in the
Indian economy.
12 Small Finance Banks are functioning in the country, as at 31st May 2023
