Types of Banks in India: Classification, Functions and MCQs

India does not have one kind of bank but a ladder of them, each licensed for a different job: a central bank that issues currency, commercial banks that take deposits and lend, cooperative banks owned by their members, rural banks for the village, and new differentiated banks that may take deposits but not lend. Papers ask which class a named bank belongs to and what each class may or may not do. This chapter sets out the ladder.

Scheduled and non-scheduled banks

The first division is legal, not functional. A scheduled bank is one entered in the Second Schedule of the Reserve Bank of India Act, 1934. To be listed, a bank must have paid-up capital and reserves of at least the amount the Act prescribes and must satisfy the Reserve Bank that its affairs are not conducted against the interest of depositors. A scheduled bank can borrow from the RBI at the bank rate, join the clearing house and take part in the money market. Banks not in the Second Schedule are non-scheduled banks, mostly small local institutions.

Commercial banks

Commercial banks are the banks a customer deals with daily. Their primary function is simple: accepting deposits and granting loans, living on the difference between the interest they pay and the interest they charge. They fall into four groups.

• Public sector banks: the State Bank of India and the nationalised banks, in which the Government holds the majority stake. Bank of Baroda, Punjab National Bank, Canara Bank and Union Bank of India are examples. The amalgamations notified for 1 April 2019 and 1 April 2020 reduced their number to twelve.
• Private sector banks: owned by private shareholders. The old private banks predate nationalisation; the new ones were licensed after the RBI guidelines of 1993, beginning with UTI Bank, now Axis Bank, and followed by ICICI Bank, HDFC Bank and later Yes Bank and Bandhan Bank.
• Foreign banks: incorporated abroad and working in India through branches or a wholly owned subsidiary, such as Citibank, HSBC and Standard Chartered.
• Regional Rural Banks: set up under the Regional Rural Banks Act, 1976 for small farmers, artisans and agricultural labourers. Their share capital is held in the fixed proportion of 50 per cent by the Central Government, 35 per cent by the sponsor bank and 15 per cent by the State Government, and each is sponsored by a commercial bank.

Cooperative banks

A cooperative bank is registered as a cooperative society and is owned by its members, who are also its borrowers, so it works on the principle of one member one vote rather than one share one vote. Rural cooperative credit is arranged in three tiers for short-term lending: the State Cooperative Bank at the top, the District Central Cooperative Bank in the middle and the Primary Agricultural Credit Society in the village. Urban cooperative banks serve traders and small businesses in towns. They were long under a dual control of the RBI and the state registrar of cooperative societies; the Banking Regulation (Amendment) Act of 2020 brought them more firmly under the Reserve Bank's supervision.

The central bank

The Reserve Bank of India is not a bank for the public. Its functions are worth learning as a list, because questions are set straight from it: sole authority for the issue of currency notes, except the one rupee note and coins which the Government issues; banker to the Government, both Union and states; banker to banks, holding their cash reserves and settling payments between them; lender of last resort; custodian of the country's foreign exchange reserves; controller of credit through the bank rate, the repo rate, the cash reserve ratio and the statutory liquidity ratio; and the regulator and supervisor of the banking system.

Differentiated banks

On the lines suggested by the Nachiket Mor Committee, the RBI licensed two new kinds of bank in the 2010s.

India Post Payments Bank, which began on 1 September 2018, is the best known payments bank. Small finance banks grew mostly out of microfinance companies.

Development financial institutions

These lend for long-term development rather than working capital and do not take ordinary deposits. NABARD, set up in 1982, is the apex institution for agriculture and rural credit and supervises cooperative banks and Regional Rural Banks. SIDBI, set up in 1990, serves small industry, the EXIM Bank of 1982 finances foreign trade, and the National Bank for Financing Infrastructure and Development was created in 2021 for infrastructure. They are not commercial banks, and a question that asks you to pick the bank that is not a commercial bank usually places one of them among the options.