Types of Banks in India: Classification, Functions and MCQs

The correct answer is C, granting loans and accepting deposits. A commercial bank exists to gather savings from those who have a surplus and lend them to those who need funds, and it earns from the gap between the interest it pays depositors and the interest it charges borrowers. Every other service it offers, such as remittances, lockers or card facilities, is secondary to these two.

Options A, B and D all describe work of the central bank. Issuing currency notes is the Reserve Bank's monopoly, with the one rupee note and coins issued by the Government. Conducting monetary policy is done by the RBI through its Monetary Policy Committee. Regulating the money supply is again the RBI's task, exercised through the repo rate, the cash reserve ratio and the statutory liquidity ratio. The line to fix is that a commercial bank deals with the public while the central bank deals with the banks.

The correct answer is C, Bank of Baroda. It was founded in 1908 by Maharaja Sayajirao Gaekwad III, nationalised in the first round of July 1969, and the Government of India still holds the majority of its shares, which is what makes a bank a public sector bank. In 2019 it absorbed Vijaya Bank and Dena Bank.

Option A, Axis Bank, began life in 1994 as UTI Bank, the first of the new private banks licensed after the RBI guidelines of 1993. Option B, ICICI Bank, grew out of a development finance institution and is a private sector bank. Option D, Yes Bank, is also private and started business in 2004. A quick test in the examination hall: if the bank was nationalised in 1969 or 1980, or is the State Bank of India, it is a public sector bank; if it was licensed in the 1990s or later, it is private.

The correct answer is A, 1974. Women of the Self-Employed Women's Association at Ahmedabad, who worked as vendors, headloaders and home-based workers, pooled their own share capital and registered a cooperative bank of their own in 1974 because ordinary banks would not deal with borrowers who had no collateral and no paperwork. It is a standard example of a cooperative bank owned by its members.

Option C, 1994, is close enough to look right to a candidate who remembers only the decade of microfinance growth, but the bank is twenty years older than that. Options B, 1894, and D, 1874, belong to the nineteenth century: 1894 is the year Punjab National Bank was registered, which is probably why it appears here. Note the wider point the question tests, that a cooperative bank is registered as a cooperative society and works on one member one vote.

The correct answer is C, both I and II. The Reserve Bank is banker to banks: every scheduled bank keeps an account with it, holds its cash reserve ratio there, settles payments with other banks through those accounts and can borrow from it when short of funds. It is also the currency issuing authority, with the sole right to issue currency notes in India under the Reserve Bank of India Act, 1934.

Option A is wrong because it leaves out note issue, which is the function the Bank is best known for. Option D is wrong because it leaves out the banker to banks role, from which the description lender of last resort follows. Option B is wrong on both counts. The one refinement worth remembering is that the one rupee note and all coins are issued by the Government of India, although the Reserve Bank puts them into circulation, and that the Bank is also banker to the Government.

The correct answer is B, the Second Schedule of the Reserve Bank of India Act, 1934. A bank is placed in that Schedule once it has the prescribed paid-up capital and reserves and satisfies the Reserve Bank that its affairs are not conducted in a manner harmful to depositors. Inclusion brings the right to borrow from the RBI at the bank rate, membership of the clearing house and access to the money market.

Options A and C name the Banking Regulation Act, 1949, which is the law on licensing, inspection and winding up of banks but does not carry the list of scheduled banks, so both are wrong. Option D, the Seventh Schedule of the Constitution, contains the Union, State and Concurrent Lists and has nothing to do with banks, although banking itself is an entry in the Union List. Remember the pair: RBI Act 1934 for the Second Schedule, Banking Regulation Act 1949 for regulation.

The correct answer is C, grant loans and issue credit cards. A payments bank is a differentiated bank licensed on the lines suggested by the Nachiket Mor Committee to carry payments and small savings to people the branch network had not reached. It is deliberately kept out of lending, so it takes no credit risk and must invest its deposits in safe government securities and bank deposits.

Option A is allowed, subject to a ceiling on the balance per customer that the Reserve Bank fixes. Option B is allowed, and a payments bank may issue debit or ATM cards although not credit cards. Option D is its core business, since remittances and payments are the purpose for which the class was created. India Post Payments Bank, which began on 1 September 2018, is the best known example. A small finance bank, by contrast, is allowed to lend and must direct most of its lending to small borrowers.

The correct answer is A. Under the Regional Rural Banks Act, 1976 the issued capital of an RRB is shared in the proportion of 50 per cent by the Central Government, 35 per cent by the sponsor commercial bank and 15 per cent by the State Government concerned. The sponsor bank also provides managerial help and training, which is why its share is the second largest.

Option B swaps the Centre and the sponsor bank, making the sponsor the largest shareholder, which is not the case. Option C swaps the sponsor bank and the State Government and leaves the sponsor with the smallest share, which would defeat the purpose of sponsorship. Option D puts NABARD in place of the Central Government; NABARD supervises and refinances RRBs but does not hold their share capital in this pattern. The order to memorise is simply 50, 35, 15, in the sequence Centre, sponsor, State.

The correct answer is C, the Primary Agricultural Credit Society. Short-term rural cooperative credit is built in three tiers: the State Cooperative Bank at the apex of the state, the District Central Cooperative Bank at the district level and the Primary Agricultural Credit Society in the village, where the farmer actually borrows. Funds flow down the tiers and the society deals directly with its members.

Option A is the top tier and is the state's own cooperative apex bank, linked to the Reserve Bank and to NABARD. Option B is the middle tier and lends to the village societies rather than to farmers. Option D, a Regional Rural Bank, is not part of the cooperative structure at all; it is a commercial bank created under the Regional Rural Banks Act, 1976 with the Centre, a sponsor bank and the State as shareholders. Do not mix the two rural channels, cooperative and RRB.

The correct answer is B, the Government of India. The Reserve Bank has the sole right to issue currency notes in India, but the one rupee note and every coin are issued by the Government through the Ministry of Finance. The Reserve Bank is the agent that distributes them, which is the distinction between issuing and circulating that examiners like to test.

Option A is what most candidates choose, because the Reserve Bank issues notes of every other denomination and puts the coins into circulation as well. Option C, the State Bank of India, is an ordinary commercial bank in this respect and issues no currency. Option D names the company that mints the coins and prints notes at the Government's order; a printer is not the issuing authority. Two more points from the same area: the Reserve Bank follows the minimum reserve system for note issue, and the coins are minted under the Coinage Act.

The correct answer is C, NABARD. The National Bank for Agriculture and Rural Development is a development financial institution set up in 1982. It refinances banks and cooperative institutions, plans rural credit and supervises cooperative banks and Regional Rural Banks, but it does not run branches to take deposits from the public, so it is not a commercial bank.

Option A, Canara Bank, founded in 1906 and nationalised in 1969, is a public sector commercial bank. Option B, HDFC Bank, licensed in the 1990s, is a private sector commercial bank. Option D, Prathama Bank, was the first Regional Rural Bank, opened at Moradabad on 2 October 1975, and Regional Rural Banks are counted among commercial banks even though they work in a limited area. The other development institutions that appear in such options are SIDBI, the EXIM Bank and the infrastructure financing institution created in 2021.