Overview of the Banking System in India 

The banking system in India, which evolved over several decades, is well established and has been serving the credit and banking needs of the economy. The banking ecosystem is providing impetus to economic growth and development of the country and catering to the specific and varied financial requirements of different customers and borrowers.

The major role of banks is to intermediate resources from the depositor to the lender for their mutual benefit while allocating them in an efficient manner, thereby contributing to economic growth through enhanced efficiency in usage of resources

Presently, 137 scheduled commercial banks are providing banking services in India. In addition, co-operative banks and local area banks are also providing banking services in various segments in different locations of the country. For the purpose of lending to specific sectors/segments, around 9,516 Non-Banking Financial Companies and 5 All India Financial Institutions are also catering to the needs of the borrowers.

Over the years, the ease of access to banking services strengthened by ensuring every village has at least one banking outlet, branch or business correspondent within a 5-kilometre distance, which has enabled coverage of 99.97% of in habited mapped villages across the country.

Banks that are included in the Second Schedule of the Reserve Bank of India Act, 1934 are considered to be scheduled commercial banks. Other than public sector banks and regional rural banks, all other scheduled commercial banks are granted banking licenses by RBI under Banking Regulation Act, 1949. In addition, RBI also gives licenses to Co-operative Banks for providing banking services under Banking Regulation Act, 1949.

Within the banking sector, Foreign Direct Investment (FDI) in private sector banks is permitted up to 49% through automatic route, and beyond that up to 74% through government approval route. FDI in public sector banks is permitted up to 20% through government approval route.

Scheduled Commercial Banks

  • Public Sector Banks
  • Private Sector Banks
  • Foreign Banks
  • Regional Rural Banks
  • Small Finance Banks
  • Payment Banks

Co-operative Banks

  • State Co-operative banks
  • Central Co-operative banks
  • Primary Co-operative banks

Banking Chart

Scheduled Commercial Banks—

Scheduled Commercial banks includes public sector, private sector, foreign banks, Regional Rural Banks (RRB), Small Finance Banks and Payment Banks.

  • Public Sector Banks are constituted under the State Bank of India Act, 1955 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Presently, there are 12 public sector banks.
  • Foreign Banks is a bank that has its headquarters outside India but runs its offices as a private entity at any other locations in India. Such banks are under an obligation to operate under the regulations provided by the Reserve Bank of India as well as the rule prescribed by the parent organization located outside India.
  • Private Sector Banks are banking companies licensed to operate under Banking Regulation Act, 1949.
  • Regional Rural Banks (RRB) are the banks established under the Regional Rural Banks Act, 1976 with the aim of ensuring sufficient institutional credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area notified by the Central Government. RRBs are owned jointly by the Government of India, the State Government and Sponsor Banks.
  • Small Finance Banks (SFB) licensed under Banking Regulation Act, 1949 and created with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections including small business units, small and marginal farmers, micro and small enterprises and other underserved sections.
  • Payment Banks are public limited companies licensed under Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services.

Co-operative Banks—

Co-operative Banks means State Co-operative Banks, Central Co-operative Banks and Primary Co-operative Banks. Primary Co-operative Banks are also known as Urban Cooperative Banks and over the years, it has registered a significant growth in number, size and volume of business handled. State Cooperative Banks are the highest-level cooperative banks in each of the states. They raise funds and assist in their proper allocation among various sectors. Individual borrowers receive funds from state cooperative banks via central cooperative banks and primary credit societies.

Co-operative Banks are registered under State Co-operative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 and its banking business is licensed and regulated by Reserve Bank of India. These banks are the financial entities that belong to its members, who are also the owners as well as the customers of their bank. Cooperative banks primarily support the agricultural activities, some small-scale industries and self-employed workers.

In addition to Scheduled Commercial Banks and co-operative banks, All India Financial Institutions and Non- Banking Financial Companies also plays an important role in promoting inclusive growth in the country.

All India Financial Institutions —

Financial Institutions plays an important role in the Indian financial system as they provide medium to long term finance to different sectors of the economy. These institutions have been set up to meet the growing demands of particular sectors, such as export, import, rural, housing and small industries. These institutions have been playing a crucial role in channelizing credit to these sectors and addressing the challenges / issues faced by them.

Export-Import Banks of India, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank and National Bank for Financing Infrastructure and Development, are operating as All India Financial Institutions in India.

Non-Banking Financial Companies (NBFCs)—

NBFCs is are playing an important role in sustaining consumption demand as well as capital formation in small and medium industrial segment of the country. The reach and last mile advantages of NBFCs have empowered them with agility and innovation with cutting edge technology in providing formal financial services to under banked and unserved sections of the society.

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, etc. and regulated by Reserve Bank of India.

NBFCs lend and make investments and hence their activities are akin to that of banks. However, there are a few differences as given below:

  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. NBFCs are classified on the basis of asset/liability structures, systemic importance and the activities they undertake. However, with effect from 1.10.2022, regulatory structure for NBFCs comprises four layers based on their size, activity, and perceived riskiness.

Source: Ministry of Finance, GOI