Banking Meaning & Definition

In simple words, banking is the act of saving, generating, and managing money. Banks
provide people with a safe place to keep their cash and credit. In addition to that, banks also
offer Certificates of Deposit. To make loans, banks use various deposits. People get money
from banks to make payments or buy goods and services. Businesses also borrow money to
grow their business.

• The Indian banking system is divided into "Scheduled Banks" and "Non-
scheduled Banks."
• Schedule banks are those that are listed in the Second Schedule of the RBI
Act, 1934 and thus meet the following requirements:
o a bank must have a paid-up capital and reserve of at least Rs. 5
lakh and
o a bank must satisfy the Reserve Bank of India (RBI) that its affairs are
not conducted in a manner that is detrimental to the interest of its
deposits.
• Non-scheduled banks are those that are not listed in the second schedule of
the RBI Act, 1934 and thus do not meet the requirements outlined in that
schedule.
• The term "scheduled banks" refers to both "scheduled commercial
banks" and "scheduled cooperative banks."
• The Scheduled commercial banks are further subdivided into four groups:
o Public sector banks (also known as "nationalised banks" and "State
Bank of India (SBI) banks");
o Private sector banks (divided into "Old Private Sector Banks" and
"New Private Sector Banks" that emerged after 1991);
o Foreign banks in India; and
o Regional Rural Banks (that operate exclusively in rural areas to
provide credit and other facilities to small and marginal farmers,
agricultural workers, and small entrepreneurs).
• Foreign banks are present in the country either through full branch/subsidiary
presence or through representative offices.
 • Except for foreign banks, these scheduled commercial banks are registered in
India under the Companies Act.

Role of RBI

• The RBI is the country's supreme monetary and banking authority, and it
controls the Indian banking system. It is known as the Reserve Bank because it
holds the reserves of all commercial banks.
• In accordance with the provisions of the Reserve Bank of India Act, 1934, the
Reserve Bank of India was established on April 1, 1935.
• The Reserve Bank's Central Office was initially located in Calcutta but was
permanently relocated to Mumbai in 1937.
• Though originally privately owned, the Reserve Bank has been wholly owned
by the Government of India since its nationalisation in 1949.
• Its current functions can be objectively summarised as:
o Monetary policy formulation, implementation, and monitoring are
all part of it. The overarching goal is to maintain price stability while
pursuing growth.
o It issues new currency notes and coins as well as exchanging or
destroying those that are no longer fit for circulation.
o It establishes broad parameters for banking operations within which
the banking and financial system operates.
▪ This function's overarching goal is to maintain public trust in the
system, protect depositors' interests, and provide cost-effective
banking services to the public.
▪ It manages the FEMA (Foreign Exchange Management Act,
1999), keeping the country's Forex (foreign exchange) reserves,
stabilizing the rupee exchange rate, and representing the
Government of India at the IMF and World Bank.
o It introduces and upgrades safe and efficient payment systems in the
country to meet the needs of the general public. The goal is to keep the
public's trust in the payment and settlement system.
o As a banker of the Government and the banks, it consists of three
categories of functions:
▪ first, performing Merchant Banking functions for the central
and state governments; second, acting as their Bankers; and third,
maintaining banking accounts of the SCBs (scheduled
commercial banks) operating in the country (domestic, foreign,
public, and private).
▪ The broad objectives are to enable governments and banks to
mobilise enough liquidity for their operations, under which it
lends or manages government borrowing plans and provides
short-term and long-term loans to banks (as Lender of Last
Resort).
 o As part of its developmental responsibilities, the RBI established
developmental banks such as IDBI, SIDBI, NABARD, NEDB (North
Eastern Development Bank), Exim Bank, and NHB.
▪ The ownership of these banks is gradually being transferred from
the RBI to the Government of India.

Types of Banks

There are many types of banks in India, such as:

1. Commercial Banks

• Any banking organisation that deals with the deposits and loans of businesses
is referred to as a commercial bank.
• Commercial banks issue bank checks and drafts and accept term deposits.
• Through instalment loans and overdrafts, commercial banks also serve as
money lenders.
• Commercial banks also provide a variety of deposit accounts, including
checking, savings, and time deposits.
• These institutions are run for profit and are owned by a group of people.

Commercial Banks are further divided into the following:

• Public Sector Banks - These are banks in which the Government of India
owns a majority stake. SBI, Bank of India, Canara Bank, and other public
sector banks are examples.
• Private Sector Banks - The majority of a bank's share capital is held by
private individuals. These banks are set up as limited-liability corporations.
Private sector banks include ICICI Bank, Axis Bank, HDFC, and others.
• Regional Rural Banks - Regional Rural Banks were established in accordance
with the provisions of an Ordinance promulgated on September 26, 1975, and
the RRB Act, 1976, with the goal of ensuring adequate institutional credit for
agriculture and other rural sectors.
o RRBs can only operate in the areas that have been designated by Gol as
covering one or more districts in the state.
o RRBs are jointly owned by Gol, the relevant State Government, and
Sponsor Banks
• Foreign Banks - These banks are registered and have their headquarters in
another country, but they have branches in our country.
o Foreign banks in India include HSBC, Citibank, Standard Chartered
Bank, and others.

2. Small Finance Banks

• The Small Finance Bank (SFB) is a private financial institution that primarily
undertakes basic banking activities such as deposit acceptance and lending
to unserved segments such as small business units, small and marginal
 farmers, micro and small industries, and unorganised sector entities,
but without any geographical restrictions, unlike Regional Rural Banks or
Local Area Banks.

3. Payment Banks

• A payment bank is a distinct type of bank that performs only the limited
banking functions permitted by the Banking Regulation Act of 1949.
• Acceptance of deposits, payments and remittance services, internet banking,
and acting as a business correspondent for other banks are examples of some of
the activities.
• They are initially permitted to collect deposits of up to Rs 1 lakh per
individual.
• They can help with money transfers as well as sell insurance and mutual funds.
Furthermore, they can only issue ATM/debit cards, not credit cards.
• They are not permitted to establish subsidiaries to provide non-banking
financial services. More importantly, they are not permitted to engage in any
lending activities.

4. Co-operative Banks

• A cooperative bank is a financial entity that is owned and operated by its

members, who are also its customers.
• Co-operative banks are frequently formed by people who belong to the same
local or professional community or who share a common interest.
• Co-operative banks typically offer a wide range of banking and financial
services to their members (loans, deposits, banking accounts, etc).
• It is further divided into:
o Urban Cooperative Banks
o Rural Cooperative Banks

Non-Banking Financial Institutions

• A Non-Banking Financial Company (NBFC) is a company registered under

the Companies Act, 1956.
• A non-banking financial company, also known as a non-banking financial
institution, provides financial services and products but is not recognised as a
bank with a full banking licence.
• NBFCs are not banks, but their activities include lending and other activities
such as providing loans and advances, credit facilities, savings and investment
products, trading in the money market, managing stock portfolios, money
transfers, and so on.
• NBFC Registration is required before NBFC activities can begin.
• Deposits can be accepted by NBFC, but only term deposits and deposits
repayable on demand are not accepted.
• Some examples of well-known NBFCs are Kotak Mahindra Finance, SBI
Factors, Sundaram Finance, and ICICI Ventures.