STRU C T U R E OF B A N K I N G

IN INDIA
HASNA V Y
2ND YEAR MBA
RESERVE BANK OF INDIA

• THE RBI OR THE RESERVE BANK OF INDIA IS THE CENTRAL BANK OF INDIA. IT IS RESPONSIBLE FOR REGULATING THE BANKING SYSTEM OF THE COUNTRY. THE RBI WAS
ESTABLISHED UNDER THE RESERVE BANK OF INDIA ACT ON 01ST APRIL 1935.

• THE RBI USES THE MONETARY POLICY INSTRUMENTS TO CREATE AND MAINTAIN THE FINANCIAL STABILITY IN THE ECONOMY. IT IS ALSO CHARGED WITH REGULATING
THE CURRENCY AND CREDIT SYSTEMS OF THE COUNTRY.

• THE RBI IS HEADQUARTERED IN BOMBAY, THE FINANCIAL HUB OF THE STATE OF MAHARASHTRA. HENCE, THE RBI SERVES THE FINANCIAL MARKETS IN MANY DIFFERENT
WAYS. THE RESERVE BANK OF INDIA SETS THE OVERNIGHT INTERBANK LENDING RATE.

• THE PRIME OBJECTIVE OF THE RBI IS TO CONDUCT CONSOLIDATED SUPERVISION OF THE FINANCIAL DOMAIN IN INDIA. AS SUCH, THE FINANCIAL DOMAIN IS MADE UP OF
COMMERCIAL BANKS, FINANCIAL INSTITUTIONS, AND NON-BANKING FINANCE COMPANIES.
SCHEDULED BANKS
• BANKS WHICH ARE INCLUDED IN THE SECOND SCHEDULE OF THE RESERVE BANK OF INDIA ACT OF 1934 ARE CALLED
SCHEDULED BANKS. ALL THE SCHEDULED BANKS IN INDIA CARRY THE FOLLOWING FEATURES:
• ELIGIBLE FOR DEBTS AND/ OR LOANS ON BANK RATE FROM THE RBI
• AUTOMATICALLY ACQUIRES THE MEMBERSHIP OF A CLEARING HOUSE

• IN ORDER TO BE LISTED IN THE SECOND SCHEDULE OF THE RBI ACT, A BANK MUST SATISFY THE FOLLOWING ELIGIBILITY
CRITERIA:
• THE PAID UP CAPITAL AND RESERVES TOGETHER SHOULD NOT BE LESS THAN INR 5 LAKHS
• WORKING OF THE BANK SHOULD NOT BE DETRIMENTAL TO THE INTERESTS OF THE DEPOSITORS
• THEY SHOULD EITHER BE A COMPANY AS PER THE COMPANIES ACT 1956 OR A STATE COOPERATIVE BANK OR A CORPORATION OR
ANY INSTITUTION NOTIFIED BY THE GOVERNMENT OF INDIA IN THIS REGARD

• EVERY WEEK, THE SCHEDULED BANKS HAVE TO PROVIDE THE DETAILS OF THEIR ACTIVITIES TO THE RBI. ALL THE RRBS,
COOPERATIVE BANKS, INDIAN, AND FOREIGN COMMERCIAL BANKS BELONG TO THE SCHEDULED BANKS CATEGORY.
UNSCHEDULED BANKS
• AS THE NAME SUGGESTS, BANKS THAT ARE NOT INCLUDED IN THE SECOND SECTION OF THE RESERVE BANK OF INDIA ACT
OF 1934 ARE CALLED NON-SCHEDULED BANKS.

• THEIR PAID-UP CAPITAL IS LESS THAN INR 5 LAKHS

• SUCH BANKS ARE NOT ELIGIBLE TO BORROW FUNDS FROM THE RBI FOR REGULAR BANKING REQUIREMENTS, UNLESS IN
CASE OF EMERGENCIES.

• NON-SCHEDULED BANKS ARE SOMETIMES LEGAL ENTITIES. HOWEVER, THEY DO NOT HAVE PROCEDURAL SUPPORT FROM
THE GOVERNMENT.

• THESE BANKS HAVE TO REIMBURSE COMPULSORILY A RESERVE AMOUNT OF INR 5 LAKH TO THE RBI AND THIS CAPITAL
MUST BE HELD THROUGHOUT THEIR OPERATIONAL PHASE.

• NON-SCHEDULED BANKS ARE NOT BOUND TO THE RULES AND REGULATIONS OF THE RBI.
• THEY ARE REQUIRED TO MAINTAIN THE CRR (CASH RESERVE RATIO) WITH THEMSELVES AND NOT WITH THE RBI.
CO-OPERATIVE BANKS
• COOPERATIVES HAVE ALL ALONG BEEN PLAYING A VERY VITAL ROLE IN THE DEVELOPMENT OF THE RURAL ECONOMY.
• A COOPERATIVE BANK IS A FINANCIAL ORGANIZATION THAT BELONGS TO ITS MEMBERS, WHO ARE ALSO THE OWNERS
AND ITS CUSTOMERS.

• SUCH BANKS PROVIDE THEIR MEMBERS WITH VARIED BANKING AND FINANCIAL SERVICES.
• COOPERATIVE BANKS ARE THE PRIMARY HELPERS OF AGRICULTURAL ACTIVITIES, SELF-EMPLOYED WORKERS, AND
SMALL SCALE INDUSTRIES.

• COOPERATIVE BANKS ARE THE ONES IN WHICH INDIVIDUALS COME TOGETHER TO FORM A CREDIT COOPERATIVE SOCIETY
AT THE GROUND LEVEL.

• THE INDIVIDUALS IN THE SOCIETY CAN BE AN ASSOCIATION OF BORROWERS AND NON-BORROWERS RESIDING IN A
PARTICULAR AREA AND INTERESTED IN THE BUSINESS AFFAIRS OF EACH OTHER.

• COOPERATIVE BANKS ARE FURTHER CLASSIFIED INTO RURAL AND URBAN.

COMMERCIAL BANKS
• A COMMERCIAL BANK IS THE ONE WHOSE PRIMARY BUSINESS IS ACCEPTING DEPOSITS AND EXTENDING
LOANS. THESE BANKS CAN BE SCHEDULED COMMERCIAL OR NON-SCHEDULED COMMERCIAL.

• SUCH BANKS CATER TO THE BANKING NEEDS OF INDIVIDUALS, BUSINESSES, AND ORGANIZATIONS. THEIR
SERVICES CONSIST OF OPENING DIFFERENT TYPES OF BANK ACCOUNTS AS WELL AS PROVIDING LOANS TO
BUSINESSES.

• THE COMMERCIAL BANKS IN INDIA ORIGINALLY FOCUS ON PROVIDING SHORT-TERM LOANS FOR
AGRICULTURE, TRADE, AND INDUSTRY.

• THESE BANKS DEAL DIRECTLY WITH THE CUSTOMERS, UNLIKE THE DEVELOPMENT BANKS.
• SBI, HDFC BANK, ICICI BANK, DENA BANK, CORPORATION BANK, ETC. ARE THE COMMERCIAL BANKS IN
INDIA.
PUBLIC SECTOR BANKS
• PUBLIC SECTOR BANKS ARE THE ONES IN WHICH THE GOVERNMENT OWNS THE MAJORITY OF THE SHARES.
FOR INSTANCE, THE SBI IS ONE OF THE PUBLIC SECTOR BANKS WHOSE 58.60% SHARES ARE HELD BY THE
GOVERNMENT.

• SUCH BANKS ARE FURTHER DIVIDED INTO NATIONALIZED BANKS AND STATE BANKS AND ITS ASSOCIATES.
• IN NATIONALIZED BANKS, THE CENTRAL GOVERNMENT SUPERVISES AND REGULATES THE FUNCTIONING OF THE
BANKING INSTITUTION.
• HOWEVER, THE CENTRAL GOVERNMENT KEEPS MINIMIZING THE SHARES IN PSU BANKS AS AND WHEN IT SELLS
SHARES.
• THIS IS DONE TO MINIMIZE THE GOVERNMENT SHAREHOLDING IN SUCH BANKS.

• BANK OF BARODA, INDIAN OVERSEAS BANK, CANARA BANK, CENTRAL BANK OF INDIA, ETC. ARE THE PUBLIC
SECTOR BANKS IN INDIA.
PRIVATE SECTOR BANKS
• THESE ARE THE BANKS IN WHICH THE MAJORITY OF THE EQUITY IS HELD BY PRIVATE ENTITIES,
CORPORATIONS, INSTITUTIONS, OR INDIVIDUALS, APART FROM THE GOVERNMENT. THESE BANKS ARE
CONTROLLED AND MANAGED BY PRIVATE PROMOTERS.

• SINCE 1969, BANKING IN INDIA HAS BEEN DOMINATED BY THE PUBLIC SECTOR BANKS, AT THE TIME WHEN
ALL THE MAJOR BANKS WERE NATIONALIZED BY THE INDIAN GOVERNMENT.

• AFTER LIBERALIZATION IN THE 1990S, BANKS LIKE HDFC, ICICI, ETC. GOT PERMISSION AND NOW ARE THE
NEW-AGE PRIVATE SECTOR BANKS.

• IN THE TOTAL BANKING SECTOR OF INDIA, PUBLIC SECTOR BANKS CONSIST OF 72.9% SHARE, WHILE THE
REST IS COVERED BY PRIVATE ENTITIES. THERE ARE 22 PRIVATE SECTOR BANKS.

• INDUSIND BANK, AXIS BANK, ICICI BANK, HDFC BANK, ETC. ARE THE PRIVATE SECTOR BANKS IN INDIA.
 FOREIGN BANKS
• THESE BANKS ARE REGISTERED AND HAVE THEIR HEADQUARTERS IN ANOTHER COUNTRY, BUT THEY HAVE BRANCHES IN OUR COUNTRY.
• FOREIGN BANKS ACCOUNT FOR LESS THAN 1% OF THE COUNTRY'S TOTAL BRANCH NETWORK. THEY DO, HOWEVER, ACCOUNT FOR APPROXIMATELY 7% OF
TOTAL BANKING SECTOR ASSETS AND APPROXIMATELY 11% OF PROFITS.

• THE RBI'S POLICY TOWARD THE PRESENCE OF FOREIGN BANKS IN INDIA IS FOUNDED ON TWO FUNDAMENTAL PRINCIPLES:
RECIPROCITY
SINGLE MODE OF PRESENCE
• BY RECIPROCITY, IT IS MEANT THAT FOREIGN BANKS ARE GIVEN NEAR-NATIONAL TREATMENT IN INDIA ONLY IF THEIR HOME COUNTRY ALLOWS INDIAN
BANKS TO OPEN BRANCHES FREELY.

• BY SINGLE MODE OF PRESENCE, THE RBI MEANS THAT IN INDIA, EITHER THE BRANCH MODE OR A WHOLLY OWNED SUBSIDIARY (WOS) MODE IS PERMITTED.
• OTHER POLICY GUIDELINES ISSUED BY THE RBI TO FOREIGN BANKS INCLUDE THE FOLLOWING:
• BANKS MUST ADHERE TO THE BASEL STANDARD'S MANDATED CAPITAL ADEQUACY REQUIREMENTS.
• THEY MUST MEET THE INR 500 CRORE MINIMUM CAPITAL REQUIREMENT.
• THEY SHOULD KEEP THE CRAR AT A MINIMUM OF 10%.
• FOREIGN BANKS' PRIORITY SECTOR TARGETS IN INDIA ARE 40%.
• FURTHERMORE, FOREIGN BANKS MUST ADHERE TO OTHER NORMS ISSUED BY THE RESERVE BANK OF INDIA.
• FOREIGN BANKS MAY ALSO OPEN REPRESENTATIVE OFFICES IN INDIA. REPRESENTATIVE OFFICES HAVE FEWER AUTHORITY THAN BRANCHES OR AGENCIES.
• FOREIGN BANKS FREQUENTLY OPEN REPRESENTATIVE OFFICESAS A FIRST STEP TOWARD ESTABLISHING A PRESENCE IN THE COUNTRY.
• THESE OFFICES ACT AS A POINT OF CONTACT BETWEEN THE PARENT BANK AND ITS CLIENTS AND CORRESPONDENT BANKS IN INDIA.
• THEY CAN BUILD RELATIONSHIPS WITH POTENTIAL CLIENTS, BUT THEY CANNOT CONDUCT BANKING TRANSACTIONS ON THEIR OWN.
• FOREIGN BANK BRANCHES ARE ALSO MORE LIKELY TO OPERATE IN AREAS WHERE REGULATORY BARRIERS TO ENTRY ARE LOWER.
• CURRENTLY, THERE ARE 45 FOREIGN BANKS OPERATING IN THE FORM OF FOREIGN BANK BRANCHES AND 34 FOREIGN BANKS OPERATING IN THE FORM OF
REPRESENTATIVE OFFICES.
 REGIONAL RURAL BANK
• REGIONAL RURAL BANKS (RRBS) ARE GOVERNMENT OWNED SCHEDULED COMMERCIAL BANKS OF INDIA THAT OPERATE AT
REGIONAL LEVEL IN DIFFERENT STATES OF INDIA. THESE BANKS ARE UNDER THE OWNERSHIP OF MINISTRY OF FINANCE,
GOVERNMENT OF INDIA. THEY WERE CREATED TO SERVE RURAL AREAS WITH BASIC BANKING AND FINANCIAL SERVICES.
HOWEVER, RRBS ALSO HAVE URBAN BRANCHES.

• THE AREA OF OPERATION IS LIMITED TO THE AREA NOTIFIED BY THE GOVERNMENT OF INDIA COVERING, AND IT COVERS ONE OR
MORE DISTRICTS IN THE STATE. RRBS PERFORM VARIOUS FUNCTIONS SUCH AS PROVIDING BANKING FACILITIES TO RURAL AND
SEMI-URBAN AREAS, CARRYING OUT GOVERNMENT OPERATIONS LIKE DISBURSEMENT OF WAGES OF MGNREGA WORKERS AND
DISTRIBUTION OF PENSIONS, PROVIDING PARA-BANKING FACILITIES LIKE LOCKER FACILITIES, DEBIT AND CREDIT CARDS,
MOBILE BANKING, INTERNET BANKING, AND UPI SERVICES