Types of Banking in India

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Decoding the different types of banking in India

Key Takeaways

• Indian Banks are broadly classified into two types – scheduled and non-scheduled.
• These banks could be commercial, small finance, payments and cooperative banks.
• Private, public, foreign and regional rural are common types of commercial banks.
• Small finance and cooperative banks deal with small-scale clients.
• RBI permits payment banks to only offer limited deposit facilities.

The Indian banking sector is rather dynamic. Banks encourage people to save money with them and mobilise that money to invest in above-average investments. Banks also use these funds to finance various kinds of loans, thereby managing the cash flow for their massive clientele. In this article, we break down the different types of banking in India and the function of the banks.

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Types of Banking

Common types of banks prevalent in India include the following:

• Scheduled and Non-Scheduled Banks
• Commercial Banks
  • Public Sector Banks
  • Private Sector Banks
  • Foreign Banks
  • Regional Rural Banks
• Small Finance Banks
• Payments Banks
• Cooperative Banks

Scheduled and Non-Scheduled Banks

The banking sector is divided into scheduled and non-scheduled banks.

• Scheduled Banks are listed in the second schedule of the Reserve Bank of India (RBI) Act, 1934. The paid-up capital and collected funds of scheduled banks must be 5 Lakh and above. The RBI grants loans at the bank rate, and these banks are eligible to become clearing house members.
• Non-Scheduled Banks are banks not listed in the second schedule of the RBI Act, 1934. The paid-up capital and collected funds are less than INR 5 Lakh. Such banks need not borrow funds from the RBI.

Commercial Banks

Commercial banks can be scheduled or non-scheduled and are regulated under the Banking Regulation Act, 1949. These banks accept deposits and grant loans to the general public, businesses, and even the Government. Commercial types of banking systems are:

• Public Sector Banks: More than 75% of the total banking business in India comes under the public sector, also known as nationalised banks. The Indian Government and RBI are the major stakeholders in this sector.
• Private Sector Banks: Most stakeholders of Private Sector Banks are individual investors, not the RBI or Indian Government. Nevertheless, these banks must adhere to all the RBI regulations for their operations.
• Foreign Banks: Foreign Banks have their headquarters in a foreign country but operate as a private entity in India. They abide by the regulations of their home country and the country in which they operate.
• Regional Rural Banks: These scheduled commercial banks serve the economically weaker sections, such as marginal farmers, agricultural labourers, and small businesses. Operating at regional levels, RRBs offer banking facilities like debit cards, bank lockers, complimentary insurance etc.

Small Finance Banks

Licensed under section 22 of the Banking Regulation Act, 1949, these types of banking systems cater to sections of societies not usually served by large banks. They serve micro and cottage industries and small business units.

Payments Banks

RBI restricts these banks to offer deposit facilities only, with a deposit limit of INR 1 Lakh per customer. You can avail of debit cards and e-banking facilities.

Cooperative Banks

These banks are registered under the Cooperative Societies Act, 1912, and function on a no-profit no-loss basis. They offer banking services to entrepreneurs, small businesses, and industries.

Final Note

Scheduled or non-scheduled are the primary types of banking in India, while commercial banks can be both. Commercial banks accept deposits and offer loans and other banking products. Conversely, payment banks strictly offer deposit facilities. Small finance and regional rural banks cater to the banking needs of small enterprises or marginalised farmers and labourers.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.