Banking System and Structure in India
What this domain tests
The examiner wants you to classify every institution correctly and to know the special licence conditions attached to newer bank types. Structure questions are often one-mark matching items, so the ownership pattern and the core restriction must be exact.
Core structure
- Scheduled banks: listed in the Second Schedule of the RBI Act, 1934. Conditions include paid-up capital plus reserves of at least ₹5 lakh and affairs not conducted in a manner detrimental to depositors. Only scheduled banks get RBI refinance and clearing-house membership as a matter of course.
- Public sector: State Bank of India (SBI Act, 1955) and the nationalised banks. Private sector: old and new generation banks licensed under the Banking Regulation Act. Foreign banks: branches or wholly owned subsidiaries.
- Regional Rural Banks (1975, Narasimham Working Group): ownership is Central Government 50%, State Government 15%, sponsor bank 35%.
- Co-operative banks: urban co-operative banks and the rural three-tier structure of State Co-operative Bank, District Central Co-operative Bank and Primary Agricultural Credit Society. They face dual regulation by RBI and the Registrar of Co-operative Societies.
- Differentiated banks: Payments Banks (Nachiket Mor Committee, 2014) accept deposits up to ₹2 lakh, cannot lend and cannot issue credit cards. Small Finance Banks must lend 75% to priority sectors, with at least 50% of loans up to ₹25 lakh.
- NBFCs are companies, not banks: they cannot accept demand deposits.
Worked example
A co-operative credit society wishes to rename itself a bank. It cannot: the word 'bank' is restricted under s.7 of the Banking Regulation Act, and only a licensed banking company or co-operative bank may use it. Similarly, an NBFC cannot accept a demand deposit, which is precisely the dividing line between banking and non-banking financial business.
Traps that cost marks
- Assuming every scheduled bank is public sector; private and foreign banks can be scheduled too.
- Mixing up RRB ownership percentages.
- Treating a PACS as a bank; it is a co-operative society at the base of the rural tier.