Introduction to Banking and the Indian Banking System
Introduction to Banking and the Indian Banking System
This domain tests how Indian banking is legally organised: what banking means, who may call itself a bank, and how scheduled, public, private, cooperative, rural and niche banks differ. Expect questions on the Banking Regulation Act, 1949, the RBI Act, 1934, and the Second Schedule.
Core rules
- Section 5(b), Banking Regulation Act, 1949 defines banking as accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
- A scheduled bank is listed in the Second Schedule to the RBI Act, 1934. It must have paid-up capital and reserves of at least ₹5 lakh and satisfy RBI that its affairs are not conducted in a manner detrimental to depositors.
- Scheduled status brings RBI liquidity facilities, inclusion in clearing, and CRR obligations; it is not the same as government ownership.
- Structure: RBI; commercial banks (public sector, private, foreign); cooperative banks (urban and rural); regional rural banks; small finance banks; payment banks; development finance institutions; NBFCs.
- Public sector banks include SBI, constituted under the SBI Act, 1955, and nationalised banks. Nationalisation in 1969 covered 14 banks and in 1980 six more.
Worked example
A primary cooperative bank has paid-up capital ₹3 lakh and reserves ₹1.6 lakh. Its total is ₹4.6 lakh, below the ₹5 lakh threshold, so RBI cannot include it in the Second Schedule on that balance sheet. It may still function as a cooperative bank if licensed, but it is non-scheduled and lacks scheduled-bank facilities. The reasoning is statutory, not a matter of RBI discretion.
Traps
- Lending is not the defining activity in Section 5(b); deposit-taking is.
- Scheduled and nationalised are different statuses.
- Payment banks accept deposits but cannot lend, so they are not miniature commercial banks.
- NBFCs are not banks and cannot accept demand deposits.