Introduction to Banking and Financial Institutions
Scope and definitions
This domain tests whether you can distinguish a bank from other financial institutions and explain who regulates what. Banking is defined in Section 5(b) of the Banking Regulation Act, 1949 as accepting deposits of money from the public, repayable on demand or otherwise, for lending or investment. The RBI Act, 1934 establishes the RBI and the Second Schedule; a scheduled bank must meet capital and reserve conditions and maintain CRR with the RBI. The BR Act, 1949 governs banking business, licensing, and many prudential rules.
Institution types
Commercial banks include public sector, private sector, and foreign banks. Cooperative banks are registered under state or central cooperative laws and licensed by the RBI. Regional rural banks (RRBs) were created under the RRB Act, 1976, usually with central government, state government, and sponsor bank shareholding. Small finance banks and payment banks are licensed under the Banking Regulation Act and have specific restrictions; payment banks cannot lend. NBFCs are companies registered with the RBI but are not banks: they cannot accept demand deposits and cannot issue cheques as banks do.
Worked example
A candidate is asked whether a district cooperative credit society that accepts deposits from members and lends to them is a bank. Reasoning: it accepts deposits and lends, but its membership and licensing matter. If it is a cooperative society without a banking licence, it is not a bank for the BR Act; if it is a licensed cooperative bank, it is. The safest exam answer states the licence and the definition, not just the activity.
Traps
Do not equate the RBI with a commercial bank; the RBI is the central bank and regulator. Do not call NBFCs banks. Do not confuse scheduled status with government ownership.