SNDT WOMEN’S UNIVERSITY LAW SCHOOL

NAME :- HITANSHI HARISH DAFDA

ROLL NO :- 7

SUBJECT :- BANKING LAW

TOPIC:- TYPES OF BANK

SUBJECT PROFESSOR:- MS. DEEPTI KANORIA

YEAR :- LL.B. 2nd Year (Semester – IV)

DATE OF SUBMISSION :- 22nd MARCH 2025

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 ACKNOWLEDGEMENT
I wish to express my sincere gratitude to my Banking Law professor
MS. Deepti Kanoria who provided me the opportunity of making this
project which provided me with a lot of knowledge and information.

Through this project I was able to express my thoughts on paper and

also learned to research on different topics. I would also like to thank
my batch mates and the seniors who guided me in this project.

I would also like to give credit to my mother, my father and my sister

who encouraged, motivated and steered my way joining law college.

Again, I would like to thank who all those who assisted me in making
this project without them I could not have completed the project.

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 INDEX

Sr. Particulars [Link]

no
1. Introduction 4

2. Classification of Banks 5

3. Types of Banks 7
1. Central Bank of India 7-9
2. Cooperative Banks 10-11
3. Commercial Banks 12-13
4. Public Sector Banks 14
5. Private Sector Banks 15
6. Specialized Banks 16
7. Small Finance Banks 17
8. Payments Bank 18
4. Case Law 19

5. Conclusion 20

6. References 21

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INTRODUCTION

Banking Law

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. Banks are a subset of the
financial services industry. Almost in any country, banks represent main pillar of financial
stability. Beside financial intermediaries, banks play an important role as national financial
institutions in everyday life. A banking system provide and offer cash management services
for customers, reporting the transactions of their accounts and portfolios throughout the
day, trade with financial and bank’s financial instruments, offer exchange of currency and
disburse different type of funds. The Banking sector offers several facilities and
opportunities to their customers. All the banks safeguard the money and valuables and
provide loans, credit, and payment services.

The banks also offer investment and insurance products. As a variety of models for
cooperation and integration among finance industries have emerged, some of the traditional
distinctions between banks, insurance companies, and securities firms have diminished. In
spite of these changes, banks continue to maintain and perform their primary role accepting
deposits and lending funds from these deposits. Banks are institutions which provide and
hold liquidity sustainable flow for all other financial and non-financial institutions. Through
the monitoring and controlling of the banks, central bank can sustain and provide impact
on country’s financial situations. Today banks deal with different personality, different
consumer behaviour, manners and cultures. Customers can be seen as different generally,
because they have different opportunities, financial capabilities, personalities, egos, social
characters, different tastes and by any other aspects they are absolutely different from one
to another. Through the segmentation bank differentiate customers and rank them according
to its own interests and needs.

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CLASSIFICATION OF BANKS

There are two broad categories under which banks are classified in India-

1. SCHEDULED
2. NON-SCHEDULED BANKS.

1. Scheduled Banks

The banks that do follow the provisions specified under the Reserve Bank of India and meet
the standards specified under clause 42 of the Reserve Bank of India Act, 1934, are
Scheduled Banks.

Scheduled banks are listed under the second schedule of the Reserve Bank of India (RBI)
Act, 1934. They need to raise funds of at least Rs 5 Lakh. They borrow money from the
Scheduled banks at the bank rate. Some major classifications of scheduled banks are
Nationalized banks, regional rural banks, foreign banks, state banks of India, scheduled
commercial banks, cooperative banks, etc.

Key Features of Scheduled Bank

 They are managed by the Reserve Bank of India, the central bank of India. Hence, they
are listed under the second schedule of the Reserve Bank of India Act, 1934.

 They meet certain criteria specified by the Central Bank RBI to be included in the
second schedule of the RBI Act 1934.

 They are eligible for various banking facilities from the RBI whenever they need them.
They can also get loans from RBI at bank rates.

 They gain the trust of the common citizens of the country as they are under the RBI,
which is the central financial organisation of the country.

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2. Non- Scheduled Banks

The banks that do not follow the provisions specified under the Reserve Bank of India and
do not meet the standards specified under clause 42 of the Reserve Bank of India Act,
1934, are Non-Scheduled Banks.

The Non-Scheduled banks reserve funds of value less than 5 lakh rupees and are omitted
from the second scheduled list of the Reserve Bank of India Act, 1934. This is because
they do not meet the criteria set by the RBI under clause 42. However, they adhere to the
RBI rules set for every banking organization in India.

Key Features of Non- Scheduled Bank

 They are not included in the second scheduled list of the Reserve Bank of India Act, of
1934. Hence, they often do not have access to certain privileges provided to the
scheduled banks in India, such as clearinghouse membership, refinancing facilities,
loan privileges at a lower interest rate, etc.

 They generally have a fund capital of less than Rs 5 lakhs. They can only borrow loans
from the RBI in emergency situations, not for normal banking work.

 They maintain their cash reserve ratio themselves without any support from the
Reserve Bank of India.

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TYPES OF BANKS

1. CENTRAL BANK (RESERVE BANK OF INDIA)

Meaning of a central bank A central bank is a financial institution that acts as the apex
monetary authority within a country or a group of countries. Its primary objective is to
manage and control the country's money supply, currency, and interest rates to achieve
specific economic and financial goals. The central bank typically operates independently
or with limited political interference to maintain stability in the financial system and support
the overall economic well-being.

Introduction to Reserve Bank of India (RBI)-

 Role and Functions

The Reserve Bank of India (RBI) is the central bank of India and was established on April
1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The RBI
operates under the overall guidance and direction of the Central Board of Directors, which
is appointed by the Government of India. The Governor, appointed by the central
government, is the highest-ranking official of the RBI and is responsible for its day-to-day
operations.

1. Monetary Authority

• Formulates, implements and monitors the monetary policy.

• Objective: maintaining price stability while keeping in mind the objective of growth.

2. Regulator and supervisor of the financial system

• Prescribes broad parameters of banking operations within which the country's banking
and financial system functions.

• Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.

3. Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999.

• Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

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4. Issuer of currency

• Issues, exchanges and destroys currency notes as well as puts into circulation coins minted
by Government of India.

• Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.

5. Developmental role

• Performs a wide range of promotional functions to support national objectives.

6. Regulator and Supervisor of Payment and Settlement Systems

• Introduces and upgrades safe and efficient modes of payment systems in the country to
meet the requirements of the public at large.

• Objective: maintain public confidence in payment and settlement system.

Developmental / Promotional Functions of RBI

1. Development of the Financial System

The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid
economic development of the nation. The RBI has encouraged establishment of main
banking and nonbanking institutions to cater to the credit requirements of diverse sectors
of the economy.

2. Development of Agriculture

In an agrarian economy like ours, the RBI has to provide special attention for the credit
need of agriculture and allied activities. It has successfully rendered service in this direction
by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and
Development Corporation (ARDC) to look after the credit, National Bank for Agriculture
and Rural Development (NABARD) and Regional Rural Banks (RRBs).

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3. Provision of Industrial Finance

Rapid industrial growth is the key to faster economic development. In this regard, the
adequate and timely availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in setting up special
financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

4. Provisions of Training

The RBI has always tried to provide essential training to the staff of the banking industry.
The RBI has set up the bankers' training colleges at several places. National Institute of
Bank Management i.e. NIBM, Bankers Staff College i.e. BSC and College of Agriculture
Banking i.e. CAB are few to mention.

5. Collection of Data

Being the apex monetary authority of the country, the RBI collects process and disseminates
statistical data on several topics. It includes interest rate, inflation, savings and investments
etc. This data proves to be quite useful for researchers and policy makers.

6. Publication of the Reports

The Reserve Bank has its separate publication division. This division collects and publishes
data on several sectors of the economy. The reports and bulletins are regularly published by
the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress
of Commercial Banks India., etc. This information is made available to the public also at
cheaper rates.

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2. COOPERATIVE BANKS

A co-operative bank is a financial entity which belongs to its members, who are at the same
time the owners and the customers of their bank. It is often established by people belonging
to the same local or professional community having a common interest. It is formed to
promote the upliftment of financially weaker sections of the society and to protect them
from the clutches of money lenders who provide loans at an unreasonably high-interest rate
to the needy. The co-operative structure is designed on the principles of cooperation, mutual
help, democratic decision making and open membership.

Cooperatives Banks are registered under the Cooperative Societies Act, 1912. These are
regulated by the Reserve Bank of India and National Banks for Agricultural and Rural
Development (NABARD) under the Banking Regulation Act, 1949 and Banking Laws Act,
1965.

Types of Cooperative Banks

1. Primary Co-operative Credit Society

 The Primary Co-operative Credit Society is an association of borrowers and non-

borrowers residing in a particular locality.
 The funds of the society are derived from the share capital and deposits of members and
loans from central co-operative banks.
 Borrowing constitutes the most important element of their working capital.
 The borrowing powers of the members as well as of the society are fixed but may differ
from state to state.
 The loans are given to members for the purchase of cattle, fodder, fertilizers and
pesticides.

2. Central Co-operative Banks

 These are federations of primary credit societies in a district and are of two types:
1. Those having a membership of primary societies only

2. Those are having membership of societies as well as individuals.

 The funds of the bank consist of share capital, deposits, loans and overdrafts from state
co-operative banks and joint stocks.

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 These banks provide finance to member societies within the limits of the borrowing
capacity of societies.
 They also conduct all the business of a joint-stock bank.

3. State Co-operative Banks

 The state co-operative bank is a federation of central co-operative bank and acts as a
watchdog of the co-operative banking structure in the state.
 It procures funds from share capital, deposits, loans and overdrafts from the Reserve
Bank of India.
 The state co-operative banks lend money to central co-operative banks and primary
societies and not directly to the farmers.

4. Land Developments Banks

 These are organized in 3 tiers, namely; state, central, and primary level with the objective
to meet the long-term credit requirements of the farmers for developmental purposes.
 National Bank for Agricultural and Rural Development (NABARD) supervises land
development banks.
 The sources of funds for these banks are the debentures subscribed by both Central and
State government as these banks do not accept deposits from the general public.

Functions of Cooperative Banks

 It provides financial assistance to people with small means and protects them from the
latches of money lenders providing loans and other services at a higher rate at the
expense of the needy.
 It supervises and guides affiliated societies.
 Rural financing- It provides financing to rural sectors like cattle farming, crop farming,
hatching, etc. at comparatively lower rates.
 Urban financing- It provides financing for small scale industries, personal finance, home
finance, etc.
 It mobilises funds from its members and provides interest on the invested capital.

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3. COMMERCIAL BANKS

A commercial bank is a kind of financial institution that carries all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment,
and other such activities. These banks are profit-making institutions and do business only
to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank
receives the deposits and gives money to various projects to earn interest (profit). The rate
of interest that a bank offers to the depositors is known as the borrowing rate, while the rate
at which a bank lends money is known as the lending rate.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a type of commercial banks where private individuals and businesses
own a majority of the share capital. All private banks are recorded as companies with
limited liability. Such as Housing Development Finance Corporation (HDFC) Bank,
Industrial Credit and Investment Corporation of India (ICICI) Bank, Yes Bank, and more
such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a
significant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank,
Corporation Bank, and Punjab National Bank.

Foreign bank –: These banks are established in foreign countries and have branches in
other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking
Corporation (HSBC), Standard & Chartered Bank, Citibank, and more such banks.

Examples of Commercial Banks

1. State Bank of India (SBI)

2. Housing Development Finance Corporation (HDFC) Bank

3. Industrial Credit and Investment Corporation of India (ICICI) Bank

4. Dena Bank

5. Corporation Bank

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Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit: The bank takes deposits in the form of saving, current, and fixed deposits.
The surplus balances collected from the firm and individuals are lent to the temporary
requirements of the commercial transactions.

Provides loan and advances: Another critical function of this bank is to offer loans and
advances to the entrepreneurs and business people, and collect interest. For every bank, it
is the primary source of making profits. In this process, a bank retains a small number of
deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand
loans, overdraft, cash credit, short-run loans, and more such banks.

Credit cash: When a customer is provided with credit or loan, they are not provided with
liquid cash. First, a bank account is opened for the customer and then the money is
transferred to the account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of

money to be paid against the goods purchased at a given point of time in the future. The
amount can also be cleared before the quoted time through a discounting method of a
commercial bank.

Overdraft facility: It is an advance given to a customer by keeping the current account to

overdraw up to the given limit.

Purchasing and selling of the securities: The bank offers you with the facility of selling
and buying the securities.

Locker facilities: A bank provides locker facilities to the customers to keep their valuables
or documents safely. The banks charge a minimum of an annual fee for this service.

Paying and gathering the credit: It uses different instruments like a promissory note,
cheques, and bill of exchange.

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4. PUBLIC SECTOR BANKS

Public sector banks are those in which the government holds more than 50% of the total
stock. The government formulates all the financial guidelines for public sector banks. The
public sector banks operate under the government to inspire trust in the depositors that their
money is safe.

India’s biggest public sector bank is the State Bank of India. Public sector banks constantly
work in the public interest by introducing schemes for customers’ benefit. They also charge
less for their services than private banks. Besides working in the public interest,
nationalised banks in India also earn huge profits.

Public Sector Banks:

 State Bank of India (SBI)  Central Bank of India

 Bank of India  Union Bank of India
 Bank of Baroda  Bank of Maharashtra

Functions of Public Sector Banks

 Providing Essential Banking Services: PSBs accept deposits, offer loans for
personal, business, and agricultural needs, and provide remittance and foreign
exchange services.

 Promoting Financial Inclusion: They help include underserved communities by

offering basic accounts and small loans, working to ensure financial access for all.

 Supporting Public Welfare: Public sector banks in India implement various

government schemes, from housing subsidies to education loans.

 Boosting Economic Growth: By lending to major sectors like agriculture and

infrastructure, PSBs contribute to overall economic development.

 Managing Public Debt and Monetary Policy: PSBs assist in managing the
government’s debt and play a role in implementing monetary policies set by the
central bank.

 Infrastructure Financing: Public sector banks finance major infrastructure

projects, contributing to national development in sectors such as transportation and
energy.

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5. PRIVATE SECTOR BANKS

Private sector banks form a significant cornerstone in the modern Indian banking scenario.
These will include all those financial institutions where the majority of the equity or control
lies in private hands. The private sector banks play a very important role in promoting
competition, upgrading the level of customer service, and introducing innovation into the
industry. While public sector banks are state-owned and controlled, their private sector
counterparts must work in the market environment and attempt to achieve efficiency and
profitability through customer satisfaction.

List of Private Sector Banks in India

According to the Reserve Bank of India, India has 21 private sector banks as of June 2023.
Some major ones include:

 HDFC Bank  Yes Bank

 ICICI Bank  Federal Bank

 Axis Bank  South Indian Bank

 Kotak Mahindra Bank  DCB Bank

 IndusInd Bank  RBL Bank

Advantages of private sector bank

There are several reasons why private sector banks are widely famous among customers in
India. The first reason is the swift service provided by a majority of the private banks in
India. They are also providing customised financial plans to cater to the needs and
requirements of the customers. Private sector banks are known for their efficient
management system. Last but not least, private banks are known for providing quick
solutions to the decisions taken by the customers.

Disadvantages of Commercial Banks

Since everything has pros and cons, private sector banks are not an exception. The charges
of services provided by private sector banks are very high compared to the free service
provided by the public banks. Currently, the majority of the privately-owned banks have
branches across the country’s main cities and are relatively inaccessible in rural areas. Last
but not least, private sector banks fail to provide job security to their employees

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6. SPECIALIZED BANKS

Certain banks are introduced for specific purposes only. Such banks are called specialized
banks. These include:

1. The Export-Import Bank of India (EXIM Bank)

The Export-Import Bank of India is a subsidiary of the National Bank for Agricultural and
Rural Development (EXIM Bank). EXIM is an example of a specialised bank in India.
EXIM Bank is the central bank of India which controls the various transactions of big
institutions. The Indian government regulates its work. EXIM banks provide all types of
banking utilities for both exporters and importers. It also provides relevant info about the
risk and opportunities circulating in the market.

2. The National Bank for Agricultural and Rural Development (National Bank for
Agricultural and Rural Development)

The National Bank for Agricultural and Rural Development is an example of a specialised
bank. The National Bank for Agriculture and Rural Development or NABARD. These
banks provide loans and credits to various organisations to invest in the development of
India. The primary goal of this bank is to facilitate rural development and rural prosperity
in the country. It gives high funds for agricultural development and provides financial
support to the farmers.

3. The Small Industries Development Bank of India (SIDBI)

The Small Industries Development Bank of India (SIDBI) performs the following
functions:

 Starts the process of adopting new technology, exchanging old technology,

transferring and upgrading existing units, and modernising them.

 SIDBI invests in favourable equity-type loans, term loans, working capital in rupees
and foreign currencies, venture capital support, and other types of resource support
for banks and other financial institutions.

 The SIDBI, in collaboration with commercial banks, ensures that SSI receives credit
for both term loans and working capital on a timely basis.

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7. SMALL FINANCE BANKS

Small Finance Bank (SFB) is a coming-of-an-age concept introduced to make the Indian
banking system stronger and less dependent. It was introduced in 2015 to cater to a certain
domain of customers. The following banking awareness study notes elaborate more on the
small finance bank in terms of its meaning, objectives, and role in the economy.

 The main objective of the small finance bank is to strengthen the financial inclusion by
extending basic banking services like deposits and the supply of credit across the
country.

 The SFBs are a certain kind of financial institution that provides financial services to
the unserved and unbanked areas in India.

 These banks are registered under the Companies Act 2013 as a public limited company.

Features of Small Finance Banks

o Resident individuals having minimum 10 years of experience or more in banking

and finance, companies and Societies will be eligible to act as promoters to set up
small finance banks.

o NBFCs (Non-Banking Financial Companies), MFIs (microfinance institutions), and

LABs (Local Area Banks) can convert their operations into those of small finance
banks.

o They must chiefly undertake basic banking services like lending advances and
accepting deposits to the needy and deserving category. It is not permitted for the
SFBs to establish subsidiaries to undertake non-banking financial functions.

o The Small Bank might need to diversify its portfolio of loans. The maximum loan
size and investment limit exposure to group borrowers individuals is restricted to
15% of capital funds

o Loans and advances less than or equal to INR 25 lakhs, must constitute a minimum
of 50% of the loan portfolio. This must be primarily aimed at the micro-enterprises
only.

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8. PAYMENTS BANKS

Payments Banks

A newly introduced form of banking, the payments bank has been conceptualized by the
Reserve Bank of India. People with an account in the payments bank can only deposit an
amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.

Options for online banking, mobile banking, the issue of ATMs, and debit cards can be done
through payments banks. Given below is a list of the few payments banks in our country:

 Airtel Payments Bank

 India Post Payments Bank

 Fino Payments Bank

 Jio Payments Bank

 Paytm Payments Bank

 NSDL Payments Ban

Features of Payment Banks in India

 A payment bank is a special sort of bank that solely performs the limited banking tasks
that the Banking Regulation Act of 1949 allows.

 Some activities include deposit acceptance, payments and remittance services, internet
banking, and acting as a business correspondent for other banks.

 They can take deposits of up to Rs 1 lakh per person at first.

 They can assist with money transfers and insurance, and mutual fund sales.

 They can also only issue ATM/debit cards and not credit cards.

 They are not permitted to engage in any lending activity.

 Payment Banks are not allowed to issue Loans and cannot accept NRI Deposits.

 A person with a payment bank account might deposit and take money from any ATM
or other service provider.

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CASE LAWS

Punjab National Bank Fraud Case

 The fraud with Punjab National Bank, India’s largest Public Sector Bank was shocking.
On 14th February 2018, Punjab National Bank disclosed to the Bombay Stock Exchange
(BSE) that a fraud of approximately 1.8 billion dollars was detected.
 The Punjab National Bank filed a complaint with the Central Bureau of Investigation
(CBI) against Nirav Modi, and a jewellery company reporting fraudulent transactions
worth Rs. 11,400 crores.
 On 16 January, the bank was approached by partnership firms, Diamond R US, Solar
Exports and Stellar Diamonds which were controlled by Nirav Modi. They wanted the
Buyer’s Credit (short term loan facility) as they had to make payments to overseas
suppliers.
 Since the firms did not have a sanctioned limit in their names, they were required to
furnish 100% cash margin for issuing the LoU (Letter of Undertaking) which was
required for availing the Buyer’s Credit. The firms claimed that they had availed buyer’s
credit in the past, but the records of the bank did not verify that.
 It was found that 2 employees of the bank had fraudulently issued LoUs without
following the proper procedure. In order to avoid entries in the banking system, the
employees had transmitted SWIFT (The Society for Worldwide Interbank Financial
Telecommunication) instructions to overseas branches of Indian banks so as to raise the
Buyer’s Credit. This is India’s largest banking fraud.
 The PNB scam has left a more than noticeable dent on India’s banking sector. A positive
outcome of this is that the government is more watchful and attuned to the banking
sector and its various happenings.
 The scam also gives both the government and the reserve bank the opportunity to enact
reforms. While the Fugitive Economic Offenders Act is certainly a good start, it must
not be the only legislation enacted in this regard.
 It is crucial that we continue to push for reform in the banking sector, so as to prevent
old and well-established banks like the PNB from having their reputations soiled in the
coming future.

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CONCLUSION

Banking system is a collection of institutions that provides us with financial services. These
organizations are in charge of running a payment system, making loans, accepting deposits,
and assisting with investments. The Reserve Bank of India (RBI), commercial banks,
cooperative banks, and development banks comprise India’s banking system (development
finance institutions). The core of India’s financial system is these institutions, which serve
as a meeting point for savers and investors. Banks play a vital role in the development of
poor countries by mobilizing resources and efficiently allocating them. The Indian banking
system is diverse, catering to a wide range of financial needs, from large commercial banks
to smaller institutions focusing on specific segments such as rural populations or specialized
sectors. This variety ensures that there is a banking solution for every need, promoting
financial inclusion and economic growth across the country.

The banking system in India is highly diversified and plays a crucial role in the country's
economic growth and development. It is governed by a well-established legal and
regulatory framework, which includes key statutes like the Reserve Bank of India Act,
1934, and the Banking Regulation Act, 1949, among others. These laws and regulations
ensure that banks operate in a safe, sound, and efficient manner, contributing to financial
stability.

India's banking sector consists of various types of banks, including public sector banks,
private sector banks, foreign banks, cooperative banks, regional rural banks (RRBs), and
newer entities like payment banks and small finance banks, all aimed at catering to different
segments of society. These banks provide a wide range of services, from traditional savings
accounts and loans to more specialized products designed for financial inclusion, rural
development, and small businesses.

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BIBLIOGRAPHY

The Banking Regulation Act, 1949

The Reserve Bank of India Act, 1934

WEBLIOGRAPHY

[Link]

[Link]

[Link]

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