Banking System in India: Structure,

Banking System in India or Indian Banking System is the cornerstone of the nation’s
economic framework. By channeling funds from savers to borrowers, and facilitating
investment and individual financial needs, it plays a crucial role in the country’s economic
development. Understanding the structure and functions of the Indian Banking System is
essential for developing a grasp of the Indian Financial System.
This article aims to study in detail the Banking System in India, including its classification,
structure, types of banks, and other related concepts.
●​ What is Banking System in India?
●​ Classification of Banks in India
○​ Scheduled Banks
○​ Non-Scheduled Banks
○​ Difference between Scheduled Banks and Non-Scheduled Banks
●​ Structure of Banking System in India
○​ Reserve Bank of India (RBI)
○​ Commercial Banks
○​ Cooperative Banks
○​ Development Banks
○​ Differentiated Banks
●​ Non-Banking Finance Companies (NBFCs)
○​ Difference between NBFCs and Banks
●​ Basel Norms or Basel Accords
○​ Basel I Norms
○​ Basel II Norms
○​ Basel III Norms
●​ Capital-to-Risk Weighted Asset Ratio (CRAR) or Capital Adequacy Ratio (CAR)
●​ Related Concepts
○​ Domestic Systemically Important Banks (D-SIBs)
○​ Neo Banks

What is Banking System in India?

Banking System in India or Indian Banking System or Banking Sector in India refers to a
network of financial institutions, such as banks and credit unions, that handle financial
transactions and provide financial services to individuals, businesses, and governments.
These institutions, primarily, act as intermediaries between people with money i.e. savers,
and those who need money i.e. borrowers. The types of services offered by the banking
institutions, usually, include accepting deposits, lending money, facilitating transactions, and
offering various financial products like savings accounts, loans, and credit cards.

Classification of Banks in India

Banks, forming part of the Banking System in India, can be divided into two categories –
1. Scheduled Banks and
2. Non-Scheduled Banks.
1.​ Scheduled Banks
Scheduled Banks under the Banking System in India refer to those financial institutions that
are listed in the 2nd Schedule of the Reserve Bank of India Act, 1934. This inclusion
signifies that they meet specific criteria set by the RBI and are subject to its stricter regulations.
A bank to be listed in the schedule has to satisfy the following 2 conditions:
1.​ It should have paid-up capital and reserves of not less than 5 lacs, and
2.​ It should satisfy the RBI that their affairs are not being conducted in a manner
detrimental to the interest of their depositors.
3.​ They should either be a company as per the Companies Act 1956 or a State
Cooperative Bank or a corporation or any institution notified by the government of India
in this regard.
Every week, the scheduled banks have to provide the details of their activities to the
RBI.
All the RRBs, Cooperative Banks, Indian, and foreign commercial banks belong to the
scheduled banks category.
Scheduled banks are further classified into commercial banks and cooperative banks.

If any Scheduled Bank violates these conditions, it gets de-listed from the schedule.
A Scheduled Bank gets the following benefits:
●​ Facility of loans on Bank Rate from RBI.
●​ Automatic membership of Clearing House.
●​ Facility of Re-Discount of first-class exchange bills from RBI.

Regional Rural Banks (RRB)

●​ These are special types of commercial Banks that provide concessional credit to agriculture
and rural sectors.
●​ RRBs were established in 1975 and are registered under the Regional Rural Bank Act, 1976.
●​ Regional Rural Banks (RRB) are the banks established with the aim of ensuring sufficient
institutional credit for agriculture and other rural sectors.
 ●​ The area of operation of RRBs is limited to the area notified by the Central Government.
RRBs are owned jointly by the Government of India, the State Government and Sponsor
Banks.
●​ RRBs are joint ventures between the Central government (50%), State government (15%),
and a Commercial Bank (35%).
●​ 196 RRBs have been established from 1987 to 2005.
●​ From 2005 onwards government started the merger of RRBs thus reducing the number of
RRBs to 82
●​ One RRB cannot open its branches in more than 3 geographically connected districts

The Regional Rural Banks in India are the Commercial Banks operating in various rural areas of the
country.

The Institute of Banking Personnel Selection is the body which conducts the IBPS RRB exam across
the country and is one of the largest banking sector Organisations in the country.

There are a total of 56 Regional Rural Banks in India.The Reserve Bank of India, which is the central
bank of the country is responsible for regulating Regional Rural Banks in India.

List of Regional Rural Banks in India

State Name of RRB Sponsor Bank Head Office

Andhra Pradesh Andhra Pragathi Syndicate Bank Kadapa

Grameena Bank

Chaitanya Godavari Andhra Bank Guntur

Grameena Bank

Andhra Pradesh State Bank of India Kadapa

Grameena Vikas Bank
 Saptagiri Grameena Indian Bank Chittor
Bank

Arunachal Pradesh Arunachal Pradesh State Bank of India Naharlagun

Rural Bank

Assam Assam Gramin Vikash United Bank of India Guwahati

Bank

Langpi Dehangi Rural State Bank of India Diphu

Bank

Bihar Uttar Bihar Gramin Central Bank of India Muzaffarpur

Bank

Bihar Gramin Bank UCO Bank Patna

Madhya Bihar Gramin Punjab National Bank Patna

Bank

Chhattisgarh Chhattisgarh Rajya State Bank of India Raipur

Gramin Bank

Gujarat Baroda Gujarat Bank of Baroda Bharuch

Gramin Bank
 Dena Gujarat Gramin Dena Bank Gandhinagar
Bank

Saurashtra Gramin State Bank of India Rajkot

Bank

Haryana Sarva Haryana Punjab National Bank Rohtak

Gramin Bank

Himachal Pradesh Himachal Pradesh Punjab National Bank Mandi

Gramin Bank

Jammu and Kashmir Ellaquai Dehati Bank State Bank of India Srinagar

J&K Grameen Bank J&K Bank Ltd. Jammu

Jharkhand Vananchal Gramin State Bank of India Ranchi

Bank

Jharkhand Gramin Bank of India Ranchi

Bank

Karnataka Pragathi Krishna Canara Bank Ballari

Gramin Bank

Kaveri Gramin Bank State Bank of India Mysuru

 Karnataka Vikas Syndicate Bank Dharwad
Grameena Bank

Kerala Kerala Gramin Bank Canara Bank Mallapuram

Madhya Pradesh Narmada Jhabua Bank of India Indore

Gramin Bank

Central Madhya Central Bank of India Indore

Pradesh Gramin Bank

Madhyanchal Gramin State Bank of India Sagar

Bank

Maharashtra Vidarbha Konkan Bank of India Nagpur

Gramin Bank

Maharashtra Gramin Bank of Maharashtra Aurangabad

Bank

Manipur Manipur Rural Bank United Bank of India Imphal

Meghalaya Meghalaya Rural State Bank of India Shillong

Bank

Mizoram Mizoram Rural Bank State Bank of India Aizawl

Nagaland Nagaland Rural Bank State Bank of India Kohima

Odisha Odisha Gramya Bank Indian Overseas Bank Bhubaneshwar

Utkal Grameen Bank State Bank of India Bolangir

Puducherry Puduvai Bharathiar Indian Bank Puducherry

Grama Bank

Punjab Punjab Gramin Bank Punjab National Bank Kapurthala

Malwa Gramin Bank State Bank of India Sangrur

Sutlej Gramin Bank Bhatinda

Rajasthan Baroda Rajasthan Bank of Baroda Ajmer

Kshetriya Gramin
Bank

Rajasthan Marudhara State Bank of India Jodhpur

Gramin Bank

Tamil Nadu Pallavan Grama Bank Indian Bank Salem

Pandyan Grama Bank Indian Overseas Bank Virudhunagar

Telangana Telangana Grameena State Bank of India Hyderabad
Bank

Tripura Tripura Gramin Bank United Bank of India Agartala

Uttar Pradesh Gramin Bank of Bank of India Lucknow

Aryavart

Allahabad UP Gramin Allahabad Bank Banda

Bank

Baroda Uttar Pradesh Bank of Baroda Raebareli

Gramin Bank

Kashi Gomti Samyut Union Bank of India Varanasi

Gramin Bank

Sarva UP Gramin Punjab National Bank Meerut

Bank

Prathama UP Gramin Syndicate Bank Moradabad

Bank

Purvanchal Bank State Bank of India Gorakhpur

 Uttarakhand Uttarakhand Gramin State Bank of India Dehradun
Bank

West Bengal Bangiya Gramin United Bank of India Murshidabad

Vikash Bank

Paschim Banga UCO Bank Howrah

Gramin Bank

Uttarbanga Kshetriya Central Bank of India Coochbehar

Gramin Bank

Non-Scheduled Banks
Non-Scheduled Banks under the Banking System in India refer to those financial institutions
that don’t meet the criteria to be included in the 2nd Schedule of the Reserve Bank of India
Act, 1934. Being excluded from the schedule means they operate under a different set of
regulations as compared to Scheduled Banks.
Non-scheduled banks are sometimes legal entities, but they do not have procedural
support from the government.
These banks have to compulsorily reimburse a reserve amount of INR 5 lakh to the RBI
and this capital must be held throughout their operational phase.
Non-scheduled banks are not bound to the rules and regulations of the RBI and they
are required to maintain the CRR (Cash Reserve Ratio) with themselves and not with
the RBI.

Difference between Scheduled Banks and Non-Scheduled Banks

Basis of Difference Scheduled Banks Non-Scheduled Banks

Meaning A banking company under A banking company under

the Banking System in the Banking System in
India which is listed in the India that is not mentioned
 second schedule of the in the second schedule of
RBI Act 1934. the RBI Act 1934.

Criteria – Should have a paid-up – No fixed criteria as such.

capital of `5 lakhs or more.
– Have to ensure that its
affairs are not conducted in
a manner detrimental to
the interest of its
depositors.

Regulatory – Have to keep CRR – Have to maintain CRR

Requirements deposits with the deposits with
Reserve Bank of India. themselves.
– Required to file their – No requirements of filing
returns on a periodic returns as such.
basis.

Rights Available – Authorized to borrow – Usually, not authorized to

funds from the RBI. borrow funds from the RBI.
– Can apply to join the However, they can borrow
clearinghouse. from the RBI under
– Can avail of the facility of emergency conditions.
rediscount of first-class – Not eligible for
exchange bills from RBI. membership in the
clearinghouse.
– Facility of rediscounting
exchange bills from RBI is
not available for them.

Risk They are financially stable These banks are riskier to

and are unlikely to hurt the do business.
rights of the depositors.

Examples Most of the banks under Only a few types of banks

the Banking System in under the Banking System
India are Scheduled in India are Non-Scheduled
Banks. For example, Banks. For example, Local
Commercial Banks, Area Banks (LABs), and
Private, and Public Sector some Urban Cooperative
Banks. Banks (UCBs).
Structure of Banking System in India
The Reserve Bank of India (RBI) sits at the top of the structure of the Banking System in
India and acts as the central bank of India. Beneath the central bank operates various types of
banks as discussed in the sections that follow.

Reserve Bank of India (RBI)

●​ The Reserve Bank of India (RBI) is the Central Bank of India, meaning that it is the
apex body in the Banking System in India.
●​ It is owned by the Union Ministry of Finance.
●​ It acts as a regulatory body, responsible for the regulation of the Indian banking
system as well as the control, issuing, and maintaining money supply in the Indian
economy.
Commercial Banks
●​ Commercial Banks refer to those banks under the Banking System in India that run on
a commercial basis. It means that they operate and offer services to earn a profit.
●​ They are regulated under the Banking Regulation Act, 1949.

Commercial Banks

●​ Organised under the Banking Companies Act, 1956

●​ They operate on a commercial basis and its main objective is profit.
●​ They have a unified structure and are owned by the government, state, or any private entity.
●​ They tend to all sectors ranging from rural to urban
●​ These banks do not charge concessional interest rates unless instructed by the RBI
●​ Public deposits are the main source of funds for these banks

The commercial banks can be further divided into three categories:

 1.​ Public sector Banks – A bank where the majority stakes are owned by the Government or
the central bank of the country.
2.​ Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3.​ Foreign Banks – The banks with their headquarters in foreign countries and branches in our
country, fall under this type of bank

Given below is the list of commercial banks in our country:

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks

State Bank of India Catholic Syrian Bank Australia and New Zealand
Banking Group Ltd.
Allahabad Bank City Union Bank
National Australia Bank

Andhra Bank Dhanlaxmi Bank

Westpac Banking Corporation

Bank of Baroda Federal Bank

Bank of Bahrain & Kuwait BSC

Bank of India Jammu and Kashmir Bank

AB Bank Ltd.

Bank of Maharashtra Karnataka Bank

HSBC

Canara Bank Karur Vysya Bank

CITI Bank

Central Bank of India Lakshmi Vilas Bank

Deutsche Bank

Corporation Bank Nainital Bank

 Dena Bank Ratnakar Bank DBS Bank Ltd.

Indian Bank South Indian Bank United Overseas Bank Ltd

Indian Overseas Bank Tamilnad Mercantile Bank J.P. Morgan Chase Bank

Oriental Bank of Commerce Axis Bank Standard Chartered Bank

Punjab National Bank Development Credit Bank There are over 40 Foreign
(DCB Bank Ltd) Banks in India

Punjab & Sind Bank

HDFC Bank

Syndicate Bank
ICICI Bank

Union Bank of India

IndusInd Bank

United Bank of India

Kotak Mahindra Bank

UCO Bank
Yes Bank

Vijaya Bank
IDFC

IDBI Bank Ltd.

Bandhan Bank of Bandhan
Financial Services.

Cooperative Banks
 ●​ Cooperative Banks refer to those financial institutions under the Banking System in
India that operate on the principles of cooperation and mutual benefit for their
members.
●​ They belong to their members who are both the owners and customers of the bank.
○​ Thus, it can be said that the customers are the owners of these banks.
●​ Cooperative Banks are named so because these have the cooperation of stakeholders
as the motive.
●​ These banks are organised under the state government’s act. They give short-term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans

They are organised in the 3-tier structure

●​ Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
●​ Funded by RBI, the government and NABARD. Money is then distributed to the
public
●​ Concessional CRR and SLR apply to these banks. (CRR- 3%, SLR- 25%)
●​ Owned by the state government and top management is elected by members
●​ Tier 2 (District Level) – Central/District Cooperative Banks
●​ Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Development Banks
●​ Development Banks are also known as Term-Lending Institutions (TLIs) or
Development Finance Institutions (DFIs).
●​ They are specialized financial institutions under the Banking System in India that
provide long-term finance and support to the sectors of the Indian economy which
possess higher risks and cannot have access to adequate loans from Commercial
Banks.

Differentiated Banks
●​ Differentiated Banks under the Indian Banking System refer to those banks that cater to
a specific segment of customers.
●​ The concept of Differentiated Banks was introduced in the Banking System in India by
the RBI based on the recommendations of the Nachiket Mor Committee in 2013 in
order to offer specialized services or unique products designed specifically to suit a
particular sector.
Non-Banking Finance Companies (NBFCs)
●​ A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 engaged in the business of loans and advances, acquisition
of shares/stocks/bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose principal
business is that of agriculture activity, industrial activity, purchase or sale of any goods
(other than securities) or providing any services and sale/purchase/construction of
immovable property.
●​ They are not considered part of the traditional Banking System in India, but they
do operate within the larger financial system regulated by the RBI.
●​ NBFC’s financial assets should constitute more than 50% of the total assets and
income from financial assets should constitute more than 50% of the gross income.
●​ While some NBFCs are regulated by the RBI, others are regulated by other
regulatory bodies.
○​ For example, Merchant Banking Companies are regulated by SEBI, and
Insurance Companies are regulated by IRDA.
Difference between NBFCs and Banks
Banks Non-Banking Financial Companies
(NBFCs)

Banks can accept Demand Deposits NBFCs cannot accept Demand Deposits.

Banks are a part of the Payment and NBFCs do not form a part of the Payment
Settlement System (PSS), and hence can and Settlement System (PSS), and hence
issue cheques drawn on itself. cannot issue cheques drawn on itself.

Bank Deposits are insured by the Deposit insurance facility of Deposit

Deposit Insurance of Deposit Insurance and Credit Guarantee
Insurance and Credit Guarantee Corporation is not available to depositors
Corporation (DICGC). of NBFCs.

Banks are required to maintain Reserve NBFCs are not required to maintain
Ratios prescribed by the RBI, such as Reserve Ratios prescribed by the RBI,
CRR, SLR, etc. such as CRR, SLR, etc.

Banks are regulated under Banking NBFCs are regulated under Companies
Regulation Act, 1949. Act, 1956.
 FDI is allowed upto 74% for Private FDI is allowed upto 100% for NBFCs.
Sector Banks.

Basel Norms or Basel Accords

●​ In the era of globalization, there are many banks which operate internationally. Failure in
any such banks may trigger a relatively large number of simultaneous failures within the
financial sector. Basel Norms are devised to avoid this.
●​ They aim to strengthen regulation, supervision, and risk management of the
banking sector in India and the world to improve its ability to absorb shocks arising
from financial and economic stress.
●​ Basel Norms are fixed by the Basel Committee on Banking Supervision (BCBS) – a
part of the Bank for International Settlements (BIS), Switzerland, which is a coordinating
agency for Central Banks of various countries.
●​ These norms are applicable to individual banks and Systemically Important
Financial Institutions (SIFIs).
●​ Their implementation is done by the Central Banks of the respective countries.
●​ So far, 3 sets of Basel Norms have been developed – Basel I, Basel II, and Basel III.
Basel I Norms
●​ The first Basel Accord, known as Basel I, was issued in 1988
●​ It focused on credit risks and defined capital and structure of risk weights for banks
●​ The minimum capital requirement was fixed at 8% of the Risk-Weighted Assets
(RWA-to an asset classification system that is used to determine the
minimum capital that banks should keep as a reserve to reduce the
risk of insolvency).
Basel II Norms
●​ It is the refined and reformed version of Basel I, which was published in 2004.
●​ It defined 3 types of risks – Operational Risks, Capital Risks, and Market Risks.
●​ Its 3 main pillars of Basel II were as follows:
Basel III Norms
●​ Basel III guidelines were released in December 2010 in the backdrop of the financial
crisis of 2008.
●​ The guidelines aim to promote a more resilient banking system by focusing on four vital
banking parameters viz. capital, leverage, funding, and liquidity.
●​ The 3 main pillars of Basel III are as follows:
Capital-to-Risk Weighted Asset Ratio (CRAR) or Capital
Adequacy Ratio (CAR)
●​ Capital-to-Risk Weighted Asset Ratio (CRAR) or Capital Adequacy Ratio (CAR) refers
to the availability of sufficient capital as a %ge of risk-weighted assets. Thus,

CRAR = (Total Capital/Total Risk-Weighted Assets) * 100

●​ Where, Total Risk-Weighted Capital = Weighted average of total capital assets held by
the bank.
●​ CRAR is fixed under Basal Norms.
●​ The principle behind fixing CRAR is that banks should have an adequate amount of
their own capital to cover risks arising from Bad Assets (Bad Loans)
●​ For the calculation of CRAR, the loan amount given in each sector is to be multiplied by
the presumed risk percentage of a specific sector. The product gives the amount of
risk-weighted assets. For example,
Purpose of Loan Loan Amount Risk Percentage Risk Weighted
(in ₹) Assets (RWA)
(in ₹)

Agriculture 100 20% 20

Industry 200 17.5% 35

Government 100 5% 5

Total 400 60

Related Concepts
Domestic Systemically Important Banks (D-SIBs)
●​ Domestic Systemically Important Banks (D-SIBs) under the Banking System in India
refer to those banks that are ‘Too Big to Fail (TBTF)’.
○​ Due to this perception, these banks enjoy certain advantages in the funding
markets.
●​ D-SIBs in India are recognized by the RBI under its framework issued in 2014.
○​ Usually, the banks whose assets exceed 2% of the GDP of India are
considered as D-SIBs.
 ●​ As of now, the State Bank of India (SBI), ICICI Bank, and HDFC Bank have been
identified as D-SIBs by the RBI.

Neo Banks
●​ Neobanks refers to the ‘fintech firms’ that solely have a digital presence, without any
physical branches.
●​ Neo banks are not regulated by the RBI. So far neo banks in India are not recognised
as ‘Banks’ by the Reserve Bank of India.
●​ Neo banks implement their services digitally and hence they are available for 24
hours every day including holidays. This is a major benefit as compared to the
traditional banks. You can have access to your new bank accounts simply
through the virtual cards and enjoy the services anytime.
●​ Besides, these tend to have effective customer support, which lets you customise
the services based on your requirements.
●​ Neobanks aims to give customers a cheaper alternative to traditional banks by
leveraging technology to offer personalized services to customers while minimizing
operating costs.
●​ There are more than 21 neo-banks in India.
●​ There are 2 types of Neobank models in India:
○​ Neobank doesn’t have a banking license themselves and instead partners up
with a traditional bank to provide their products,
○​ Neobanks obtain banking licenses themselves to operate fully on their own.
●​ Examples of neobanks in India include – there are several new banks in India which
include Freo, Zik Zuk, Akudo, Finin, Epifi, Chqbook, Niyo, Mahila Money, RazorPay X,
Instant Pay, Fam Pay, Fi Money, Jupiter etc.

Banking System in India or Indian Banking System is a dynamic and evolving entity,
continuously adapting to meet the changing needs of the economy and its citizens. As India
marches towards a more digital and inclusive future, the Banking System in India will
undoubtedly play a critical role in ensuring sustainable economic growth and prosperity.
Indian Economy