The Reserve Bank of India (RBI) claims that the Indian banking industry is well-capitalized and regulated. The nation has significantly better economic and financial conditions than any other nation on the globe. Studies on the risks associated with credit, markets, and liquidity point to Indian banks as being typically robust and doing well throughout the global recession.
Innovative banking formats like payments and small financing banks have recently been introduced to the Indian banking sector. India has recently concentrated on expanding the scope of its banking industry through a number of initiatives, including the Pradhan Mantri Jan Dhan Yojana and Post Payment Banks. These types of programs, together with important banking sector changes like digital payments, neo-banking, the growth of Indian NBFCs, and fintech, have greatly increased financial inclusion in India and fueled the country’s credit cycle.
With India’s Immediate Payment Service (IMPS) being the sole system at level five in the Faster Payments Innovation Index, the digital payments system in that nation has advanced the most among the other 25 nations (FPII). In recent years, India’s Unified Payments Interface (UPI) has worked to expand its worldwide reach while revolutionizing real-time payments.
There are three phases in which the banking industry develops:
Phase I – Early Phase (1770 to 1969), which can be subdivided into Pre Independence-Period (1786-1947) and Post-Independence Period (1947-1969)
Phase II – Nationalisation Phase (1969 to 1991)
Phase III – Liberalisation or Banking Sector Reforms Phase (1991 – till date)
Banking Structure in India
“Scheduled Banks” and “Non-scheduled Banks” are two categories in the Indian financial system. The following standards must be met by scheduled banks, which are those that are designated in the Second Schedule of the RBI Act of 1934:
- A bank must have at least Rs. 5 lakh in paid-up capital and reserves and
- A bank must demonstrate to the Reserve Bank of India (RBI) that its operations are not harming the interest on its deposits.
Non-scheduled banks are ones that aren’t included in the second schedule of the RBI Act of 1934 and don’t follow the guidelines set forth in that schedule. Scheduled commercial banks and scheduled cooperative banks are both referred to as “scheduled banks” in this context.
Four further groupings make up the Scheduled Commercial Banks:
- Public sector banks (also known as “nationalised banks” and “State Bank of India (SBI) banks”);
- Private sector banks (divided into “Old Private Sector Banks” and “New Private Sector Banks” that emerged after 1991);
- Foreign banks in India; and
- Regional Rural Banks (that operate exclusively in rural areas to provide credit and other facilities to small and marginal farmers, agricultural workers, and small entrepreneurs).
Foreign banks have a presence in the nation through representative offices or full branch/subsidiary operations. These scheduled commercial banks are registered in India under the Companies Act, except foreign banks.
Types of Banks
1. Commercial Banks
A commercial bank is any financial institution that manages the deposits and loans of companies. Checks, drafts, and term deposits are all accepted by commercial banks. These commercial banks also act as lenders through overdrafts and instalment loans. Additionally, they provide a range of deposit accounts, such as checking, savings, and time deposits. These organizations are privately owned and operated for profit.
2. Small Finance Banks
The Small Finance Bank (SFB) is a private financial institution that, unlike Regional Rural Banks or Local Area Banks, primarily carries out basic banking activities, such as deposit acceptance and lending to underserved segments, such as small business units, small and marginal farmers, micro and small industries, and unorganized sector entities.
3. Payment Banks
A special kind of bank known as a “payment bank” carries out just those restricted banking operations that are allowed by the Banking Regulation Act of 1949. Some of the operations include providing online banking, accepting deposits, payments, and remittance services, as well as serving as a business correspondent for other banks. They are initially allowed to accept deposits of up to Rs 1 lakh from each person. They can sell insurance and mutual funds in addition to offering assistance with money transfers. Additionally, they are only able to issue ATM/debit cards, not credit cards. To offer non-banking financial services, they are not allowed to set up subsidiaries. More crucially, they are allowed to do any financing services.
4. Co-operative Banks
A cooperative bank is a type of financial institution where its members, who are also its clients, own and run it. People from the same geographical or professional group or those with similar interests commonly get together to join cooperative banks. Cooperative banks often provide their members with a wide array of banking and financial services (loans, deposits, banking accounts etc.).
It is further divided into:
- Urban Cooperative Banks
- Rural Cooperative Banks
Banks play a key role in the advancement of an economy through lending to a variety of economic sectors for company expansion, business diversification, and backing of new initiatives. A banking system is a network of establishments that offers us financial services. These businesses are in charge of managing the financial system, approving loans, taking deposits, and aiding with investments. The banking system in India is made up of commercial banks, cooperative banks, and development banks (development finance institutions). These organizations, which act as a hub for savers and investors, are the foundation of the Indian financial system. Through the effective mobilization and distribution of resources, banks contribute significantly to the development of underdeveloped nations.