Structure of Banking Sector in India

A country's banking system is an important pillar that supports the financial system of the country's economy. The current banking structure in India has grown over several decades, is complex, and has been fulfilling the economy's credit and banking needs. In today's banking structure, there are several layers to cater to the distinct and varied needs of different customers and borrowers. In India, the banking system played a critical role in mobilising deposits and encouraging economic development. The performance and strength of the banking structure improved noticeably after the financial sector reforms (1991).

The Indian banking business is split into two categories: organised and unorganised. The Reserve Bank of India, Commercial and Cooperative Banks, and Specialized Financial Institutions make up the organised sector (IDBI, ICICI, IFC etc). Let us understand the structure of the banking sector in India in a detailed manner.

Structure of Indian Banking System

To understand the banking structure in India, we have to understand RBI. The Reserve Bank of India (RBI) is India's central and most important baking authority. Scheduled Banks and Non-Scheduled Banks are the two main types of banks.

According to the RBI Act, 1934, the Scheduled banking structures in India are all banks that are listed in the second schedule of the act. Cooperative or commercial banks are examples of this type of bank. Public or private parties may own commercial banks. Their role is that of a bank in the traditional sense. They receive money from the public and issue drafts and cheques. They lend money to creditors. They are primarily profit-making institutions. Certain other regulations must be followed if the scheduled commercial bank is a subsidiary of an international bank.

Non-scheduled banks are those that are not listed in the second section of the Reserve Bank of India Act, 1934. Except in emergencies, they are not eligible to borrow from the RBI for normal banking purposes.

Commercial and Cooperative Banks are Subsets of Scheduled Banks

(Image will be uploaded soon)

Cooperative Banking Structure in India

Cooperative banks are those that have been established by a cooperative society that has been registered under the Society Registration Act. These scheduled cooperative banks were established primarily for the benefit of small borrowers and lenders. The RBI, as the chief bank regulator, has the authority to remove any bank from the second schedule. If the bank acts in a way that jeopardises depositors' interests, or if cash reserves fall below Rs 5 lakh, the RBI has the authority to remove the bank under its inherent powers.

Structure of Commercial Banking System in India

A commercial bank is an institution that accepts deposits, makes business loans, and provides related services to a variety of customers and businesses, such as accepting deposits and lending loans and advances to general customers and business owners. 

Commercial banks are further classified into four subcategories based on how they operate. They can be public or private sector banks, international or foreign banks, or regional rural banks. Public sector banks are those that are owned and operated by the government of India. Many times, the government does not fully own the bank. In such a case, the government of India owns the majority stake. The list of Public sector banks in India are:

Because they are owned by the government, these banks have a strong market position in comparison to private banks. In recent years, the government has merged many public sector banks in order to strengthen their balance sheets. It also has PPP plans and is aiming for large-scale disinvestment in this area.

Individuals who own banks in the private sector are known as private sector banks. Private individuals own and control the majority of the stock in such banks. Such banks are frequently registered as a limited liability company that has been granted a banking licence. The top 10 private sector banks of India are:

In recent years, foreign banks have also dominated the banking sector. There are 45 different foreign banks that have already established themselves in India. These banks are registered as banks in India and have a banking licence from the RBI, but their headquarters are in another country. Such banks can be wholly-owned subsidiaries incorporated in India or operate via the branch model. Foreign banks operating in India are encouraged to use the wholly-owned subsidiary mechanism.

Regional rural banks are community-based banks established by the government to ensure that credit is available to those who need it most. Farmers and agriculturalists are the primary borrowers of these banks. They were not part of the banking system at first. They were first implemented in 1975 when the RBI Act was revised by an ordinance. Because the government created these banks, the government has set operational limits on them. The same is published in the official gazette on a regular basis. The Prathama Bank in Uttar Pradesh was the first regional rural bank to be created.

Cooperative Banks

A cooperative bank is a financial institution owned and operated by its members, who are also the bank's owners and clients. They offer a wide range of banking and financial services to their members. Agricultural operations, some small-scale companies, and self-employed people are all supported by cooperative banks. Mehsana Urban Co-operative Bank is an example of a cooperative bank in India.

Individuals band together to form a Credit Co-operative Society at the grassroots level. Individuals in the society comprise a group of borrowers and non-borrowers who live in the same area and are interested in one another's commercial affairs. People of various social classes are brought together in the shared organisation because membership is essentially open to all residents of a locality. A Central Co-operative Bank is formed when all of the societies in a given area band together.

Cooperative banks are further separated into two types: urban and rural cooperative banks.

Short-Term or Long-Term Rural Cooperative Banks

State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies are the three types of short-term cooperative banks.

State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) are long-term banks (PCARDBs).

Primary cooperative banks in urban and semi-urban areas are referred to as Urban Co-operative Banks (UCBs).

Development Banks

Development Banks are financial institutions that provide long-term lending to fund capital-intensive investments with low rates of return and significant social benefits spread over a long period of time. Industrial Finance Corporation of India (IFCI Ltd) was founded in 1948, followed by the Industrial Development Bank of India (IDBI) in 1964, the Export-Import Banks of India (EXIM) in 1982, the Small Industries Development Bank of India (SIDBI) in 1989, and the National Bank for Agriculture and Rural Development (NABARD) in 1982.

A country's banking system has the power to have a significant impact on the economy's development. It also contributes to the development of rural and suburban areas of a country by providing cash to small firms and assisting them in expanding their operations. Commercial Banks, Regional Rural Banks (RRBs), Urban Co-operative Banks (UCBs), Primary Agricultural Credit Societies (PACS), and other organised financial institutions serve the people's financial needs. The Reserve Bank of India's and the Indian government's measures to promote financial inclusion have greatly enhanced access to formal financial institutions.