KNOW EVERYTHING ABOUT THE BANKING SYSTEM IN INDIA
This write-up will take you through the details of the prevailing banking system in India.
We have included the detailed structure of the banking system in India. Know about the types of banks and hierarchical order of the banking system.
Gain some information about the financial regulators of the country as well and widen your knowledge horizons.
What do you mean by the banking system?
The banking system means the principal mechanism or network of institutions.
Through this group or network, financial or monetary services are controlled and created in the economy.
On the other hand, banking refers to accepting deposits and lending money.
The process of accepting and lending is carried out by banking companies and other financial institutions which are recognized under the banking system.
What is the structure of the Indian Banking System?
The banking institutions in India are segregated or classified. Every group or type of bank has its functions to perform. They have their target market and sectors to work in.
The structure of the banking system in India is as follows:-
Reserve Bank of India
The apex banking institution or the Central Bank of the country, RBI as established under the RBI Act 1934 on 1st April 1935.
The Reserve bank of India controls regulates and is responsible for all the financial aspects of the economy.
It has various developmental and promotional functions to perform along with supervising and controlling the Indian banking system.
Must Read:- Functions of RBI
Commercial banks are the banks that perform the functions of accepting deposits and lending money.
They offer various facilities like a bank account, short-term and long-term loans. Moreover, these banks offer a wide range of facilities to their account holders such as overdrafts, deposits, interests, cheques, etc.
Commercial banks are further classified into two types:-
Public Sector Banks
Public sectors banks are those where more than 50% of the stake is held by the government.
The shares of public sector banks are listed on stock exchanges and the remaining shares are held privately by bodies or individuals.
Currently, there are 12 public sector banks in India which contributes to 75% and 70% of the total deposits and advances respectively.
Private Sector Banks
The banks which have the majority or more than 50% of the stake held by private shareholders and not the government are private sector banks.
They are further classified into two types as follows:
Banks with their head offices situated in India are categorized as Indian banks.
Foreign banks are those which have their head offices or headquarters located in countries other than India.
Examples of foreign banks are Chartered Bank, HSBC, Deutsche Bank, bank or America, and more.
Scheduled and non-scheduled banks
Scheduled banks are the banks that are included in the Second Schedule of the Reserve Bank of India Act 1934. They have their paid-up capital and reserves according to the RBI schedule.
Non- Scheduled Banks are not included in the Second Schedule of the Reserve Bank of India Act 1934. These are commercial banks that do not follow the norms stated out by RBI.
Private owners run these banks with their resources and cannot borrow money from RBI for regular banking purposes.
Regional and rural banks (RRBs)
RRBs are commercial banks that are set up to cater to the financial needs of the people of rural areas.
These banks were set up under the provisions of the 26 September 1975 ordinance and the RRB Act of 1976. The Narshimhan Working Group recommended its establishment.
The first RRB, Prathama Grameen Bank, was set up in Moradabad, UP on 2nd October 1975. Syndicate Bank sponsored the bank with an initial capital of Rs. 5 crores.
At present, there are 43 regional and rural banks in India that are sponsored by the Indian Government, State Government, and Sponsor Bank.
The financial entities which are established on a co-operative basis and belong to their members are referred to as cooperative banks.
They were set up bypassing the Co-operative Act 1904 and follow the principle of mutual help and co-operation.
Co-operative banks have a crucial role in rural financing and promoting savings and investments habits among individuals.
State Co-operative Banks
These are the apex co-operative banks of all the states of the country. Every state has its State Cooperative Bank and is responsible for mobilizing the funds and aiding its proper channelization among the various sectors.
The funds which are passed by these banks reach the primary credit society through the central co-operative bank.
Central Co-operative Banks
Central co-operative banks operate at the district level with certain primary credit societies acting as its members.
These banks offer loans to their members and serve as a link between the primary credit societies and the state co-operative banks.
Primary Credit Societies
Primary credit societies are formed at the village or town level. The borrowing and non-borrowing members decide in one locality and the operation of it is restricted to that area or locality only.
The members keep a watch over the activities of all the members and are responsible for the functioning of the societies.
Development banks and other financial institutions
The Development Banks and other such related Financial Institutions are set up to promote industrial growth and provide support to the infrastructure facilities of the countries.
However, the assistance of the bank can expand to various sectors. Financial assistance to both public and private sector industries is provided by Development Bank.
They obtain their working capital requirements from commercial banks, cooperative banks, money lenders, indigenous bankers, and more.
In other words, they are the specialized Financial Institutions that provide long-term and short-term finances to the industrial and agricultural sectors.
Their prime motive is to finance the basic needs of society and contribute to the growth and development of the socio-economic sectors of the country.
- Industrial Credit and Investment Corporation of India or ICICI
- Industrial Development Bank of India (IDBI)
- Export-Import Bank (EXIM)
- National Bank for Agriculture and Rural Development or NABARD
What are the organized and unorganized sectors?
The organized sector is characterized by the policies and regulations put forth by the Government. Moreover, the general conditions of employment are followed.
Also, people enjoy the security of employment in this sector. Under the organized sector, several acts like the Minimum Wages Act, Payment of Gratuity Act, and more are followed.
Examples:- Indian government jobs, banks, police, politics, large scale private companies, and government schools and colleges, and more related to it.
The unorganized sector is characterized by its non-registration by the government. There are small and scattered units that are outside the control of the Government and no rules and regulations are followed.
Examples:- Farming, shopkeeping, hotel management, domestic workers, labouring, rickshaw pulling, and more related to it.
Who are the financial regulators in India?
In India, there are three mainly identified and recognized financial regulators or bodies.
They are responsible for regulating different aspects of the financial services in the country which are as follows:-
- Banking sector – Reserve Banks of India (RBI)
- Capital market/ mutual funds sector – Securities Exchange Board of India (SEBI)
- Insurance sector – Insurance Regulatory and Development Authority (IRDA)
Which was the first bank in India?
Bank of Hindustan was the first bank established and started in 1770 in India.
The Punjab National Bank was the first bank to start solely with Indian capital investment. It was founded by Lala Lajpat Rai.
Bank of India holds the position of the first bank to open an overseas branch in London in 1946.
The Central Bank of India is the first Indian-owned and managed commercial bank in India.
The State Bank of India is the oldest bank in India which is still in existence. The Bank of Calcutta was established in June 1806.
Later on, in 1921, the Bank of Bombay, Bank of Madras, and Bank of Bengal merged to form the Imperial Bank of India. The bank was later converted in 1955 to the State Bank of India.
The Allahabad bank is the oldest existing public sector bank in the country.
Who introduced the banking system in India?
In 1786, the foundation of the Bank of Calcutta was laid. The origin of the banking system in India paved its way from the 18th century when the English Agency houses in Calcutta and Bombay were formed.
Later, three presidency banks were formed which upon merger were known as Imperial Bank of India which was later on converted to State Bank of India.
Today, the banking system in India is responsible for a major part of the financial sector of the country.
It regulates and manages over 70% of the funds which flow through the financial sector in the country. It serves as the base of the economy and the economic development of India.
Hello! My name is Mansi Shrivastava who happens to have a knack for writing. It has not always been what I admired but developing into a writer was something I appreciate the most now. When not glued to the computer screen, I love to try my hand in arts and crafts. Also, binge-watching with a bowl of snacks has always been my thing.