Banking Industry Structure
All banks of India can be simply divided into 3 major groups viz. Central Bank (RBI), Scheduled Banks and Non-scheduled Banks. This implies that every bank other than RBI, is either a scheduled bank or a non-scheduled bank.
However, on the basis of functions, there are five broad categories of Banks in India viz. Central Bank (RBI), Commercial Banks, Development Banks (or Development Finance Institutions), Cooperative Banks and Specialized banks.
- Scheduled Versus Non-scheduled banks
- Different types of Scheduled Commercial Banks
- Cooperative Banking
Scheduled Versus Non-scheduled banks
A bank is called a scheduled bank in India, if it is listed in the second schedule of the RBI Act, 1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain statutory conditions such as:
- These banks need to have paid up capital and reserves of at least Rs. 0.5 million (50 Lakh)
- They should satisfy the CRAR norms and other prudential norms of RBI
- They should satisfy the RBI that their business is not being conducted in a manner prejudicial to the interests of its depositors.
In our country all banks are scheduled banks except four Local Area Banks and some Non-scheduled Urban Cooperative Banks. As of February 2015, these four local area banks are:
- Coastal Local Area Bank Ltd – Vijayawada (Andhra Pradesh)
- Capital Local Area Bank Ltd – Phagwara (Punjab)
- Krishna Bhima Samruddhi Local Area Bank Ltd, Mahbubnagar (Andhra Pradesh)
- Subhadra Local Area Bank Ltd., Kolhapur (Maharashtra)
The scheduled banks are further classified into Scheduled Commercial Banks and Scheduled Cooperative Banks. The basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These banks work according to the cooperative principles of mutual assistance.
Classification up to this point is displayed in the below graphics.
Different types of Scheduled Commercial Banks
The scheduled commercial banks are those banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services.
Scheduled Commercial Banks can be further divided into four groups:
- Public Sector Banks: This includes:
- SBI & Associates
- Nationalized Banks
- Other Public Sector Banks
- Private Banks
- Foreign Banks
- Regional Rural Banks
Number of Scheduled Commercial Banks (Public Sector Banks)
At present, there are 27 Public Sector Banks in India including SBI (and its 5 associates) and 19 nationalized banks. Further, there are two banks which have been categorized by RBI as “Other Public Sector Banks”. IDBI and Bhartiya Mahila Bank come under this category. The 19 nationalized banks in India viz. Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India and Vijaya Bank.
Further, there are two scheduled commercial banks in India, which have been classified as “other Public Sector Banks”. These are IDBI and Bhartiya Mahila Bank.
State Bank of India Group
State Bank of India with its around 17,000 branches and around 200 foreign offices, is India’s largest banking and financial services company by assets. With over 2 lakh employees, SBI is banker to millions of Indians. This bank got birth in the British Era. Its first parents were three presidency banks viz. Bank of Calcutta (later Bank of Bengal), Bank of Bombay and the Bank of Madras. In 1921, these three presidency banks were merged in one entity called “Imperial Bank of India”. The Imperial Bank of India was nationalized in 1955 and was renamed a State Bank of India. Thus, State bank of India is the oldest Bank of India.
In 1959, there were eight associates of SBI. The current five associate banks of SBI are:
- State Bank of Bikaner & Jaipur
- State Bank of Hyderabad
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Travancore
Apart from the above, the SBI also has seven non-banking subsidiaries viz. SBI Capital Markets Ltd, SBI Funds Management Pvt Ltd, SBI Factors & Commercial Services Pvt Ltd, SBI Cards & Payments Services Pvt. Ltd. (SBICPSL), SBI DFHI Ltd, SBI Life Insurance Company Limited and SBI General Insurance.
Is SBI a nationalized bank?
SBI got birth in the British Era. Its first parents were three presidency banks viz. Bank of Calcutta (later Bank of Bengal), Bank of Bombay and the Bank of Madras. In 1921, these three presidency banks were merged in one entity called “Imperial Bank of India”. The Imperial Bank of India was nationalized in 1955 and was renamed a State Bank of India. Thus, although SBI comes under the definition of nationalized banks; yet while classifying the commercial banks in India, RBI puts State Bank of India and its five associates under a separate category (SBI & Associates). Thus, Public Sector Scheduled Commercial Banks are of three categories in India viz. SBI & its five associates; 19 Nationalized Banks and two other Public Sector Banks viz. Bhartiya Mahila Bank and IDBI Bank.
Why SBI is put in different category?
This is mainly because SBI group is governed by a different set of laws viz. SBI Act, 1955 and SBI Subsidiary Banks Act, 1959.
Old private banks and new private banks
In private sector banks, most of the capital is in private hands. There are two types of scheduled commercial (private sector) banks in India viz. Old Private Sector Banks and New Private Sector Banks. There are 13 old private sector banks as follows:
- Catholic Syrian Bank
- City Union Bank
- Dhanlaxmi Bank
- Federal Bank
- ING Vysya Bank
- Jammu and Kashmir Bank
- Karnataka Bank
- Karur Vysya Bank
- Lakshmi Vilas Bank
- Nainital Bank
- Ratnakar Bank
- South Indian Bank
- Tamilnad Mercantile Bank
Out of the above banks, the Nainital Bank is a subsidiary of the Bank of Baroda, which has 98.57% stake in it. Some other old generation private sector banks in India have merged with other banks. For example, Lord Krishna Bank merged with Centurion Bank of Punjab in 2007; Sangli Bank merged with ICICI Bank in 2006; Centurion Bank of Punjab merged with HDFC in 2008. All of these were doing business when RBI came up with its new guidelines on private Banks in 1993.
New Private Sector Banks
The new private sector banks were incorporated as per the revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. At present, there are seven new private sector banks viz. Axis Bank, Development Credit Bank (DCB Bank Ltd), HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, Yes Bank.
Apart from the above, there are two banks which are yet to commence operation. These have obtained ‘in-principle’ licenses from RBI. They are IDFC and Bandhan Bank of Bandhan Financial Services. Thus, the whole picture of banking classification is as follows:
Foreign Banks and their branches in India
As of December 2014, there are 43 foreign banks from 26 countries operating as branches in India and 46 banks from 22 countries operating as representative offices in India. Apart from that, few foreign banks have entered into India via the NBFC route. There are 334 foreign bank branches in India.
What is the share of foreign banks in the banking business in India?
Foreign Banks account for less than 1% of the total branch network in the country. However, they account for approximately 7% of the total banking sector assets and around 11% of the profits. Most of the foreign banks in India are niche players and their business is usually focused on trade finance, external commercial borrowings, wholesale lending, investment banking and treasury services. Some other banks are confined to private banking and wealth management.
What is the RBI policy towards Foreign Banks in India?
RBI policy towards presence of foreign banks in India is based upon two cardinal principles viz. reciprocity and single mode of presence.
By reciprocity, it means that overseas banks are given near national treatment in India only if their home country allowed Indian banks to open branches there without much restrictions. By single mode of presence, it means that RBI allows either of the branch mode or a wholly owned subsidiary (WOS) mode in India.
Some other policy guidelines of RBI towards foreign banks are as follows:
- Banks have to adhere to mandated Capital Adequacy requirements as per Basel Standard.
- They should have to meet minimum capital requirement of Rs. 5 billion.
- They should need to maintain minimum CRAR at 10%
- Priority sector targets for foreign banks in India is 40%.
Further, the foreign banks have to follow other norms as set by Reserve Bank of India.
Regional Rural Banks
Each RRB is owned by three entities with their respective shares as follows:
- Central Government → 50%
- State government → 15%
- Sponsor bank → 35%
They are different from other commercial banks on the basis of their:
- Ownership: as mentioned above, they are owned by three different entities
- Regulation: They are regulated by NABARD; which is a subsidiary of RBI. Other banks are regulated by RBI directly.
- Statutory Background: RRBs have a separate law behind them viz. Regional Rural Banks Act, 1976.
- Statutory pre-emptions: RRBs don’t need to maintain CRR and SLR like other banks.
What were the reasons for establishing the Regional Rural Banks?
Regional Rural Banks were started due to the fact that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. So, basic idea was that such banks will work in rural perspectives and they would bring more and more farmers under the financial inclusion. A separate act was passed to provide them a statutory background.
What were various problems of Regional Rural Banks?
RRBs were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”, however, they were planned as the self sustaining credit institution which were able to refinance their internal resources in themselves and were excepted from the statutory pre-emptions. However, soon the RRBs were marred by several problems. There was a need to consolidate and recapitalize them. In 1990, there were 196 RRBs in India. This number currently stands at 57 (March 2014) after mergers and amalgamations.
What is the current government’s policy on Regional Rural Banks?
The Modi Government has put hold on further amalgamation of the Regional Rural Banks. The focus of the new government is to improve their performance and exploring new avenues of investments in the same. Currently, there is a bill pending to amend the RRB Act which aims at increasing the pool of investors to tap capital for RRBs.
A cooperative is jointly owned enterprise in which same people are its customers who are also its owners. Thus, basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These banks work according to the cooperative principles of mutual assistance.
Indian cooperative structures are one of the largest such networks in the world with more than 200 million members. It has about 67% penetration in villages and fund 46% of the total rural credit. It also stands for 36% of the total distribution of rural fertilizers and 28% of rural fair price shops.
What is history of Cooperative Banking in India?
The idea of cooperatives was first given by Hermann Schulze (1808-83) and Friedrich Wilhelm Raiffeisen (1818-88). In India, the history of Cooperatives begins from 1904 when the Cooperative Credit Societies Act, 1904 led to the formation of Cooperative Credit Societies in both rural and urban areas. The act was based on recommendations of Sir Frederick Nicholson (1899) and Sir Edward Law (1901). The Cooperative Societies Act of 1912, further gave recognition to the formation of non-credit societies and the central cooperative organizations. In independent India, with the onset of planning, the cooperative organizations gained more leverage and role with the continued governmental support.
What is the extent of Urban Cooperative Banking in India?
The structure of cooperative network in India can be divided into two broad segments viz. Urban Cooperative Banks and Rural Cooperatives. Urban Cooperatives can be further divided into scheduled and non-scheduled. Both the categories are further divided into multi-state and single-state. Majority of these banks fall in the non-scheduled and single-state category. Banking activities of Urban Cooperative Banks are monitored by RBI. However, registration and management activities are managed by Registrar of Cooperative Societies (RCS). These RCS operate in single-state and Central RCS (CRCS) operate in multiple state.
Different Rural Cooperatives
The rural cooperatives are further divided into short-term and long-term structures. The short-term cooperative banks are three tiered operating in different states. These are-
- State Cooperative Banks- They operate at the apex level in states
- District Central Cooperative Banks-They operate at the district levels
- Primary Agricultural Credit Societies-They operate at the village or grass-root level.
Likewise, the long-term structures are further divided into –
- State Cooperative Agriculture and Rural Development Banks (SCARDS)- These operate at state-level.
- Primary Cooperative Agriculture and Rural Development Banks (PCARDBS)-They operate at district/block level.
The rural banking cooperatives have a complex monitoring structure as they have a dual control which has led to many problems. A Forum called State Level Task Force on Cooperative Urban Banks (TAFCUB) has been set-up to look into issues related to duality in control.
- All banking activities are regulated by a shared arrangement between RBI and NABARD.
- All management and registration activities are managed by RCS.
Key features of Cooperative banking in India
A cooperative bank is an institution which is owned by its members. They are the culmination of efforts of people of same professional or other community which have common and shared interests, problems and aspirations. They cater to a services like loans, banking, deposits etc. like commercial banks but widely differ in their values and governance structures. They are usually democratic set-ups where the board of members are democratically elected with each member entitled to one vote each. In India, they are supervised and controlled by the official banking authorities and thus have to abide by the banking regulations prevalent in the country. The basic rules, regulations and values may differ amongst nations but they have certain common features:
- Democratic structures
- Profits are mainly pooled to form reserves while some amount is distributed to members
- Involved in community development
- Foster financial inclusion by bringing banking to the doorstep of the lowest segment of society
These banks are small financial institutions which are governed by regulations like Banking Regulations Act, 1949 and Banking Laws Cooperative Societies Act, 1965. They operate both in urban and rural areas under different structural organizations. Their functions are decided by the level at which they operate and the type of people they cater to. They greatly differ from the commercial banking entities.
- These are established under specific acts of cooperative societies operating in different states unlike mainstream commercial banks which are mainly joint-stock companies.
- They have a tiered network with a bank at each level of state, district and rural. The state-level bank forms the apex authority.
- Not all sections of banking regulation act are applicable to cooperative banks
- The ultimate motive is community participation, benefit and growth as against profit-maximization for commercial banks.
Major problems of the functioning of the Cooperative Banks in India
- The duality in control by RCS of a state as ‘Cooperation’ is a state subject. However financial regulatory control by RBI has led to many troubles as there is ambiguity in power structure as there is no clear demarcation.
- Patchy growth of cooperative societies across the map of India. It is said these have grown maximally in states of Gujarat, Maharashtra, Tamil Nadu whereas the other parts of India don’t have a heightened presence.
- The state partnership has led to excessive state control and interference. This has eroded the autonomous characters of many of these.
- Dormant membership has made them moribund as there is a lack of active members and lack of professional attitude.
- Their main focus being credit so they have reduced to borrower-driven entities and majority of members are nominal and don’t enjoy voting rights.
- Credit recovery is weak especially in rural areas and it has sustainability crisis in some pockets.
- There is a lack of risk management systems and lack of basic standardised banking models.
- There is a widening gap between the level of skills and the increasing computerization of banks.
The government needs to have a serious look into the issues as they did not show an impressive growth in the last 100 years.