Types of Banks and Banking Services

Banks act as the primary financial intermediaries in an economy, mobilizing savings from households and channeling them into productive investments across commercial, industrial, and social sectors. In India, the banking architecture is regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934. The system comprises scheduled and non-scheduled institutions that handle credit allocation, liquidity management, payment systems, and financial inclusion. Understanding the distinct institutional categories, service delivery models, and regulatory frameworks provides a complete overview of the Indian financial landscape.

Classification of Banks in India

Scheduled and Non-Scheduled Banks

• Scheduled Banks: Included in the Second Schedule of the RBI Act, 1934. They must have a paid-up capital and reserves of at least 5 lakh rupees and satisfy the RBI that their affairs are not conducted in a manner detrimental to the interests of depositors. They enjoy benefits such as borrowing facility from the RBI at Bank Rate and clearing-house membership.
• Non-Scheduled Banks: Banks not listed in the Second Schedule of the RBI Act, 1934. They cannot borrow from the RBI for day-to-day operations under normal circumstances and are subject to higher statutory cash reserve requirements maintained with themselves rather than the central bank.

Commercial Banks

• Public Sector Banks (PSBs): Institutions where the Central Government or state entities hold a majority stake (more than 50%). State Bank of India (SBI) and nationalized banks like Punjab National Bank (PNB) and Bank of Baroda fall in this category.
• Private Sector Banks: Financial institutions where majority equity is held by private individuals and corporate entities. These are divided into Old Private Sector Banks (incorporated before 1993) and New Private Sector Banks (licensed post-1993 guidelines, such as HDFC Bank and ICICI Bank).
• Foreign Banks: Registered abroad but operating branches or subsidiaries in India. They operate under home country regulations as well as RBI directives, contributing to international trade finance and cross-border corporate banking.
• Regional Rural Banks (RRBs): Created under the Regional Rural Banks Act, 1976, to meet rural credit needs. The equity is shared between the Central Government (50%), the concerned State Government (15%), and the Sponsor Public Sector Bank (35%).

Cooperative Banks

• Urban Cooperative Banks (UCBs): Primary cooperative banks operating in urban and semi-urban areas. They are registered under State Cooperative Societies Acts or the Multi-State Cooperative Societies Act, with banking functions regulated by the RBI.
• Rural Cooperative Institutions: Structured in a short-term structure (State Cooperative Banks at the apex level, District Central Cooperative Banks at the district level, Primary Agricultural Credit Societies at the village level) and a long-term structure (State Cooperative Agriculture and Rural Development Banks and Primary Agriculture and Rural Development Banks).

Differentiated and Specialized Banks

• Small Finance Banks (SFBs): Formed to promote financial inclusion by extending basic banking services, small business loans, and micro-credit to unserved and underserved segments. They must maintain a minimum 75% Priority Sector Lending (PSL) target.
• Payment Banks: Setup based on the recommendations of the Nachiket Mor Committee to facilitate small savings and remittance services. They can accept demand deposits up to 2 lakh rupees per individual customer but cannot issue credit cards or extend loans.
• Development Financial Institutions (DFIs): Specialized entities setup to provide long-term infrastructure and industrial finance, such as NABARD, SIDBI, EXIM Bank, NHB, and NaBFID.

Comparative Matrix of Primary Bank Types

Core Banking Services and Delivery Channels

Deposit and Credit Services

• Demand Deposits: Savings Accounts and Current Accounts (CASA) allowing immediate withdrawal without prior notice. Current accounts offer overdraft facilities without earning interest.
• Time Deposits: Fixed Deposits (FD) and Recurring Deposits (RD) earning higher interest rates for set tenure durations, subject to early withdrawal penalties.
• Credit Facilities: Term loans for long-term capital expenditure, Cash Credit (CC) and Overdraft (OD) for working capital requirements, and trade credit through Letters of Credit (LC) and Bank Guarantees (BG).

Retail and Digital Delivery Channels

• Core Banking Solution (CBS): Networking platform enabling customers to access accounts and conduct transactions from any branch of the bank regardless of where the account was opened.
• Automated Teller Machines (ATMs): Categorized into On-site/Off-site ATMs, White Label ATMs (owned and operated by non-bank entities under RBI authorization), and Brown Label ATMs (hardware owned by third parties, branded and operated by banks).
• Digital Payment Systems: Real-Time Gross Settlement (RTGS) for high-value continuous settlement, National Electronic Funds Transfer (NEFT) for nationwide batch-wise transfers, and Unified Payments Interface (UPI) developed by NPCI for instant mobile transfers.

Key Facts and Trivia for Exam Preparation

• Reserve Bank of India Act: Second Schedule of the RBI Act, 1934 lists the criteria for scheduled banks.
• Banking Regulation Act: Banking in India is governed primarily under the Banking Regulation Act, 1949, which gives the RBI power to license banks, regulate shareholding, and manage operations.
• First Payment Bank: Airtel Payments Bank became the first entity to launch payment bank operations in India in 2017.
• Nachiket Mor Committee: Recommended the framework for setting up differentiated banks, specifically Payments Banks, in 2014.
• Usha Thorat Committee: Recommended the licensing and operational guidelines for Small Finance Banks in India.
• Priority Sector Lending (PSL) Targets: Commercial banks must allocate 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE) to priority sectors; Regional Rural Banks and Small Finance Banks must allocate 75%.
• Deposit Insurance Coverage: Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, insures bank deposits up to 5 lakh rupees per depositor per bank across savings, fixed, current, and recurring deposits.
• White Label ATMs: First permitted by the RBI in 2012; Tata Communications Payment Solutions launched the first White Label ATM network under the brand name ‘IndiCash’.
• NaBFID: National Bank for Financing Infrastructure and Development was established under the NaBFID Act, 2021, as a specialized DFI to finance long-term infrastructure projects in India.