Types of Banks and Banking Services

Introduction

India’s banking system is regulated primarily by the Reserve Bank of India (RBI) and forms the core of the country’s financial architecture. It includes different types of banks and banking services designed to meet the credit, deposit, payment, and development needs of varied sectors.

For Prelims revision, the key focus is on bank categories, licensing norms, regulatory thresholds, and recent legal and digital-payment related changes.

Commercial Banking Structure in India

• Licensing authority: All banking licences in India are issued by the RBI under Section 22 of the Banking Regulation Act, 1949.
• Major bank categories: India’s commercial banking sector includes Public Sector Banks, Private Sector Banks, Small Finance Banks, Payments Banks, Regional Rural Banks, Foreign Banks, and Local Area Banks.
• Public Sector Banks: These banks are major commercial banks in which the government holds a majority stake.
• Private Sector Banks: These banks are owned and managed by private entities, though they are regulated by the RBI like other scheduled banks.
• Foreign Banks: These operate in India as branches or through other permitted structures, subject to RBI regulation.
• Local Area Banks: These are small, locally focused banks created to meet credit needs in specific regions.
• Current sector count: As of August 2025, the sector comprises 12 Public Sector Banks, 21 Private Sector Banks, 12 Small Finance Banks, 5 operational Payments Banks, 28 Regional Rural Banks, 44 Foreign Banks, and 2 Local Area Banks.

Regional Rural Banks and Amalgamation

• Purpose of RRBs: Regional Rural Banks are designed to provide credit and banking support in rural and semi-urban areas.
• Amalgamation strategy: Under the Ministry of Finance’s One State, One RRB strategy, 26 Regional Rural Banks were amalgamated into 11 new entities with effect from May 1, 2025.
• Current number: This consolidation reduced the number of active RRBs from 43 to 28 across 26 states and 3 Union Territories.
• Financial performance: For financial year 2025–26, the consolidated net profit of RRBs reached ₹10,176 crore.
• Asset quality: During the same period, GNPA and NNPA fell to 5.3% and 2.1% respectively.

Specialised and Differentiated Banking Models

• Small Finance Banks (SFBs): These banks are meant to further financial inclusion by serving underserved segments, small businesses, and small borrowers.
• Universal bank transition: Under RBI guidelines issued on April 26, 2024, an SFB seeking voluntary transition into a Universal Bank must have at least five years of scheduled status, be listed on a recognised stock exchange, and maintain a minimum net worth of ₹1,000 crore.
• Asset quality for transition: The SFB must also maintain GNPA ≤ 3% and NNPA ≤ 1% for the previous two financial years.
• Payments Banks: These banks are permitted to accept demand deposits up to ₹2 lakh per customer.
• Payments bank restrictions: They cannot extend loans, issue credit cards, or undertake underwriting activities.
• Fino Payments Bank: On December 5, 2025, Fino Payments Bank Limited received in-principle RBI approval to convert into a Small Finance Bank, the first payments bank to obtain such approval.
• Transition timeline: The bank is scheduled to submit formal operational readiness by the fourth quarter of FY 2027, with its core lending technology stack expected by February 2027.

Legislative Amendments in Banking

• Banking Laws (Amendment) Act, 2025: Key provisions came into force on August 1, 2025.
• Coverage: The Act introduced 19 amendments across 5 core laws, including the Reserve Bank of India Act, 1934; the Banking Regulation Act, 1949; the State Bank of India Act, 1955; and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
• Substantial interest threshold: The threshold for bank directors and officers was revised from ₹5 lakh to ₹2 crore.
• Cooperative bank governance: The tenure of directors in cooperative banks was extended from 8 years to 10 years.

Digital Payments and Grievance Redressal

• Integrated Ombudsman Scheme: The RBI Integrated Ombudsman Scheme (RB-IOS, 2026) became effective from July 1, 2026, replacing the 2021 version.
• Role of the scheme: It provides cost-free alternate grievance redressal for bank customers and payment system users.
• Compensation powers: The RBI Ombudsman can award up to ₹30 lakh for consequential financial losses and up to ₹3 lakh for harassment, mental anguish, loss of time, and expenses.
• Digital payment authentication: The Authentication Mechanisms for Digital Payment Transactions Directions, 2025 became enforceable from April 1, 2026.
• Two-factor requirement: All domestic digital payments must use at least two distinct authentication factors, with at least one dynamic factor for non-card-present transactions.
• Cross-border transactions: Card issuers were given a deadline of October 1, 2026, to implement risk-based authentication for cross-border card-not-present transactions.
• E-mandate framework: The Digital Payments – E-mandate Framework, 2026 became effective from April 21, 2026.
• Recurring payments: Recurring transactions using cards, Prepaid Payment Instruments (PPIs), or UPI can be registered only after successful validation of an additional factor of authentication.
• UPI limits: The standard daily UPI transaction limit is ₹1 lakh, with an extended limit of up to ₹5 lakh per day for categories such as education, healthcare, and investments.
• Balance checks: In-app balance checks on UPI are capped at 50 per day to reduce load on the network.

Key Prelims Takeaways

• RBI licensing: Banking licences in India are issued under Section 22 of the Banking Regulation Act, 1949.
• Bank categories: Commercial banking includes Public Sector Banks, Private Sector Banks, SFBs, Payments Banks, RRBs, Foreign Banks, and Local Area Banks.
• SFB-to-universal bank route: The key conditions are five years of scheduled status, listing, net worth of ₹1,000 crore, GNPA ≤ 3%, and NNPA ≤ 1%.
• Payments bank limit: Payments banks can accept deposits up to ₹2 lakh per customer but cannot lend.
• RRB consolidation: After amalgamation under One State, One RRB, India has 28 active RRBs.
• Ombudsman relief: Under RB-IOS, 2026, compensation can go up to ₹30 lakh for financial loss and ₹3 lakh for harassment-related claims.
• UPI controls: Daily UPI transaction limits and balance-check caps are important for digital payments prelims questions.