Classification of Banking System in India and how do banks work with RBI?

In India the banking system has been divided into different groups. Each group has its own advantages and limitations in its working. They have their specific market. Some cater to the rural sector while others in both urban as well as rural. Many of them are only providing services in major cities and towns.

The banking system plays a major role in developing the economic growth by directing savings into investments and also by improvising allocative productivity of resources.

The Indian banking system consists of Central bank (Reserve bank of India), Co-operative banks, Commercial banks and Development banks. These institutions form the base of the Indian Financial system as it is the meeting ground for investors and saves.

RBI (Reserve Bank of India)

Before the establishment of RBI India had no central bank. Now the RBI has the highest authority and it controls and regulates the banking system of our country. As it maintains the reserves of all the banks it is called as the Reserve Bank. It is a statutory body and is responsible for printing, managing and supplying the currency notes in the Indian economy.

Let’s discuss in brief the functions of RBI

1. The RBI is an only institution who has the authority to print currency notes of different denominations.
2. It acts as a banker to the government and performs banking functions of the state and central government. It also advices the government on important monetary and economic policy.
3. It is termed as the banker’s bank and lends money in times of need to all other commercial banks of the country.
4. The RBI controls and regulates the credit flow in the country through qualitative and quantitative methods.
5. The RBI maintains the foreign exchange funds by buying and selling the foreign currency.

Indian Banking Classification

The Indian banking system is broadly classified into Scheduled Banks, Non – Scheduled Banks and Development banks.

Scheduled Banks

Banks that fall under the 2^nd schedule of the Reserve bank act, 1934 are considered as schedule banks. They are eligible for taking loans from RBI on bank rate. It also automatically acquires the clearing house membership.

Schedule banks are further categorised into commercial banks and co-operative banks.

Commercial Banks

Commercial banks are financial institutions formed with the purpose of making profit. They provide following services:

• Accept deposits
• Give loans
• Fund transfer services
• They offer short to medium term credit as they collect funds from local public which can be withdrawn at a short notice.

Commercial banks are classified in Public sector, Private sector, foreign banks and RRB’s.

• Public sector banks: In Public sector government holds the major stake. These banks hold a huge space in banking industry of India. With the recent amalgamation and mergers of smaller banks with the larger ones, they are 12 public sector banks controlled and managed by the RBI. E.g. State bank of India
• Private Sector Banks: India started issuing license in1990’s to the private Sector banks. Here the majority stake holding is in private hands. These banks are regulated by RBI and registered with Limited liability. Examples of private sector banks in India are HDFC bank, ICICI bank, Kotak Mahindra bank, etc.
• Foreign banks: Foreign banks are entities whose headquarters are located outside India but is runs its office in the country. These banks have to follow the regulations of the Central bank as well as the rules prescribed by their head organisation situated outside the country. These banks provide an access to Indian corporation with global bond and stock markets. Example of foreign banks in India – Citi bank, HSBC, etc.
• Regional Rural Banks (RRB): RRB were established in 1975, under the ordinance of Regional Rural Banks. They were established mainly to promote and provide credit facility to the agriculture and growth for rural sectors. RRB’s are jointly owned by GOI, state government and sponsor Banks. Example – Andhra Pradesh Grameena Vikas Bank.

Co-operative Banks

Co-operative banks operate in rural as well as urban areas. They are registered under the co-operative societies Act 1912. They are run by its member who are owners and customers of the bank.  These banks mainly support small scale industries, agricultural activities and self-employed workers. These banks are formed at a ground level where individual together form a credit co-operative society. For example of a co-operative bank in India – Mehsana Urban co-operative bank.

Co-operative banks can be further classified into rural and urban co-operatives bank.

• The Rural Co-operative Banks play a major role in catering to the growing credit needs of rural India or mainly the agriculture sector. They are either short term or long term.
• The Urban Co-operative Banks are located in urban or semi urban areas for the welfare and upliftment of local people. They provide loans to small business men and monthly income group people. They also provide loans against gold, silver, produce etc.

Payment Banks

In the year 2014 – 2015 RBI issued license to payment banks. They are specialised banks. They can take small deposits, currently upto 1 lakh. They do not have permission to make loans and issue credit cards. Example – Airtel payment bank.

Small Finance Banks

Small finance banks have recently got license from RBI. They can provide basic services of lending and depositing. Their aim is to provide financial inclusions to small industries, unorganised sector entities, marginal farmers etc. Example – AU small finance bank.

Non Scheduled Banks

All other banks that do not come under section 2 of the RBI are termed as Non- schedule banks. They can only borrow from RBI in case of emergencies and not for regular banking purposes. They have a reserve capital of less than 5 lakhs. Example – Jammu & Kashmir Bank.

Development Banks

Development banks provide long term credit for supporting capital intensive investments. They are also called term lending institutions. They lend at stable and lower rates of interest to encourage long term investment with significant social benefits. For example – urban infrastructure industry, mining industry and irrigation systems.

Some of the development banks in India are NABARD (National Bank for Agriculture and Rural Development), SIDBI (Small Industries development bank of India), EXIM (Exports and Import Bank of India), IFCI (Industrial Finance Corporation of India) and IDBI (Industrial Development bank of India).

Conclusion

The banking system in India has heavily influenced the development and growth of the rural sectors. It has been playing a major role in the upliftment of the small and medium scale entrepreneurs. Banking system is like a lifeblood for the economic activities in the country.