Types of Banks in India

& Role of RBI

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Classification of Banks

 Broadly, banks are classified either into commercial banks or as central bank.
they are also classified as Scheduled and Non-scheduled Banks.
 Scheduled banks have been included in the second schedule of the Reserve
Bank, and fulfils the following three criteria:
1.It must have a paid up capital of at least Rs. 5 lakhs.
2.It must fulfil the RBI norms about no activity that may be detrimental to
the depositors interests.
3.It must be a Corporation(not a partnership or a single ownership firm).
 Non-Scheduled Banks are excluded from the Second schedule of RBI. The
Reserve Bank does not exercise much control over them, but they report
monthly to RBI.
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Commercial Banks

 Commercial Banks are those banks which provide banking services to people with a profit
motive. They charge a certain prescribed amount for the services they provide.
Types of Commercial Banks
Public Sector Banks – Majority stake is held by Government
State Bank of India and its associate banks: These associate banks are State Bank of Bikaner &
Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of
Travancore.
Nationalised Banks– These are those commercial banks that have been nationalized for fulfilling
the social objectives of the government. There are 20 Nationalised banks in India. These are –
Allahabad Bank, Andhra Bank, Bank of Maharashtra, Bank of Baroda, Canara Bank, Central Bank
of India, Bank of India, , Corporation Bank, Dena Bank, Indian Overseas Bank, IDBI Bank Ltd.,
Oriental Bank of Commerce, Indian Bank, Punjab & Sind Bank, Punjab National Bank, Union Bank
of India, Syndicate Bank, United Bank of India, UCO Bank, and Vijaya Bank.
Regional Rural Banks(RRB)– These banks have been established to strengthen the rural
economy. They facilitate the credit and deposit flow for farmers, artisans, labourers in their
limited local area. These banks are jointly owned by the central and state government along
with a sponsor commercial bank.

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Private Sector Banks
 Majority share capital is with private individuals & corporates
 Old Private Banks – There are fourteen old private banks operating in India. These banks were
not nationalised when other banks were nationalised in 1969 and 1980. These are- Catholic
Syrian Bank Ltd., Dhanalakshmi Bank Ltd., City Union Bank Ltd., Federal Bank Ltd., Lakshmi
Vilas Bank Ltd., ING Vysya Bank Ltd., Karur Vysya Bank Ltd., Karnataka Bank Ltd., , Nainital Bank
Ltd., Ratnakar Bank Ltd., Jammu & Kashmir Bank Ltd., South Indian Bank Ltd., SBI Commercial &
International Bank Ltd, and Tamilnad Mercantile Bank Ltd.
 New Private Banks- There are seven new private banks functioning in the Indian economy. These
are- Axis Bank Ltd., Development Credit Bank Ltd, ICICI Bank Ltd., IndusInd Bank Ltd., Kotak
Mahindra Bank Ltd., HDFC Bank Ltd., and Yes Bank Ltd.
 Foreign Banks- These banks have their registered head offices in a foreign country, while they
operate their branches in India. They can operate in India either through wholly-owned
subsidiaries or through branches. There are 32 foreign banks operating their various branches in
India.
 Co-operative Banks – Cooperative banks are those scheduled banks that are regulated by RBI,
under a cooperative structure to provide credit to all categories of businesses. Their ownership
structure is unique where like minded individuals and companies pool in money together to
support credit facilities to businesses. These can operate in either Urban or Rural setting. That
is another criteria to differentiate these co-operative banks.

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History of RBI

 The Reserve Bank of India (RBI) commenced its operations on 1st April,1935
during the British rule in accordance with the provisions of the Reserve Bank
of India Act, 1934 by the recommendation of Hilton-Young commission .
 The original share capital was Rs.5 crore divided into shares of 100 each fully
paid, which were initially owned entirely by private share-holders.
 Following India’s Independence, the RBI was nationalised on 1st January, 1949.
 Reserve Bank continued to act as the Central Bank for Burma (Myanmar) till
Japanese Occupation of Burma (1942-45) and later up to April,1947. After the
partition of India, the Reserve Bank served as the central bank of Pakistan up
to June 1948 when the state bank of Pakistan commenced operations.

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History of RBI

 The Reserve Bank of India (RBI) is India’s Central Banking institution, which
controls the monetary policy of the Indian rupee.
 It is the apex bank in the Indian Banking system.
 The preamble of the Reserve Bank of India describes the basic functions of
the bank such as to regulate the issue of Bank Notes and keeping a reserves
with a view to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage.
 The Reserve Bank of India has 4 zonal offices at Chennai, Delhi, Kolkata &
Mumbai and has 19 regional offices and 10 sub-offices.

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Organizational Structure of RBI

 The Central Board of Directors is the main committee of RBI.

 The Government of India appoints the directors for a 4-year term.
 The Board consists of a Governor, and not more than 4 Deputy Governors, 4
directors to represent the regional boards, 2 from the Ministry of Finance and
10 other directors from various fields.
 The bank is headed by the Governor and the post is currently held by
economist Mr.Shaktikanta Das.
 There are 4 deputy governors Dr.Viral V.Acharya, Shri.N.S.Vishwanathan,
Shri.M.K.Jain and Shri. B.P.Kanungo.

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Main Functions of RBI – Banker’s Bank

1. Issue and management of currency and money supply

2. Exercise of credit control
3. Management of foreign exchange reserves and external value of rupee
4. Buying and selling of securities
5. Maintaining of sound and healthy banking system in India
6. Advising Central and State governments in fiscal and monetary policies
7. Promotion of institutional and other infrastructure with a view to
provide and distribute credit in accordance with priorities and policies
of the government
8. Issuance of licenses to companies and corporations to do banking
business in India. This also includes issuance of License for opening of
new branches etc.
 Supervisory Powers of RBI

1. It provides discretionary credit to commercial banks

2. It is authorized to inspect the commercial banks

3. It has powers to appoint additional directors on the boards of banks

4. It has wide powers on the overall management of banks

5. It has powers to control advances given by commercial banks

6. It has powers to recommend suspension of business of a banking company or for its winding up

7. It issues directions for regulating the working of banks

Did You Know

– Before the formal banking system in

India Individual bankers like Shroffs,
Seth's, Sahukars, Mahajans, etc met
about 90% of the financial
requirements of rural India
 Did You Know
– Punjab National Bank was the
first bank to start solely with
Indian Capital

– Country-Specific Facts:

• In The United Kingdom about 5% of

population does not have a bank
Account

• In Australia about 8% of population

does not do banking

• BUT, In India about 85% of

population does not have a bank
account
Role of RBI

 RBI controls the supply of money in the economy by its control over interest
rates in order to maintain price stability and achieve high economic growth
using monetary policy.
 Main aim of Monetary policy is to :
1. Stabilise exchange rates
2. Maintain healthy Balance of payment
3. Attain Financial stability
4. Control Inflation
5. Strengthen Banking System

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What Is Capital Adequacy?

 Capital Adequacy Ratio measures a bank’s capital in relation to it’s

risk-weighted assets. The capital adequacy ratio is calculated by
dividing a bank’s capital by it’s risk-weighted assets.
 Capital Adequacy Ratio (CAR) is also known as Capital to Risk
(Weighted) Assets Ratio (CRAR). It is a measure of a bank’s capital.
 CAR measures a bank’s financial strength by using it’s capital and
assets. It is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
 As per RBI Norms, Indian scheduled commercial banks are required to
maintain a CAR of 9% while Indian PSU Banks are emphasized to
maintain a CAR of 12%.
What Is Capital Adequacy?

 The capital used to calculate the capital adequacy ratio is divided into two
tier:
1. Tier1 Capital comprising of equity capital, ordinary share capital,
intangible assets and audited revenue reserves. Tier1 capital is used to
absorb losses and does not require a bank to cease operations.
2. Tier2 Capital comprises of unaudited retained earnings, unaudited
reserves and general loss reserves. This capital absorbs losses in the
event of a company winding up or liquidating.
 The two capital tiers are added together and divided by risk-weighted
assets to calculate a bank’s capital adequacy ratio. Risk-weighted assets
are calculated by looking at a bank’s loans, evaluating the risk, and then
assigning the weight.
 Currently, the minimum ratio of capital to risk-weighted assets is between
8 to 10.5%
 Minimum Capital Adequacy Ratio are critical in ensuring that banks have
enough cushion to absorb a reasonable amount of losses before they
become insolvent and consequently lose depositor’s fund.
What Is Statutory Liquidity Ratio ?

 At the end of the every business day, banks are required to

maintain a minimum ratio of their Time liabilities (when the bank
has to wait to redeem their liabilities) and Net Demand (when bank
can withdraw money from these accounts immediately) in the form
of liquid assets like gold, cash and govt. securities.
 The ratio of time liabilities and liquid assets in demand is called
Statutory Liquidity Ratio or SLR.
 The maximum SLR that the Reserve Bank of India can set is 40%
p.a. However the current SLR is set at 18.75%p.a.
What Is Cash Reserve Ratio ?

A certain proportion of the net time and demand liabilities of the

bank is also to be placed with Reserve Bank of India as Cash
Reserve
(Presently 4% - effective 07/08/2019)
Bank Rate
 Bank Rate is the rate at which central bank of the country ( Bank Rate in
India is decided by RBI) allows finance to commercial banks. Bank Rate is
a tool, which central bank uses for short-term purposes. Any upward
revision in Bank Rate by central bank is an indication that banks should
also increase deposit rates as well as Base Rate / Benchmark Prime
Lending Rate. Thus any revision in the Bank rate indicates that it is likely
that interest rates on your deposits are likely to either go up or go
down, and it can also indicate an increase or decrease in your EMI.

 This is the rate at which central bank (RBI) lends money to other banks
or financial institutions. If the bank rate goes up, long-term interest
rates also tend to move up, and vice-versa. Thus, it can said that if bank
rate is hiked, in all likelihood, banks will soon hikes their own lending
rates to ensure that they continue to make profit.
Presently 5.65% - effective 7/8/2019
What Is Marginal Standing Facility Rate
(MSF) ?

 When Banks face acute financial shortage, they can avail this
special facility offered by RBI.
 In MSF, Banks can borrow cash from RBI against their approved
government securities.
 This option is preferred during emergency and critical situations
only. MSF rate is always higher than Repo Rate as banks needs the
funds instantly. The current MSF rate stands at 5.65%.
Repo rate

 Repo Rate is the rate at which the RBI lends shot-term money to the
banks against securities. When the repo rate increases, borrowing
from RBI becomes more expensive. Therefore, we can say that in
case, RBI wants to make it more expensive for the banks to borrow
money, it increases the repo rate; similarly, if it wants to make it
cheaper for banks to borrow money, it reduces the repo rate.

Presently 5.40% (effective 7/08/2019)

Reverse Repo rate

 Reverse Repo rate is the rate at which banks park their short-term
excess liquidity with the RBI. The banks use this tool when they feel
that they are stuck with excess funds and are not able to invest
anywhere for reasonable returns. An increase in the reverse repo
rate means that the RBI is ready to borrow money from the banks at
a higher rate of interest. As a result, banks would prefer to keep
more and more surplus funds with RBI.

Presently 5.15% (effective 7/08/2019)

Thus, we can conclude that Repo Rate signifies the rate at
which liquidity is injected in the banking system by RBI,
whereas Reverse repo rate signifies the rate at which the
central bank absorbs liquidity from the banks
Issuer of Currency- RBI

 The Bank issues and exchanges currency notes and coins and destroys the
same when they are not fit in circulation.
 The objective are to issue bank notes and giving public adequate supply of
the same, to maintain the currency and credit system of the country to utilize
it in its best advantage, and maintain reserves.
 It is the sole authority in India to issue Currency.
 Every note issued by RBI has its name imprinted on the top along with
signature of governor below the promisory clause.

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Issuer of Banking License- RBI

 Every Bank has to obtain a Banking license from RBI to conduct Banking
Business in India (as per sec.22 of the Banking Regulation Act)
 Since April 2014, The RBI has granted 23 new banking licenses.
 Entities/groups in the private sector, entities in public sector and Non-Banking
Financial Companies (NBFCs) shall be eligible to set up a bank through a
wholly-owned Non-Operative Financial Holding Company (NOFHC). They will
also need to have a sound & successful track record of 10 years.
 Various Banks have been given license like IDFC, Bandhan Bank, Equitas
Holding, Fino Paytech etc.

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Bankers Bank

 As a Bankers Bank, RBI enables smooth and swift clearing and settlement of
inter-bank transactions.
 RBI provides efficient means of fund transfer to all banks, enables banks to
maintain their accounts with RBI for statutory reserve requirements and
maintenance of transaction balances.
 RBI regulates opening of new ATMs and branches of commercial banks
 RBI provides loans to banks/bankers, accepts deposits of banks and
rediscounts the bills of the bank.

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Lender of Last Resort

 The banks can borrow from the RBI by keeping eligible securities as collateral
or any other arrangement and at the time of need or crisis, they approach RBI
for financial help. Thus RBI works as Lender of the Last Resort (LORL) for
banks.

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Banker and Debt Manager of the Govt.

 RBI keeps deposits of Government (Central & State) as deposit free interest.
 RBI receives and makes payment on behalf of the government.
 RBI carries out the government’s exchange remittances & other banking
operations.
 Helping both State & Central Govt to float new loans and manage public debt.
 Acts as an advisor to Government on all banking and monetary functions.

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Controller of Credit

 Credit control is a major vector used by RBI to control demand and supply
money in the economy.
 Some of the Credit control mechanism are
a. Open Market Operations (OMO)
b. Credit Ceiling

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Clearing House

 Clearing Houses facilitate the exchange of instruments and processing of

payment instructions at a central point among the participating banks.
 RBI acts as a clearing house for settlement of banking transactions.
 It is a member bank of the Asian Clearing Union
 RBI manages 14 clearing houses of the country situated in different major
cities. The SBI and its associate banks look after clearing house function as an
agent of RBI.

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Managing Foreign Exchange

 RBI is required to maintain external value of rupee. For this purpose it acts as
a custodian of FOREX.
 On a given day, the foreign exchange rate reflects the demand for and supply
of foreign exchange arising from trade and capital transactions. The RBIs
Financial Markets Department (FMD) participates in the foreign exchange
market by undertaking purchase/sales of foreign currency to ease volatility in
periods of excess demand for/supply of foreign currency.
 Administer and enforces the provision of Foreign Exchange Management Act
(FEMA), 1999.

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Indigenous Banks

 Indigenous banks mean Local Area Banks (LABs). These are banks with
features distinct from public sector, private sector, nationalised bank. These
banks basically aims to cater to the need of the local, area specific banking
needs.

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Industrial Bank

 A financial institution with limited scope – of services, Industrial banks sell

certificates that also accept customer deposits.
 They then invest the proceeds in instalment loans for consumers and small
businesses. These banks are also known as Morris banks or industrial loan
companies.

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