MODULE - 1

INTRODUCTION TO
BANKING SYSTEM
IN INDIA
Contents of the Module
• Bank and Banking: Meaning and definition;

• Overview of Indian Banking System:

• Role and functions of RBI,
• Functions of Commercial Banks,

• Types of Banks;

• Banking Ombudsman: Meaning and functions.

Bank- Meaning
• The origin of the word “Bank” is derived from German word “Banck” which means “joint
stock fund”
• From this word “Banck”, Italian word “Banco” is coined which means “Heap of Money”
• Some researches opines that the word bank is derived from “Bancus” or “banque” which
means bench.
• Initially, the bankers transacted their business on benches in the market place and the
bench resembled a banking counter.
• If the banker failed, his “banque” (bench) was broken up by the general public, hence the
word “bankrupt”.
• The Oxford Dictionary defines Bank as “an establishment for the custody of money which
it pays out on a customer’s order”.
• This definition doesn’t suffice the scope of activities provided by a Bank.
Bank - Definition
Name of the Expert Bank Definition
Crowther A bank is a dealer in debts- his own and other peoples

Jhon Harry Bank is an economic institution whose main aim is to

earn profit through exchange of money and credit
instrument
R.P. Kent A bank is an institution, the principal function of which
is collect the unutilized money of the people and to lend
it to others

Cairn Cross A bank is a financial intermediary- a dealer in loans and

debts
Banking - Definition
• The Banking Regulations Act 1949, Section 5(b) defines banking as
“accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, and order or otherwise”.
Overview of Indian Financial System
• Indian Financial System comprises of institutions (banks, non-banking
financial companies, insurance companies, mutual funds, etc.), financial
markets (money market, Government Securities market, foreign exchange
market, etc.) and financial market infrastructure supported by the legal and
institutional framework.
• The financial system performs several vital functions: intermediating
between savers and investors, facilitating payments, risk-sharing, providing
liquidity etc.
• A well-functioning financial system contributes to economic welfare, whereas
a dysfunctional or unstable financial system leads to economic hardship.
• The objective of regulation is to ensure that the financial system performs
these vital functions without any adverse impact on the real economy.
Overview of Indian Financial System
Indian Financial System

Institutions Markets Market Infrastructure

Money Markets
Banks Non-Banks

Capital Markets
Commercial RBI regulated NBFCs

Mutual Funds and

Cooperative Insurance Companies
Intermediating between
savers and investors

Facilitating payments,

Providing liquidity,

Risk-sharing,
Reserve Bank of India
• The Reserve Bank of India (RBI) is India's central bank and regulatory
body responsible for regulation of the Indian banking system.
• It is under the ownership of Ministry of Finance, Government of India.
• RBI is controlled by a Central Board of Directors.
• Central Board consists of
• Governor: Shaktikanta Das
• 4 Deputy Governors
• 2 Finance Ministry representatives
• 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai, and
New Delhi
RBI Timeline
Year Event
1934 The British enacted the Reserve Bank of India Act
1935 Reserve Bank of India was established on 1st of April in Calcutta
1937 Reserve Bank of India was permanently moved to Mumbai
1949 RBI nationalized after independence.
2016 Original RBI Act of 1934 was amended.
This provided the statutory basis for the implementation of the flexible
inflation-targeting framework.
Functions of RBI - Explanation
• Implementation and monitoring monetary policies
•  price stability
• Open Market Operations (buying and selling of securities),
• Cash Reserve ratio 4.50% (bank deposits with RBI),
• Statutory Liquidity Ratio 18% (liquid assets like cash, gold, bonds with themselves),
• Bank Rate 4.25% (Interest on loans taken by banks from RBI),
• Credit ceiling (Banks loans to public have ceiling).
• Comprehensive methods of banking operations
• Licensing, Liquidity of assets, Bank mergers, Branch expansion
• Managing Foreign exchange: FOREX reserves, rupee value
• Issuer of currency: supplies currency, issuing and exchange of currency notes, destruction of
currency notes and coins.
• RBI’s Developmental role
• Encourages rural and agricultural development and issues directives to the commercial banks to lend loans
Recent Bank Mergers
Functions of RBI
• Reserve Bank of India works as:
• Monetary Authority
• Implementation and monitoring monetary policies.
• Ensuring price stability in the country considering the economic growth of the
country
• Regulator and Administrator of the Financial System
• The RBI determines the comprehensive parameters of banking operations.
• These methods are responsible for the functioning of the country’s banking and
financial system. Methods such as:
• License issuing
• Liquidity of assets
• Bank mergers
• Branch expansion, etc.
Functions of RBI contd.
• Managing Foreign Exchange
• RBI manages the FOREX Reserves of India.
• It is responsible for maintaining the value of the Rupee outside the country.
• Issuer of currency
• The Reserve Bank of India is responsible for providing the public with a sufficient
supply of currency notes and coins.
• The quality of currency notes and coins is also taken care of by the RBI.
• RBI is in charge of issuing and exchanging of currency and coins.
• Also, the destruction of currency and coins that are not fit for circulation.
Functions of RBI contd.
• RBI’s Developmental role:
• Promotional functions that support national objectives are organized by
RBI that encourage rural and agricultural economic development.
• The RBI will regularly issue directives to the commercial banks to lend
loans to small-scale industrial units.
 RBI

Scheduled Banks Non-scheduled Banks

Commercial Cooperative
Banks Local Area Banks
Banks

Public Sector Private Sector

Foreign
SBI Domestic

Nationalized
Universal Differentiated
Banks

Regional Rural Banks Payment Banks

Small Finance Banks

 Overview
Majority stakeof Indian
is held by Banking System
• How is SBI different from
the Ministry of Finance of • Cater to financial
other nationalized banks?
the Government of India RBI needs of locals
• Established in 1955
• 1959- 7 subsidiaries of SBI
Scheduled Banks nationalized Non-scheduled Banks
• Why • These subsidiaries were
Nationalization? later merged in 2008, 2010
• Banking Commercial and CooperativeBanking
• 2017
Investment
Banks Local Area Banks
Regulation Act, Banks services
1949 • Wholesale banking • Licensed by RBI in 2015
• 1969-91  14 services
Public Sector Private Sector • Offer products to only select areas
banks • Retail Banking • Promote financial inclusion and payments
• 1980  6 more Services
banks Foreign
SBI Domestic
• Deposit up to 1 lakh rupee
Nationalized • Cannot avail loan
Universal Differentiated
Banks

Regional Rural Banks Payment Banks • Financial assistant to

micro industries and
• To develop rural economy small farmers
• To provide credit to farmers, Small Finance Banks
artisans and small business.
Scheduled and Non-Scheduled Banks
• Scheduled Banks: By definition, any bank which is listed in the 2nd schedule of the Reserve
Bank of India Act, 1934 is considered a scheduled bank.
• The Schedule consists of those banks which satisfy various parameters, criteria under
clause 42 of this act.
• The list includes the State Bank of India and its subsidiaries (like State Bank of
Travancore), all nationalized banks (Bank of Baroda, Bank of India etc.), regional rural
banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative
banks.
• To qualify as a scheduled bank, the paid-up capital and collected funds of the bank must
not be less than Rs5 lakh.
• Non-scheduled Banks: By definition are those which are not listed in the 2nd schedule of
the RBI act, 1934.
• Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.
• Bangalore City Co-operative Bank Ltd. Bangalore, Baroda City Co-op. Bank Limited are a
few examples.
Commercial Banks
• The commercial banking sector in India is quite diverse. Based on the
ownership pattern, banks can be broadly categorized into public sector
banks, private sector banks.
• While the State Bank of India, nationalized banks and Regional Rural Banks
(RRBs) are constituted under respective enactments of the Parliament, the
private sector banks and foreign banks are considered as banking companies
as defined in the Banking Regulation Act, 1949.
• Till 2015, only universal banking licenses were being issued. However, since
2015, licenses for differentiated banks (niche banks) are also being issued
alongside licenses for universal banks.
Public Sector Banks
• Public Sector Banks (PSBs) are a major type of government owned banks in India, where a
majority stake (i.e. more than 50%) is held by the Ministry of Finance of the Government of
India or State Ministry of Finance of various State Governments of India.
• The shares of these banks are listed on stock exchanges. Their main objective is social
welfare.
• Emergence of Public Sector Banks:
• The Central Government entered the banking business with the nationalization of the Imperial Bank of
India in 1955.
• A 60% stake was taken by the Reserve Bank of India and the new bank was named State Bank of India.
The seven other state banks became subsidiaries of the new bank in 1959 when the State Bank of
India (Subsidiary Banks) Act, 1959 was passed by the Union government.
• The next major government intervention in banking took place on 19 July 1969 when the Indira
government nationalized an additional 14 major banks.
• The total deposits in the banks nationalized in 1969 amounted to 50 crores. This move increased the
presence of nationalized banks in India, with 84% of the total branches coming under government
control.
SBI and Nationalized Banks
• Nationalized Banks (Government Shareholding %, as at end-March 2021)
• State Bank of India (56.9%)
• Bank of Baroda (64.0%)
• Canara Bank (69.3%)
• Punjab National Bank (76.9%)
• Indian Bank (88.1%)
• Union Bank of India (89.1%)
• Bank of India (89.1%)
• Central Bank of India (89.8%)
• Bank of Maharashtra (93.3%)
• UCO Bank (94.4%)
• Indian Overseas Bank (95.8%)
• Punjab and Sind Bank (97.1%)
Nationalized Banks
• After Independence, all the major banks of the country were led privately which was a cause of concern as
the people belonging to rural areas were still dependent on money lenders for financial assistance.
• To resolve this problem, the then Government decided to nationalize the Banks.
• These banks were nationalized under the Banking Regulation Act, 1949.
• 14 banks were nationalized during 1969 to 1991 via Allahabad Bank, Bank of India, Bank of Baroda, Bank
of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian Overseas Bank, Indian Bank,
Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank and UCO Bank.
• In the year 1980, another 6 banks were nationalized, taking the number to 20 banks. These banks
included: Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind
Bank and Vijaya Bank.
• Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalized
in 1959: State Bank of Patiala, State Bank of Hyderabad, State Bank of Bikaner & Jaipur, State Bank of
Mysore, State Bank of Travancore, State Bank of Saurashtra, State Bank of Indore.
• All these banks were later merged with the State Bank of India in 2017, except for the State Bank of
Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.
Regional Rural Banks
• Regional Rural Banks (RRBs) were setup with a view to developing the rural
economy by providing credit and other facilities, particularly to the small and
marginal farmers, agricultural labour, artisans and small entrepreneurs.
• Being local level institutions, RRBs together with commercial and co-
operative banks, were assigned a critical role to play in the delivery of
agriculture and rural credit.
• The function of financial regulation over RRBs is exercised by Reserve Bank
and the supervisory powers have been vested with NABARD
• List of RRBs Functioning in the Country | Department of Financial Services |
Ministry of Finance | Government of India
Private Banks
• Banks where the majority stake are owned by a private organization or an
individual or a group of people are called Private Banks
• Domestic Banks: Banks that belong to private sector and established in India.
Eg: HDFC bank, ICICI Bank, Axis Bank, Federal Bank, Yes Bank, Kotak
Mahindra Bank etc.,
• Foreign Banks: Foreign banks are registered and have their headquarters in
another country, but they have branches in India. A foreign bank branch is a
type of foreign bank that is required to follow both the home and host
country's regulations. Banks frequently open a foreign branch in order to
better serve their multinational corporate clients. Examples: Citi Bank,
Standard Chartered Bank, HSBC Bank, Royal Bank of Scotland etc.
Universal Banks
• The term ‘universal banks’ in general refers to the combination of commercial
banking and investment banking, i.e., issuing, underwriting, investing and
trading in securities. In a very broad sense, however, the term ‘universal
banks’ refers to those banks that offer a wide range of financial services,
beyond commercial banking and investment banking, such as, insurance.
However, universal banking does not mean that every institution conducts
every type of business with every type of customer. Universal banking is an
option; a pronounced business emphasis in terms of products, customer
groups and regional activity can, in fact, be observed in most cases. In the
spectrum of banking, specialized banking is on the one end and the universal
banking on the other.
Differentiated banks
• Differentiated banks are banking institutions licensed by the RBI to provide
specific banking services and products.
• A differentiated license will allow a bank to offer products only in select areas.
• Main aim for giving license to differentiated banks is to promote financial
inclusion and payments.
• The term differentiated banks indicate that they are different from the usual
universal banks.
• Differentiated banks licensing was launched in 2015.
• The differentiated banks are of two types: Payment banks and Small Finance
Banks.
Payments Banks
• A newly introduced form of banking, the payments bank have been conceptualized by
the Reserve Bank of India. People with an account in the payments bank can only
deposit an amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards
under this account.
• Options for online banking, mobile banking, the issue of ATM, and debit card can be
done through payments banks. Given below is a list of the few payments bank in our
country:
• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
Small Finance Banks
• As the name suggests, this type of bank looks after the micro industries, small
farmers, and the unorganized sector of the society by providing them loans
and financial assistance. These banks are governed by the central bank of the
country.
• Capital Small Finance Bank, Fincare Small Finance Bank, Suryoday Small
Finance Bank, Ujjivan Small Finance Bank, Utkarsh Small Finance Bank, Esaf
Small Finance Bank, Northeast Small Finance Bank, Jana Small Finance Bank,
Equitas Small Finance Bank etc.,
Local Area Banks (LAB)
• Introduced in India in the year 1996
• These are organized by the private sector
• The prime objective of a local area bank or a LAB is to cater to the credit and
other financial related needs and requirements of the locals.
• Local Area Banks are registered under Companies Act, 1956
• Coastal Local Area Bank Ltd, Krishna Bhima Samruddhi LAB Ltd, Subhadra
Local Bank Ltd
Cooperative Banks
• These banks are organized under the state government’s act. They give short term loans to the
agriculture sector and other allied activities.
• The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans
• They are organized in the 3 tier structure
• Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
• Funded by RBI, government, NABARD. Money is then distributed to the public
• Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
• Owned by the state government and top management is elected by members
• Tier 2 (District Level) – Central / District Cooperative Banks
• Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
 Functions of Commercial Banks

Primary Secondary
Functions Functions

Acceptance of Deposits Acts as an agent

Providing loans Overdraft Facility

Discounting Bills of
Credit Creations
Exchange

Provides Locker facility

Issues Traveller's Cheque

Functions of Commercial Banks
• Acceptance Of Deposits: Commercial banks accept deposits from the general public. These banks
provide interest on deposits accepted to the public. Commercial banks accept deposits through
different types of accounts i.e. current account, savings account, fixed deposits, recurring deposit.
The Interest rate provided on deposits in these accounts differs from each other.
• Providing Loans And Advances: Commercial banks provide loans to the public as per their needs.
The amount accepted as deposits by these banks is used for providing loans. Banks charge high-
interest rates on the amount provided as a loan from its customers. Both short term & long term
loans are provided by the bank. Banks generally ask for some collateral security before providing
advances to their customers.
• Credit Creation: Credit creation is one of the unique & important features played by commercial
banks. It is through this function commercial banks manage & control the flow of credit in the
economy. These banks by accepting deposits & providing credit facilities to its customers help in
generating more & more credit. Commercial banks are also termed as factories or manufacturers of
credit.
Functions of Commercial Banks
• Acts As An Agent: The commercial bank acts as an agent of its customers. It
performs several functions & duties on behalf of its customers. Banks make
several payments & receive different payments for their customers. It pays
rent, insurance premium & income tax of its customers. Banks also facilitates
the transfer of funds for its customers. It also buys & sells securities for its
customers.
• Overdraft Facility: Commercial banks provide overdraft facility to its reputed
& reliable customers. Under this facility, customers are able to withdraw more
than they have as a credit in their current account. The maximum overdraw
limit is set by the bank. This facility is provided to the current account holder.
Customers need to pay interest on the overdrawn amount to the bank.
Functions of Commercial Banks
• Discounting Bill Of Exchange: This is one of the important secondary functions
performed by commercial banks. Banks provide the facility of discounting bills of
exchange before the due date to its customers. Banks charge a commission for providing
this service. Banks pay the bill amount after charging their commission to the customers.
• Provides Locker Facility: Banks provide locker facilities to its customers. Customers get
the facility of keeping their valuable items in the locker of their banks. It provides safety
to its customers. Banks charge some fees according to time from its customers for locker
usage.
• Issues Traveller Cheque: Banks issue traveller cheque to its customers for convenience.
Instead of taking cash with them while travelling, banks issue them traveling cheque. It
provides safety to its customers. This cheque can be easily discounted at different
branches of the bank all over India.
Banking Ombudsman Scheme
• Banking Ombudsman is a quasi judicial authority first introduced
in India in 1995.
• The current scheme became operative from 1 January 2006, and
replaced and superseded the banking Ombudsman Scheme 2002.
Presently the Banking Ombudsman Scheme 2006 (As amended up
to July 1, 2017) is in operation.
• Banking Ombudsman facilitate in resolving customer complaints
and objections against insufficiency in banking services.
Scope of Banking Ombudsman
• If a customer is not happy with the services and facilities rendered by the Bank, the
customer has all the power to complain to the complaint cell of the Bank.
• If the Bank does not take any action or efforts, then the customer can propose the
problem with the Ombudsman of the relevant bank.
• The RBI has selected steps to establish the Internal Ombudsman and make them extra
self-governing.
• However, several customers observe that even though the Bank has a complaint system
and an Internal Ombudsman, many of their objections continue to be unsolved and
they are not allowed and forced to address the external Banking Ombudsman.
• So, the banking Ombudsman officials are introduced in every relevant bank for the
sake of customers. They look forward to all the complaints and resolve that at their
best.
Grounds of Complaint
• Any person may file a complaint with the Banking Ombudsman having jurisdiction on any one of the
following grounds alleging deficiency in banking including internet banking or other services.
• Non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.;
• Non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of
commission in respect thereof;
• Non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof;
• Non-payment or delay in payment of inward remittances ;
• Failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;
• Non-adherence to prescribed working hours ;
• Failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a
bank;
• Delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of the reserve bank
directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a
bank ;
• Complaints from non-resident Indians having accounts in India in relation to their remittances from abroad, deposits
and other bank related matters;
• Refusal to open deposit accounts without any valid reason for refusal;
Grounds of Complaint contd.
• Levying of charges without adequate prior notice to the customer;
• Non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/debit card
operations or credit card operations;
• Non-disbursement or delay in disbursement of pension (to the extent the grievance can be attributed
to the action on the part of the bank concerned, but not with regard to its employees);
• Refusal to accept or delay in accepting payment towards taxes, as required by reserve
bank/government;
• Refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of
government securities;
• Forced closure of deposit accounts without due notice or without sufficient reason;
• Refusal to close or delay in closing the accounts;
• Non-adherence to the fair practices code as adopted by the bank; (s)non-adherence to the provisions of
the code of bank's commitments to customers issued by banking codes and standards board of India
and as adopted by the bank ;
• Non-observance of reserve bank guidelines on engagement of recovery agents by banks; and
Grounds of Complaint contd.
• Any other matter relating to the violation of the directives issued by the Reserve Bank in relation to
banking or other services.
• A complaint on any one of the following grounds alleging deficiency in banking service in
respect of loans and advances may be filed with the Banking Ombudsman having
jurisdiction:
• Non-observance of reserve bank directives on interest rates;
• Delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of
loan applications;
• Non-acceptance of application for loans without furnishing valid reasons to the applicant; and
• Non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or
code of bank’s commitment to customers, as the case may be;
• Non-observance of reserve bank guidelines on engagement of recovery agents by banks; and
• Non-observance of any other direction or instruction of the reserve bank as may be specified by the
reserve bank for this purpose from time to time.
When to file a Complaint
• If the reply is not received from the bank within a period of one month after
the concerned bank has received complaint representation.
• If bank rejects the complaint.
• If the complainant is not satisfied with bank's reply.
• Banking Ombudsman does not charge any fee for filing and resolving
customer's complaints.
• If any loss suffered by the complainant then complainant is limited to
the amount arising directly out of the act or omission of the bank or Rs.
20 Lakhs whichever is lower.
• Reserve Bank of India has widen the scope of its Banking
Ombudsman scheme, 2006, to include deficiencies arising out of
sale of Insurance/ mutual fund/ other third-party investment
products by Banks. For example, if IDBI bank is selling mutual
funds of Reliance Mutual Funds. If Reliance Mutual funds did not
provide the promised services, then IDBI bank will be made liable
for the damages.
Thank you