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A bank is a financial institution that provides banking services and other financial services to its customers. Banking services include accepting deposits and giving loans. In India, there are different types of banks, and each bank has its own set of responsibilities. The various types of banks provide financial services like money deposit and withdrawal facilities, loans, fixed deposits, currency exchange, wealth management, etc. Banks have helped instill a culture of savings amongst people and have also helped enhance the economic development of the country.
Primary functions of a bank
The Indian banking sector is one of the most significant drivers of the economy. It provides liquidity to the economy, which helps to create demand. For example, car loans issued by banks stimulate demand for cars, contributing to the growth of the automobile sector.
Indian banks are highly regulated due to their importance for financial stability and economic growth. The Reserve Bank of India (RBI) is the governing body of all banks and financial institutions in the country.
The primary functions of a bank are as follows:
- Deposits/withdrawal facility – Customers deposit their savings in banks to use those savings at the time of their needs. Every customer is provided with a bank account ID to deposit or withdraw money from their respective bank accounts. Providing security and preventing unauthorized access are also functions that a bank ensures.
- Granting loans and advances – Another crucial function of a bank is providing loans to customers. Banks lend money to their customers in the form of loans on a time and interest basis. Apart from granting loans and advances, banks provide other services like overdraft, discounting of bills of exchanges, cash credits, etc.
Types of banks
The following are the different categories of banks in India:
- Central bank – A central bank is the monetary authority of a country. It is entrusted with various responsibilities to bolster the economic and financial strength of the country. Regulation of the banking sector (money market) is the primary responsibility of a Central bank. Under the Reserve Bank of India Act, 1934, the Reserve Bank of India was established on April 1, 1935. The Reserve Bank of India is India’s Central bank that regulates and guides other banks in the country.
- Commercial banks – Commercial banks provide a range of financial services, including checking and savings accounts, money market accounts, time deposits, etc. These banks function commercially, with profit being their primary goal. Commercial banks operate under the Banking Regulation Act, 1949. The State bank of India, HDFC Bank, Axis Bank, ICICI Bank, and Canara Bank are some examples of commercial banks.
Commercial banks, known for providing short-term loans, are owned by the government, private companies, or the state. The banks in which the government holds the majority of stocks are public sector banks. On the other hand, private sector banks are those in which most of the stock is held by a private entity, group of people, or individual.
Commercial banks in India are further divided into scheduled and non-scheduled banks. A scheduled commercial bank is listed in the second schedule of the Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the bank must have at least five lakhs rupees in paid-up capital and raised funds. A scheduled bank is eligible for low-interest loans from the Reserve Bank of India.
On the other hand, a non-scheduled commercial bank does not comply with the RBI’s regulations and have a reserve capital of less than five lakh rupees. Additionally, these institutions are not listed in the Second Schedule of the RBI Act, 1934.
3. Regional rural banks (RRBs) – RRBs were founded in 1976 following the recommendations of the Narasimham Working Group (1975). These banks are governed by the Regional Rural Banks Act (1976). Regional rural banks are government-owned scheduled commercial banks that operate at the various regional levels.
RRBs’ main purpose is to provide credit and other services to agricultural workers, artisans, small and marginal farmers, and small entrepreneurs in rural areas to reduce regional imbalances, create rural jobs, and close the credit gap. These banks have a 50:35:15 shareholding pattern amongst the three sponsoring entities: central government, sponsoring bank, and state government, respectively. In 1975, Prathama Grameen Bank was established in Moradabad, Uttar Pradesh, making it the first regional rural bank in India.
4. Cooperative banks – A cooperative bank is a bank-owned and operated by its shareholders, who are also the bank’s clients. It offers a wide variety of standard banking and financial services, such as offering low-interest loans to small business owners, providing working capital loans, and extending advances against debentures or shares.
The Multi-State Cooperative Societies Act, 2002, governs various cooperative banks in India. Cooperative banks are controlled by the Reserve Bank of India (RBI) and also by the registrar of cooperative societies under two laws: Banking Regulations Act, 1949, and Banking Laws (Cooperative Societies) Act, 1955.
Cooperative banks are organized in a three-tiered system, namely:
Tier 1: State cooperative banks (regulated by RBI, state governments, NABARD)
Tier 2: Central/district cooperative banks
Tier 3: Agriculture (Primary) cooperative banks
4. Nationalised banks in India – Nationalised banks are public sector or government-owned banks in India. In these banks, the majority stakes are held by the Indian Government’s Ministry of Finance or various state finance ministries.
Its emergence happened way back in 1955 with the inception of the Imperial Bank of India, later known to be the State bank of India. As of 2021, there are 12 nationalised banks in India. State Bank of India is a nationalised bank with the maximum number of branches across the country.
The other banks are – Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab, and Sind Bank Punjab National Bank, UCO Bank, and Union Bank of India.
6. Payments bank – Payments banks are a new category of banks authorised by the Reserve Bank of India to provide remittance/payment services to migrant workers, small businesses, etc.
The proposal for establishing payments banks stemmed from the Report of the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (Chairman: Nachiket Mor) submitted in January 2014.
Payment Banks are not allowed to set up subsidiaries to engage in non-banking financial services activities, such as leasing, hire purchase, etc., or to engage in lending services. These banks provide services like internet banking, ATM card issuance, debit card issuance, and mobile banking. The account holders of payments banks can only deposit money up to Rs 1,00,000/- in their account. They cannot apply for loans and credit cards through this account.
Conclusion
Banks are the vital economic wing of any nation. The various types of banks provide financial services like money deposit and withdrawal facilities, loans, fixed deposits, currency exchange, wealth management, etc.
For a country to develop economically, its financial infrastructure must be strong and well-developed. Banks serve as that financial backbone, providing valuable services to every country.
