How Many Types of Banks are There in India

Introduction

The two main categories of Indian banks are scheduled banks and non-scheduled banks. These financial institutions might be cooperative, commercial, small-finance, or payment-based. Private, public, multinational, and regional/rural varieties of commercial banks are frequently available.Cooperative banks provide finance to clients on a smaller scale.

Payment companies are only allowed to offer a limited number of deposit choices because of the Reserve Bank of India (RBI). India's banking sector is highly busy. Customers are urged to save money with banks so that they can utilise that money to make investments that are more profitable than average.

By employing these funds to finance various forms of loans, banks can control the financial flow of their enormous clientele. In this article, we look at different banking practices in India and how banks function.

The scheduled banks are included in the second schedule of the Reserve Bank of India (RBI) Act, 1934. Scheduled banks are required to have collected funds of at least $5,000 as well as paid-up capital. These banks are eligible to join clearinghouses and get loans at bank rates from the RBI.

Non-scheduled banks are those that are not included in the second schedule of the RBI Act of 1934. Less than INR 5 lakh is made up of paid-up capital and other funds combined. Such banks are not in need of an RBI loan.

Examples:

Commercial Banks

Commercial banks, whether or not they are scheduled, are governed by the Banking Regulation Act of 1949. These financial organisations accept deposits in exchange for lending money to people, businesses, and even the government. Among the commercial banking systems are:

Public Sector Banks

Public sector banks, which are also known as nationalised banks, handle more than 75% of all banking activity in India. The Indian government and the RBI are the two largest actors in this sector.

Private Sector Banks

Individual investors make up the majority of Private Sector Bank shareholders, not the RBI or the Indian Government. These banks must, however, abide by all RBI rules in order to do their business.

Foreign Banks

Foreign banks that operate in India as private businesses do so with headquarters outside of India. Both in their own nation and the country where they conduct business, they follow the laws.

Regional Rural Banks

These designated commercial banks provide services to economically underprivileged groups, including small companies, agricultural labourers, and marginal farmers. RRBs or Regional Rural Banks are regional banks that provide services like debit cards, bank lockers, free insurance, etc.

Small Finance Banks

These banking systems, which are allowed to operate under section 22 of the Banking Regulation Act of 1949, serve segments of society that big banks don't often service. They support small businesses, cottage industries, and microbusinesses.

Payments Banks

RBI limits these banks to exclusively provide deposit services, with a 1 lakh rupee (INR) per client deposit restriction. You can use e-banking services and debit cards.

Cooperative Banks

These banks operate on a no-profit, no-loss basis and are recognised under the Cooperative Societies Act of 1912. They provide financial services to corporations, industries, and sole proprietors.

The two main categories of banking in India are scheduled and non-scheduled, but commercial banks can offer both. Commercial banks provide loans and other banking services in addition to accepting deposits. Payment banks, on the other hand, only provide deposit facilities. Small businesses, especially marginalised farmers and labourers, have their financial requirements met by regional rural banks and small financing institutions.

History

Ancient India

The Vedas, which are ancient Indian writings, refer to the idea of usury and interpret the term kusidin as "usurer." Usury is also mentioned in the Jatakas (600–400 BCE or Before Common Era.) and the Sutras (700–100 BCE). Usury was prohibited in texts from this era as well; Vasishtha barred members of the Brahmin and Kshatriya varnas from engaging in it.

Usury was more commonly accepted by the second century CE or Common Era. The Manusmriti saw usury as a legitimate way to get money or support oneself. Additionally, it regarded lending money above a particular rate—and at varying rates for different castes—as a terrible sin. The Jatakas, Dharmashastras, and Kautilya all indicate the existence of loan deeds, also known as rnapatra, rnapanna, or rnalekhaya.

Adesha was a tool employed later during the Mauryan era and is identical to a modern bill of trade (321–185 BCE). It was a directive given to a banker telling him to pay the note's balance to a different party. It has been demonstrated that these tools are widely used. Businessmen commonly traded letters of credit in large cities.

Mediaeval Period

The Medieval period in India (approximately the 6th to 16th century CE) saw the emergence of various banking practices and institutions. One of the most prominent among these was the hundi system, which originated in the ancient period and continued to be used extensively during the Medieval period.

Hundis were essentially promissory notes that could be used for payment, transfer of funds, or as a form of credit. They were widely used by traders, moneylenders, and other merchants who needed to move money across long distances. The hundi system was based on trust and reputation, and the credibility of the person who issued the hundi was crucial for its acceptance.

Apart from hundis, there were other banking practices that emerged during the Medieval period, such as the sarrafs (money changers) and shroffs (bankers). These were essentially intermediaries who facilitated the exchange of different currencies and provided credit to merchants and traders.

One of the most significant developments during the Medieval period was the emergence of indigenous banking institutions, such as the shroffs and the hundiwallas. These institutions were often run by communities or families specialising in banking and moneylending. They provided a range of services, including deposit-taking, money transfers, and credit facilities.

Overall, the Medieval period in India saw the emergence of a range of banking practices and institutions that played a crucial role in facilitating trade and commerce. The hundi system, in particular, was a unique and sophisticated system of credit and payment that helped to connect different parts of India and beyond.

Colonial era

The colonial era in India (approximately 1757-1947) was a period of significant change in the Indian banking sector. During this time, several European banks established themselves in India and began to dominate the banking landscape.

The first European bank to set up operations in India was the Bank of Hindustan, which was established in 1770. This was followed by other banks such as the General Bank of India (1786), the Bank of Bengal (1806), and the Bank of Bombay (1840), which eventually merged to form the Imperial Bank of India in 1921.

These European banks played a crucial role in providing credit to Indian merchants and traders and also acted as intermediaries for the British colonial administration. They were often involved in financing the colonial government's expenses, such as the construction of railways and other infrastructure.

However, these banks were mainly focused on the needs of the European community in India and did not provide services to the wider Indian population. As a result, Indian entrepreneurs and traders often had to rely on indigenous banking institutions, such as the hundiwallas and the chit funds.

One of the major developments during the colonial era was the establishment of the Reserve Bank of India (RBI) in 1935. The RBI was set up to regulate the banking sector and to ensure the stability of the Indian rupee. It was also responsible for managing India's foreign exchange reserves and issuing currency notes.

Overall, the colonial era had a significant impact on the Indian banking sector, with the establishment of European banks and the subsequent emergence of the RBI. However, it also highlighted the need for banking institutions that catered to the needs of the wider Indian population.

Conclusion

The power that banks have over the amount of money in circulation and their function as the primary drivers of economic growth make them crucial to the economic development of nations. Economic development is a dynamic and ongoing process that is heavily reliant on resource mobilisation, investment, and the operational effectiveness of the many economic sectors.

Because it is defined as the reflection of how a bank's resources are employed in a manner that enables it to achieve its objectives, the performance of bank institutions and other financial institutions has to be assessed. Efficiency in the banking sector is crucial since it is regarded as a crucial component of the modern economy. Banks and other financial institutions need to be thoroughly analysed in order to guarantee a sound financial system and a productive economy.

Although banks and other financial institutions provide various products and services to assist business organisations, there is little room for differentiation among them because the products and services are essentially the same from one bank to the next. To ascertain the banks' contribution to company development, it is vital to evaluate each bank's performance separately.

In Malaysia, there are many different private and public banks, and some of these banks have their own branch networks spread throughout the nation. Different financial institutions have emerged as a result of economic reforms and mobilisation. Financial institutions of all kinds have appeared on the market as a result of economic reforms and mobilisation.

Overall, this has fostered more efficiency in financial services by not only creating a more dynamic and competitive banking environment that asks for improved evaluation and analysis. In order to promote growth, employment, wealth creation, the eradication of poverty, and an increase in GDP or Gross Domestic Product, it is essential that the banking sector and other financial institutions are strong.