Banking System in India

Notes

Structure

Reserve Bank of India (apex).
Scheduled banks (included in the Second Schedule of the RBI Act, 1934; must have a paid-up capital and reserves of at least ₹5 lakh) and non-scheduled banks.
Scheduled commercial banks: public sector banks (SBI and other nationalised banks; 12 after the 2019-20 mergers), private sector banks, foreign banks, regional rural banks (RRBs, 1975), small finance banks (SFBs) and payments banks.
Cooperative banks: Urban Cooperative Banks (UCBs), State and District Central Cooperative Banks, and PACS (rural credit).
Development financial institutions: NABARD (1982), SIDBI (1990), EXIM Bank (1982), NaBFID (2021); and NBFCs.

Evolution

Bank of Hindustan (1770); the Presidency Banks (Bengal 1806, Bombay 1840, Madras 1843) merged into the Imperial Bank of India (1921), which became the State Bank of India (1955).
Nationalisation of 14 major banks on 19 July 1969 (deposits above ₹50 crore) and 6 more in 1980.
Narasimham Committee I (1991): financial sector reforms: lower CRR/SLR, prudential norms, entry of new private banks (1993), and deregulation of interest rates. Narasimham Committee II (1998) on banking sector reform and capital adequacy.
Bank mergers: SBI and its associates (2017); Bank of Baroda with Vijaya and Dena (2019); in 2020, ten PSBs were merged into four (PNB, Canara, Union and Indian Bank).

Types of newer banks

Small Finance Banks (2015 licences): serve small borrowers and the unserved (e.g., AU, Ujjivan). Payments Banks (2015): accept deposits (limit per customer) and offer payments, but cannot lend (India Post Payments Bank, 2018).

Regulation and priority sector

Banking Regulation Act, 1949. Priority sector lending (PSL): 40% of adjusted net bank credit to agriculture, MSMEs, weaker sections, housing and education.
Basel III norms: minimum capital adequacy ratio and buffers. On-tap licensing for universal banks and small finance banks.

Key Points

RBI is the apex; scheduled banks are in the Second Schedule.
14 banks nationalised in 1969; 6 in 1980.
Narasimham Committees (1991 and 1998) reformed banking.
SFBs and payments banks (2015) for inclusion.
Priority sector target is 40% of ANBC.

MCQs

Q2. Payments banks in India: (a) Can give loans (b) Cannot lend but accept deposits (c) Are only for corporates (d) Are cooperative banks Ans: (b).

Q3. The Narasimham Committee (1991) recommended: (a) Nationalisation of banks (b) Financial sector reforms including lower CRR and SLR (c) Creation of NABARD (d) Demonetisation Ans: (b).