Banking Awareness Question Day 11

Types of Banks in India – Category and Functions of Banks in India

Banks are financial institutions that perform deposit and lending functions. There are various types of banks in India and each is responsible to perform different functions.

In terms of the government exam syllabus, a candidate must know the types of Banks and the role of each of them in managing the financial system of a country.

The bank takes deposit at a much lower rate from the public called deposit rate and lends money at a much higher rate called the lending rate.

Banks can be classified into various types. Given below is the bank types in India:-

  • Central Bank
  • Cooperative Banks
  • Commercial Banks
  • Regional Rural Banks (RRB)
  • Local Area Banks (LAB)
  • Specialized Banks
  • Small Finance Banks
  • Payments Banks

This is an important topic for the IAS Exam and Banking Exam. In this article, aspirants will get information on the banking system in India, its function, and the type of banks in India.

Commercial Banks:

  • A commercial bank is a financial institution that performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit.
  • In fact, commercial banks, as their name suggests, ax profit-seeking institutions, i.e., they do banking business to earn a profit.
  • They generally finance trade and commerce with short-term loans. They charge a high rate of interest from the borrowers but pay much less rate of Interest to their depositors with the result that the difference between the two rates of interest becomes the main source of profit of the banks.
  • Most of the Indian joint stock Banks are Commercial Banks such as Punjab National Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.

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Industrial Bank:

An industrial bank is a financial institution with a limited scope of services. Industrial banks sell certificates that are labeled as investment shares and also accept customer deposits. They then invest the proceeds in installment loans for consumers and small businesses.

These banks are also known as Morris banks or industrial loan companies.

The main functions of the industrial banks are:
(a) They accept long-term deposits.
(b) They grant long-term loans to the industrialists to enable them to purchase land, construct factory building, purchase heavy machinery, etc.
(c) They help selling or even underwrite the debentures and shares of industrial firms,
(d) They can also provide information regarding the general economic position of the economy.

Agricultural Banks:

Agricultural Banks are the banks that provide agricultural credit to the farmers. The Agricultural Development Banks provide medium-term and long term credit. Some examples of Agricultural Banks in India are Agricultural Finance Corporation, Agricultural Refinance and Development Corporation, National Bank for Agricultural and Rural Development (NABARD). Agricultural Banks are established by the government to promote agricultural credit in the country.

Exchange Banks:

Exchange Banks are the banks which operate by financing the imports and exports of the country. These banks are mainly concerned with providing foreign exchange to their customers and help to promote international trade. They also offer to discount of foreign bills of exchange to their customers.

Savings Banks:

Savings Banks mainly concentrates on the mobilization of savings of the people. In India Post offices run by the Postal department act as savings banks. Since Commercial banks are providing these facilities of savings banks to the public, the need for separate savings bank is fading.

Foreign Exchange Banks:

Foreign Exchange Banks are the banks that provide finance for foreign trade. These banks accept deposits from the public. Foreign Exchange Banks are specialized banks in providing credit for foreign trade. These banks usually have their branches in foreign countries for the uninterrupted functioning of their services. But in recent times commercial banks are also financing foreign trade.

Public Sector Banks (PSBs):

Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held by a government. The shares of these banks are listed on stock exchanges. There are a total of 20 PSBs in India.

Private Sector Banks:

The private-sector banks in India represent part of the Indian banking sector that is made up of private and public sector banks. The “private sector banks” are banks where greater parts of share or equity are not held by the government but by private shareholders.

Cooperative Banks:

Cooperative banks are owned by their customers and follow the cooperative principle of one person, one vote. Co-operative banks are often regulated under both banking and cooperative legislation. They provide services such as savings and loans to non-members as well as to members, and some participate in the wholesale markets for bonds, money and even equities. [1]  Many cooperative banks are traded on public stock markets, with the result that they are partly owned by non-members.

Features of Co-operaive Banks:

  • Co-operative banks are organized and managed on the principle of co-operation, self-help, and mutual help. They function with the rule of one member, one vote.
  • Function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization.
  • The co-operative bank performs all the main banking functions of deposit mobilization, the supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functional specialists in agriculture-related products. However, co-operative banks now provide housing loans also.
  • UCBs provide working capital loans and term loans as well.
  • Co-operative banks do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi-urban, urban, and metropolitan areas also.
  • Co-operative banks are perhaps the first government-sponsored, government-supported, and government-subsidized financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments.

Domestic Bank:

The domestic bank is home banks that are opened and operated by Indians and
headquartered in India. SBI is an Indian bank so it is called a domestic bank

Foreign Banks:

Foreign banks are the banks that have the headquarter outside the country but they have banking business in India.  CITY bank headquartered in USA so it is a foreign bank in India.

Scheduled Banks:

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

The banks included in this schedule list should fulfill two conditions. 
1. The paid capital and collected funds of the bank should not be less than Rs. 5 lac.
2. Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities. 
1. Such bank becomes eligible for debts/loans on bank rate from the RBI
2. Such banks automatically acquire the membership of clearinghouse.

The Scheduled banks comprise Scheduled Commercial Banks and Scheduled Co-operative banks. The further classification is as follows:
 Scheduled Commercial banks
 Public Sector Banks
 State Bank of India and its associates, and
 Other Nationalised banks
 Private Sector Indian Banks
 Old private-sector banks
 New private-sector banks
 Private-sector Foreign banks
 Regional Rural Bank (RRBs)
 Scheduled Co-operative banks
 Scheduled State Co-operative Banks
 Scheduled Urban Co-operative Banks

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Non-Scheduled Banks:

  • The banks which are not included in the Second Schedule of the Reserve Bank of India Acts are non-scheduled banks.
  • The Local Area Banks (LABs) are small private banks, conceived as low-cost structures that would provide efficient and competitive financial intermediation services in a limited area of operation, i.e., primarily in rural and semi-urban areas, comprising three contiguous districts.
  • LABs were set up to enable the mobilization of rural savings by local institutions and, at the same time, to make them available for investments in the local areas.
  • LABs were created following an announcement made by the then Finance Minister in the Union Budget in August 1996
  • LABs were required to have a minimum capital of Rs. 5 crores.
  • The promoters of the bank may comprise private individuals, corporate
    entities, trusts and societies with a minimum capital contribution of Rs. 2 crores.
  • The area of operation of the LAB is limited to a maximum of three geographically contiguous districts and are allowed to open branches only in its area of operation.
  • Since LABs are being set up in district towns, their activities are focused on the local customers with lending primarily to agriculture and allied activities, small scale industries, agro-industrial activities, trading activities and the non-farm sector.
  • LABs are also required to observe the priority sector lending targets at 40% of net bank credit (NBC) as applicable to other domestic banks. Within the above target, these banks will adhere to the requirement of lending at least 25% of their priority sector deployments (10% of NBC) to the weaker sections.

Now there are four Local Area Banks:-

1. Coastal Local Area Bank
Founded: 27 December 1999
Headquarter: Vijayawada (Andhra Pradesh)
Area of Operation: Krishna, Guntur and West Godavari

2. Capital Local Area Bank Ltd.
Founded: 14 January 2000
Headquarter: Phagwara (Punjab)
Area of Operation: Jalandhar, Kapurthala and Hoshiarpur

3. Krishna Bhima Samruddhi Local Area Bank Ltd.
Founded: 28 February 2001
Headquarter: Mahbubnagar (Andhra Pradesh)
Area of Operation: Mahbubnagar in Andhra Pradesh, Raichur and Gulbarga in

4. Subhadra Local Area Bank Ltd.
Founded: 1996
Headquarter: Kolhapur, Maharashtra
Area of Operation: Kolhapur