Indian Banking System – Structure & Functions


First of all we have to know about the need of banking system. The financial system plays an important role to survive the country and also manage the whole financial system. In the present scenario the International Financial Institutes such as World Bank, International Monetary Fund, Asian Development Fund and so many other financial institute controlling the nations in their financial matters as well as put their influence in their political issues also. if the internal banking structure of a nation is not strong so it is very difficult to survive. Finally the nation need to a strong banking system. A strong banking system of any country should be able keep the balance between the depositors and the lenders. Indian Banking Structure is very strong. There is an autonomous body to control the whole monetary policies, distribution and manage the financial matters. In this blog we will discuss about the all required details of the Indian Banking System.

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In the Indian banking System we have The Reserve Bank of India is the apex body to control whole the banking system of the country. apart from that we has Scheduled Commercial Banks, Unscheduled Commercial Banks, Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks and Rural Regional Banks. when we see the structure of Indian Banking it looks like very complexed but it made like this that every citizen can take the advantage of the banking system. It can be easily understand the structure of Indian Banking System by the Diagram given above.

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Reserve Bank of India

In my views it will always be better to know anything when we have to know the history of its. In existence of Reserve Bank of Indian there is a great history that we must have to know. A commission was setup by the British Government in 1920 known as The Royal Commission on Indian Currency and Finance headed by Sir John Hilton Young. After at about six year in the year 1926 the commission had submitted his report. In this reports the commission had recommended to the British Government to establish a central bank in the country. Mainly on the basis of the report of this commission, The Reserve Bank of India act had been passed and the RBI had been come into in existence. One question come in my mind when The Imperial Bank of India was working as the central bank so what was the need to think about an other central bank? I know this question might be in your mind also. The Imperial Bank of India was come into existence in January 1921. It was made through the reorganization or amalgamation of the three Presidency Banks ( The Bank of Bengal, the Bank of Bombay and the Bank of Madras of the British regime. this was to done because to try to make a single and powerful banking entity. But The Imperial Bank of India (IBI) did not full fill the requirement to be as The Central Bank of India because 80% of capital participation was from the private sector and only 20% capital participation from the state. The Imperial Bank of India preferred to do a profitable business such as commercial Banking. Now a Central Bank was very much required to handle the whole Indian banking system that’s why the commission was formed in 1920.

As I already mentioned above that the Royal Commission had submitted his report in the year 1926 with a suggestion that there must be to set up a central bank for the financial growth of the country and also suggested the name of the institution “The Reserve Bank of India”.
In the year 1927 a bill was also be introduced in the Legislative Assembly but it could not be came into existence due to some conflicts with the constitution.
In the year 1931 The Indian Central Banking Enquiry Committee was set up to revive the issue of the establishment of the Reserve Bank of India as the Central Bank for India. The inquiry committee analyzed the case and supported the establishment of a Reserve Bank for India. Finally The Reserve Bank of India Act was passed in the Legislative Assembly in the year 1934 and a Central Bank came into existence. But the problem which was faced by the Imperial Bank of India the same situation was arise in front of Central Bank. The problem was in the construction plan of the Central Bank. The Reserve Bank was constituted on the model of shareholders’ bank, because there were so many leading foreign central bank were based on the same model. In this situation the government were held a few shares and the majority of shareholder were private entities. So it could be said that the central bank had the large number of private ownership and the idea and the motto of the private sector is to get mare and more profit of its investment. so it could not fit the idea of construction of a central bank.

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In the year 1947 India was going to get its freedom from the British regime. Now it was the time to need the close integration on the monetary and credit policies for the banks in India. There was also in need to have a Government owned Central bank to implement the economic policies through out the nation and an entity to make control on the banks in India.
After getting the independence, the Indian Government thinked over to nationalize the Reserve Bank. the Government of India took a great decision and introduced bill named as the Reserve Bank (Transfer to Public Ownership) Act, 1948. After this Act the ownership of Reserve Bank of India transferred from private shareholders to the Government. Resulted, The Reserve Bank of India started work as state-owned central banking institution from 1st January 1949. 

This was the whole story how The Reserve Bank of India came into existence.  The Reserve Bank of India was started with the paid-up capital of Rs. Five crores and the central office of The Reserve Bank of India is located at Mumbai.

Management of RBI

The Reserve Bank of India is managed by the Central Board of Directors.                                      The Reserve Bank of India has local boards in Mumbai, Delhi, Calcutta and Chennai.                The construction of management of Reserve Bank of India is like this, One Governor, Four Dy. Governors and Fifteen other Directors

Perform the following Functions

  • Issuance of Currency
  • Banker of the Government
  • Banker of the Banks
  • Controller of the Banks
  • Controller of the Credit
  • Control, Maintain & Regulate the CRR,SLR. Repo rate & Reverse Repo Rate
  • Maintenance & Control on External Transactions
  • Financial Policy Maker
  • Monetary control and Audit

Structure of Banking System

The Indian Banking System is very complexed. There are so many banking channels. In the Indian Banking System The Reserve Bank of India is an apex bank and it is an autonomous body also. Here we are discussing about the structure of banking system and we will also discuss each of the banking channel separately below. There are three types of banks under the RBI or in the banking system. One is scheduled Banks, second is un-scheduled banks and third is Development Banks. In the category of scheduled banks, it may be further divided into two categories one is commercial banks and another is co-operative banks. The commercial banks are further four categories and the categories are –
01) Public Sector Banks
02) Private Sector Banks
03) Foreign Banks
04) Rural Regional Banks.
On the other side the co-operative can also be categorized into the four banks
01) central co-operative Bank
02) State co-operative Banks
03) Primary co-operative Banks
04) Land Development Banks.
One more class of banking system in India that is called Development Banks. They are –
01) IFCI
02) IDBI
03) EXIM Bank

Scheduled Banks

The scheduled banks are the banks which are included in the second schedule of the Reserve Bank of India act 1934. Now a question arise which banks are included in the second schedule of RBI act 1934? The answer is only those banks can be included in the second schedule of RBI act 1934 who has satisfied the conditions mentioned in the section 42(6) of RBI act 1934. The section 42(6) says that a bank can be included in the second schedule of RBI act 1934 whose paid-up capital and reserves should not be less than Rs. five lacs and the RBI satisfied that the affair of the bank is strong and no chance will be put on the endanger the depositor’s interest.  Under the category of scheduled banks there is the sub-category of the banks. One is commercial banks and other is co-operative banks.

Commercial Banks

The Commercial Banks are the institution which works to ensure to make profits. The main function is to accept deposits from general public and lend money as a loan to the individuals entrepreneurs, businessmen and other service or non-servoce providing institutions and much more. The main objective of these banks is to earn profits from the interest earned on loans and earned commission in anticipation of their work.                                                            The commercial banks can be further divided into four categories.
01) Public Sector Banks
02) Private Sector Banks
03) Foreign Banks
04) Regional Rural Banks.

Public Sector Banks

The major type of Banks in India are Public Sector Banks (PSBs). In the Public Sector Bank the Government of India has its more than fifty percent of the stake holdings. The shares of these banks can also be listed on stock exchanges. The Public Sector Banks can also be categorized as under –
a) State Bank of India
b) Nationalized Banks
c) Other Commercial Banks.

Private Banks

The Private Sector Banks are the banks which has the majority of the stake holding of the private shareholders and there is no government participation in their shareholdings.
like ICICI Bank, HDFC Bank, RBL Bank, Yes Bank, and many more.
One question come into my mind When there is a great team of commercial banks in India the what is the requirement of Private Bank?
And the answer is that the private banks believe in class banking not in mass banking and these private bank provides all the banking facilities at the doorstep of their customers. The Private banks are also keen to introduce the latest techniques of information technology in the banking system because it is managed and controlled by the private promoters.
The Private banks can also be classified into two categories.
01) Pre-liberalization
02) Post-liberalization
The Private Banks come under the Pre-liberalization category are those which was already
in existence before liberalization.
As the reader may be know that the liberalization took place in India in the Year 1990.            There are twelve bank came under this category. These banks are Federal Bank, Karnataka Bank, Karur Vysya Bank, RBL Bank, etc.
The banks which get the license after the liberalization in India took place. These bank are also known as New Age Banks. They are HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, etc.

Foreign Banks

The Foreign banks can also be defined as banks branch of a foreign country bank working in India. The Reserve Bank of India has issued seprate guidelines and provides special rules for a foreign bank to establish and operate in India. it can be say like that “A foreign bank is an International Bank which have to bound to follow the rules and regulations of both the parent country and the host country.
The Foreign Sector Bank working in India are – ANZ Banking Group Ltd., Bank of America N.A.,  Bank of Bahrain & Kuwait BSC, Barclays Bank Plc etc.

Rural Regional Banks

The Regional Rural Banks (RRBs) are sponsored by any of the Public Sector Bank. It is the duty of a sponsor bank to provide aid and assist the sponsored RRB. The idea behind to sponsor the RRB is to put steps ahead and operate at the regional levels also in the different States of India because the RRB have been come in the existance with a view of provide financial services at the primary level of the rural areas in India.
The activities of the RRB can be as under:
01) Providing the all banking and financial facility in rural areas
02) To make balance in demand and supply of the financial requirement in rural areas.
03) To make such a measures by which the outflow of the rural deposits could be restrict.
04) To increase the employment opportunities in rural areas and try to generate such activities by which the rural employment may increase.
The functional area of a Rural Regional Banks are restricted or it can also be say that the functional area of a RRB is fixed for a limited area for which it established. 

Co-operative Bank

The Co-operative Banks are also one of the financial entities. The co-operative banks established on the basis of co-operative among their members. It means that the customers of a co-operative bank are also owners of the bank. The co-operative banks provides all the regular banking and financial services to their customers. It can be say that the
co-operative bank is the smallest financial institution that offers credit facilities to a small businesses not only in rural area but also in urban areas. The working of the co-operative banks are monitored and regulated by the Reserve Bank of India and all the transactions done by the co-operative banks come under the Banking Regulations Act, 1949.
There are four types of co-operative banks found in India:
01) Central Co-operative Banks
02) State Co-operative Banks
03) Primary Co-operative Banks
04) Land Development Banks

Un-Scheduled Banks

Un-scheduled Banks are the bank which are not included in the second schedule of the Reserve Bank of India act 1934

Development Banks

After independence the Indian Government thought for the importance of institutional credit in the country. Therefore, on the request of Government of India the Reserve Bank of India (RBI) made a plan and introduced the concept of the Development Bank in the country. The Reserve Bank of India planed the design of the development banks in such a way that a institution who are made to provide re-finance facility to the banks on their medium- and long-term borrowing. The bank funds can not be struck for a longer period by the way of re-financing. For example if a bank grant loan for the big institution with big amount of loan for a longer period and than the bank can be re-finance their loan amount from these development bank and the bank can be able to provide again the credit to the other big institution.
So friends, the concept to introduced the Development Banks in the banking system was to provide more and more amount of funds come on the economy and the nation become financially strong.
There are mainly five development banks
01) IFCI
02) IDBI
03) Exim Bank

IFCI ( Industrial Finance Corporation of India)
The IFCI was established by a special act passed in 1948 by the government of India. The IFCI was the first financial institution which was set up in India with the objective of making the medium and long term credit for industrial needs or to made easy to re-finance of the medium or long term borrowings of the commercial banks.

IDBI (Industrial Development Bank of India)
The Industrial Development Bank of India was established under the act named as the Industrial Development Bank of India Act, 1964. It was created as a Development Financial Institution (DFI) and made it to provide re-finance facility to the commercial banks on their medium and long term credit for industrial development.

EXIM BANK (The Export-Import Bank)
In the past year it was found that IDBI has a great load of finance and re-finance, so a branch has been opened to take over the operations of export and import operations of the country which was known as Exim Bank. the Exim Bank was set up in the year 1982. The main aim to establish the Exim Bank was to provide financial assistance to exporters and importers and to increase the international trade in the country and provide some protection to the Commercial banks who were involve to provide finance for international trade.

SIDBI (The Small Industries Development Bank of India)                                                                    The Small Industries Development Bank of India (SIDBI) was set up in the year 1990 with an Act as the Principal Financial Institution for the promotion, financing, re-financing and development of the MSME (Micro, Small and Medium Enterprise) sector and also to maintain the co-ordination of the function of the institutions which are engaged in MSME finance.
The main idea behind to establish the SIDBI is to provide refinance facilities of medium or long term loans and short-term lending also to the small industries. Or it can be say that the purpose to establish of SIDBI is to serves as the principal financial institution in concern of Micro, Small and Medium Enterprises (MSME) sector.

NABARD (National Bank for Agriculture and Rural Development)
National Bank for Agriculture and Rural Development( NABARD) was came into existence in the year 1982 by an Act. The purpose behind to establish NABARD was to transfer the functions of agricultural credit performed by RBI and the refinance functions of the Agricultural Refinance and Development Corporation (ARDC). This was the dedicated service to the nation by the late Prime Minister Smt Indira Gandhi to improve the Rural and Agriculture Development.

So friends this is the whole structure of the Indian Banking System which I have expressed before you. I has tried the explain in such way that you will like to read this blog. Please comment how you feel to read this blog. Thank you for your encouragement and support 

Mental Exercise

This is the time check your mental skills
01) Who headed the Royal Commission ?
02) The Imperial Bank of India came into existence by amalgamation of how many Presidency Banks?
03) When was the Royal Commission submitted its report ?
04) What was the reason behind the Reserve Bank of India act had been passed by the British Parliament in 1934?
05) Which committee was made to revive the issue of the establishment of the Reserve Bank of India as the Central Bank for India ?
06) In which year and by which act the Reserve Bank of India is being nationalized?
07) Who headed the Reserve Bank of India?
08) What do you mean by the term of currency of India?
09) Who made the idea to established bank of Rural and Agriculture Development?
10) Exim Bank was established to promote and protect which of the business sector ?
Thank you for answer these questions

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