TYPES OF BANKS

TYPES OF BANKS

The Banks can be classified on a number of basis. Depending upon the criterion selected, a bank can be classified into more than one category also.

CLASSIFICATION OF BANKS

RBI ACT OWNERSHIP CONSTITUTION NATURE OF BANKING
Scheduled Banks Public Sector Banks Statutory Banks Payment Banks
Non- Scheduled Banks Private Banks

1. Indian

2. Foreign

Nationalized Banks Small       Banks
Cooperative Banks Regional Rural Banks   


SCHEDULED BANK

At present there are 149 scheduled banks in India, including 56 RRBs. (RBI data, Dec 2015.)

A bank whose name appears in the second schedule of the RBI Act, 1934 is called a ‘scheduled bank’. Whenever the RBI is not satisfied with the functioning of a bank, it may delete the name of that bank from the second schedule. Barring a few small banks, almost all banks (including foreign ones) in India are Scheduled Banks.

The bank whose name does not appear in the 2nd schedule is called a ‘non- scheduled bank’.

STATUTORY BANK

The banks which have been constituted under a separate Act of Parliament are called Statutory Banks. Some examples of such banks are – Reserve Bank of India (Reserve Bank of India Act-1934), State Bank of India (State Bank of India Act – 1955), IDBI Bank (Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003). 

PUBLIC SECTOR BANKS

All those banks where the government share holding is 51% or more are called Public Sector Banks. Thus all nationalized banks, SBI, IDBI Bank and RRBs are Public Sector Banks.

The State Bank of India is the largest public sector bank in India.

NATIONALISED BANKS

The banks which were nationalised in 1969 and 1980 vide Banking Companies (Acquisition and Transfer of Undertaking) Act are called nationalised banks. In all, 14 banks, each with deposits of over Rs 50 crores, were nationalised in 1969.

Later, in 1980, six more banks, each with deposits of over Rs 200 crore, were nationalised. Of the 6 banks nationalised in 1980, New Bank of India was merged with Punjab National Bank in 1993, leaving only 19 nationalised banks.

Punjab National Bank is the largest nationalised bank in India.

PRIVATE BANKS

The capital structure of the RRB is jointly subscribed by the Central Government–50%, State Government–15% and Sponsoring Bank–35%.

Recently govt. has decided to increase the authorized capital of RRBs from Rs. 5 crore to Rs. 2000 crores.

 

All banks other than public sector banks are called Private Banks. These banks are registered under the Companies Act, 1956. They are of two types – Indian Banks and Foreign Banks. The Banks registered in India are called Indian Banks while those with their registered office outside India are called Foreign Banks.

ICICI Bank is the largest Indian private sector bank and Standard Chartered Bank is the largest foreign bank in India.

REGIONAL RURAL BANKS – RRBs

The Narasimhan Working Group (1975) proposed the establishment of RRBs as special purpose, low cost banks to serve the banking needs of rural areas.

These banks were formed under the Regional Rural Banks Act, 1976. Every RRB has to be sponsored by a public sector bank.  At present there are 56 RRBs.

Generally, they are confined to a local area only and are not allowed to open branches in cities.

75 per cent of their total loans have to be in priority sector.

COOPERATIVE BANKS

These banks are co-operative societies registered under the respective State Cooperative Societies Act. For their organisational structure, they are governed by the State Cooperative Societies Act and for their banking functions they are governed under Banking Regulation Act.

Both RRBs and Coop Banks are supervised by NABARD as well.

Inspection of RRBs and Cooperative Banks is conducted by NABARD under the Banking Regulation Act, 1949.

DEVELOPMENT FINANCIAL INSTITUTIONS – DFIs

These financial institutions have been set up under different acts of Parliament, each for a specific purpose. They do not have a banking licence and hence, cannot issue their own cheques.  They have limited public dealings and generally, they deal with banks and other financial institutions. In India, there are six major DFIs as under:

  1. NABARD (National Bank for Agriculture and Rural Development): Set up in 1982 under the NABARD Act, 1981, it works for development of agriculture and rural economy. It is also the regulator of cooperative banks and RRBs.  It is owned by the Government of India (99.50%) and RBI (0.50%).

          Head Office: Mumbai

  1. EXIM Bank (Export Import Bank of India): Set up in 1982 under the Export-Import Bank of India Act, 1981, wholly owned by Government of India, it works for the promotion and financing of exports.

          Head Office: Mumbai

  1. NHB (National Housing Bank): Set up in 1988 under the National Housing Bank Act, 1987, it is owned by the Reserve Bank of India and works for the development of housing finance sector and also regulates the housing finance companies.

          Head Office: New Delhi

  1. SIDBI (Small Industries Development Bank of India): Set up in 1990 under the SIDBI Act, 1989 for the promotion, financing and development of the Micro, Small and Medium Enterprise (MSME) sector. Promoted by IDBI, it is owned by a number of financial institutions.Head Office: Lucknow
  2. IFCI (Industrial Finance Corporation of India):
    Established in 1948 under an act of Parliament, it is the first Development Financial Institution (DFI) in the country to cater to the long-term finance needs of the industrial sector. The government holds a majority share in IFCI along with several other Financial Institutions.Head Office: New Delhi
  1. MUDRA (Micro Units Development and Refinance Agency Ltd.) It is an institution for development and refinancing of loans up to Rs. 10 lakh to non-farm sector only to micro, small and medium enterprises (MSMEs) by all public sector banks, RRBs, MFIs, NBFCs.It functions under the Pradhan Mantri Mudra Yojana (PMMY).Head Office: Mumbai

It has 3 loan schemes:

  1. Shishu for loans up to Rs. 50,000/-,
  2. Kishore for loans above 50,000 up to Rs. 5 lakh,
  3. Tarun for loan above Rs 5 lakh up to Rs 10 lakh.

The government has decided to convert MUDRA in to a regular bank.      

BANK BRANCHES OF ALL SCHEDULED COMMERCIAL BANKS

(as in Dec. 2015)

SR. NO. AREA NUMBER
1. Rural 49,181
2. Semi-Urban 35,259
3. Urban 24,608
4. Metropolitan 21,650
Total 1,30,698

D-SIB–DOMESTIC SYSTEMICALLY IMPORTANT BANK

A few banks, on account of their size, cross-jurisdictional activities, complexity, specialities and linkage with other banks, become important for the entire system. Their failure may cause significant disruption to the entire banking system. Such banks thus are considered Systemically Important Banks (SIBs) as their continued functioning is critical for the uninterrupted availability of banking services.

In July 2014, RBI had announced the framework for dealing with D-SIBs and names of banks designated as domestic systemically important bank were to be declared every year in August starting from August 2015.

On August 31, 2015, RBI, for the first time gave the status of D-SIB to State Bank of India and ICICI Bank.

DIFFERENTIATED BANKING

According to the Reserve Bank of India, India needs variety of Banks to cater to needs of different strata of society. The Nachiket Mor Committee constituted by the RBI has proposed a Differentiated Banking system with Payment Banks for Deposits and Wholesale Banks for credit with relaxed entry points for financial inclusion.

The Reserve Bank released the guidelines for ‘Payment Banks’ and ‘Small Finance Banks’ in November 2014.

PAYMENT BANKS

These banks can receive demand deposits and make remittances, but cannot lend; focus on migrant labour and low income households.

On August 19, 2015, RBI gave in principle approval to 11 entities to set up Payment Banks.

They are India Post, Reliance Industries Ltd., Aditya Birla Nuvo, Tech Mahindra, Sun Pharma, National Securities Depository Ltd., Airtel M Commerce Services Ltd., Vodafone m-pesa Ltd., Cholamandalam Distribution Services Ltd., Fino Pay Tech Ltd. and Paytm.

SMALL FINANCE BANKS

These banks will lend to “un-served and under-served sections”, including small business units, small and marginal farmers, and micro and small industries.

On Sep 18, 2015 RBI gave in principle approval for 10 Small Finance Banks.

They include Ujjivan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, Equitas Holdings Ltd, Au Financiers (India) Ltd, Capital Local Area Bank Ltd*, Disha Microfin Pvt. Ltd, ESAF Microfinance and Investments Pvt. Ltd, RGVN (North East) Microfinance Ltd, Suryoday Micro Finance Pvt. Ltd, and Utkarsh Micro Finance Pvt. Ltd.

*It started functioning as India’s first small finance bank in March, 2016. 

PAYMENT BANKS AND SMALLS FINANCE BANKS- SALIENT FEATURES

PAYMENT BANKS SMALL FINANCE BANKS
OBJECTIVE
Provide small savings accounts and payments/remittance services to migrant labour  workforce and low-income households Financial inclusion and credit to small business units through high –technology, low–cost operations
ELIGIBLE PROMOTERS
Individuals or professionals with necessary experience and eligibility, existing NBFCs, corporate banking correspondents, mobile companies, supermarket chains, real estate co-ops and corporate entities Resident individuals or professionals with 10 years of experience in banking and finance, companies and societies owned and controlled by residents, existing NBFCs, microfinance institutions and local area banks owned and controlled by residents
SCOPE OF ACTIVITIES
Can accept only demand deposits where balance should not exceed Rs. 1 lakh. Cannot open FD or RD accounts Basic services of accepting deposits and lending
Cannot give loans, can issue ATM/debit card but not credit cards No restriction on the area of operations
Can distribute non-risk simple financial products such as mutual funds and insurance products  At least 50% of its loan portfolio should comprise loans and advances of up to Rs. 25 lakh. 
NRIs will not be allowed to open accounts 75% of their total loans have to be in the priority sector.
DEPLOYMENT OF FUNDS
Minimum 75 per cent of its “demand deposit balances” to be invested in SLR securities. Will have to observe same CRR and SLR norms as for regular commercial banks.
CAPITAL REQUIREMENTS
Minimum paid-up equity capital of Rs. 100 crore. Promoter’s contribution has to be not less than 40% for first 5 years. 

WHAT IS A BANK ?

WHAT IS A BANK?

A Bank is a financial institution which acts as an intermediary between those who have surplus funds and those who need it. Persons with surplus funds keep their deposits with the banks, out of which the banks give loans to those who require them. Thus, the Banks help in mobilising the savings and put these idle savings to productive use.

Thus, banks act as levellers of wealth not only between persons but also among different areas by mobilising funds from surplus areas and investing them in deficit areas, thereby leading to distribution of wealth. Therefore, banks are also known as ‘financial intermediaries.’

DEFINITION OF BANKING

Banking is a legally defined activity, which means that it is governed by strict rules and regulations. The Banking Regulation Act, 1949 defines and governs the banking activities in India.

As per Section 5(b) of this act, banking has been defined as “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”. In simple words, banking is related to –

  1. Accepting deposits of money from the public.
  2. For the purpose of lending, i.e. making loans, and making investments (in approved govt. securities).
  3. Withdrawal of money on demand or through cheque.

The above three are the basic functions of the banks. Other than this, banks are allowed to undertake several other functions like bill business, foreign exchange business, bonds/debentures, bank guarantees, letter of credit, etc. as mentioned in Sec. 6 of the Banking Regulation Act, 1949.

However, modern banking covers a large number of other activities also like issuance of debit/credit cards, providing safe custody of valuable items, locker facility, ATM services, transfer of funds, etc.

UNIQUE FEATURES OF BANKING

Banking has three unique features which are not available to any other organisation.

  1. The deposits are repayable on demand. It means that whenever a depositor wants to withdraw the money, bank will pay the money, subject to applicable rules. For example, A makes an FD for a period of 6 years but on the second day if he needs the payment, bank will make the payment.

No company other than a bank can accept deposits payable on demand.

  1. The Banks are allowed to issue cheques and no company other than a bank can issue its own cheques.
  2. For the Banks, it is necessary to incorporate words like bank, banking, banker, in their name. No other organisation is allowed to use such words as part of its name.

Some other features of banking include:

  • Banks are authorized to create credit i.e. creating additional money by making loans.
  • Most of the banks are commercial in nature, i.e. they function for making profits. 

BANKING COMPANY

A company registered under the Companies Act, which transacts the business of banking as defined in Banking Regulation Act is known as banking company. Most of the banks are in the form of registered company.

CENTRAL BANK

In all countries the entire banking system is controlled by a Central Bank. The name Central Bank is given to that bank which is entrusted with task of controlling the issue of money and regulating all other banks. It also regulates the supply of money in the country. In India this function is performed by RBI.

BANK LICENCE

To undertake the banking activities in India, it is compulsory, by law, to obtain a licence from the Reserve Bank of India (Sec.22 of Banking Regulation Act, 1949). Even the foreign banks have to obtain such a licence from the RBI before opening a branch in India. The RBI also has the powers to cancel the licence, if it is not satisfied with the bank’s functioning.

Minimum capital required to start a banking company is Rs. 500 crore. 

REGULATION OF BANKS

The Banking Regulation Act, 1949 authorises the Reserve Bank of India to regulate and control the banks in India. As per Section 35(a) of this law, the RBI is fully authorized to issue instructions/directions to the banks as it deems fit, as and when considered necessary. It is mandatory for all the banks (including foreign banks) to comply with directions of the RBI.  Further, Sec. 35 authorises RBI to inspect any bank branch any time.

HISTORY OF BANKING

HISTORY OF BANKING

THE ROOTS

The idea of banks began as long ago as 1,800 BC in Babylon, a city in present day Iraq. In those days wealthy persons acted as moneylenders and made loans to people.

Beginning of formal banking can be traced to the functioning of money lenders in 12th and 13th centuries in the Italian towns of Florence and Genoa. In the 16th century, a German family called the Fuggers from Augsburg became prominent bankers.

At the end of the 17th century, England suffered heavy losses in war with France. So in 1694, a group of wealthy persons got together to form the Bank of England to provide loan to the government.  The Bank of Scotland was founded in 1695.

In 1833, bank notes issued by the Bank of England were made legal tender i.e. they must be accepted as a valid means of payment. Modern banks began with the Bank Charter Act of 1844.

Chartered Bank of India opened its branches in Mumbai and Calcutta in 1858.           

THE INDIAN SCENARIO

The existence of banking in India could be traced to the 500 BC. Chanakya’s Arthashastra, dating back to 400 BC contains references to creditors, lenders and lending rates.

Beginning of formal banking in India dates back to opening of Bank of Bombay in 1720 in Mumbai.  It was followed by Bank of Hindustan in 1770 in Kolkata.

Structured professional banking with government support began in June 1806 with the opening of the Bank of Bengal, first ‘Presidency Bank’ in Calcutta.

Later, two more Presidency Banks were opened – Bank of Bombay in 1840 and Bank of Madras in 1843.  In 1921, these three presidency banks were merged to form Imperial Bank of India.

The first Indian owned bank was the Allahabad Bank set up in Allahabad in 1865, followed by the Punjab National Bank in 1895 in Lahore.

The following are some major milestones in the field of banking in India:   

1935:   Establishment of Reserve Bank of India.

1949: Enactment of Banking Regulation Act.

1955:   Nationalisation of Imperial Bank into State Bank of India.

1969:   Nationalisation of 14 major Banks.

1975:   Creation of Regional Rural Banks.

1980:   Nationalisation of six banks with deposits of over 200 Crores.

1988:   Beginning of computerization in banks

1992:   Introduction of NPA system

1994:   Entry of private tech savvy banks, ATMs

2000:   Dawn of online banking

2004/05: Beginning of RTGS/NEFT 

2009:   Incorporation of NPCI for retail payment systems

2010:   Connectivity of ATMs 

2015:   Opening of Payment Banks and Small Finance Banks