Banking in India – How Does Bank Work in India?

The banking system in India today came into existence in the last decades of the 18th century. The first bank was established in 1770, the largest and the oldest bank still in existence is the State Bank of India and still working today efficiently.

In the past few decades, the Indian banking sector has gained a reputation for its several features and services provided. One of the main unique achievements was its extensive reach, the government and the banking authority succeeded in placing thousands of branches in remote areas, therefore, making banking services available to every citizen. This is one of the reasons why the Indian banking system has a strong foundation and structure.

How Does Bank Work in India?

What exactly is a bank? A bank can simply be defined as a manufacturer of credit. In other words, a bank is an institution with several levels that basically handles the citizen’s money to their advantage and for its own advantage.

Now you know what exactly a bank means. The Reserve Bank of India also commonly referred to as the RBI is the central banking institution of India. The Central banking system is known by different names in different countries. So what exactly does RBI do? To understand the function and purpose of the RBI, you have to consider RBI as the supreme bank in India. The main function of the RBI is to

  1. The RBI is the sole manufacturer of the Indian National rupee
  2. RBI is the banker for the government. RBI represents the Indian government in the International Monetary Fund (IMF) and The World Bank
  3. RBI maintains and regulates the Cash reserves of the Commercial banks
  4. It is the RBI who handles the foreign currency reserves
  5. RBI provides financial aid to the commercial bank at times of crisis or if the commercial bank asks for its support, however, the RBI might charge a higher interest rate for the services provided
  6. In accordance with the government policies, RBI controls the credit.
  7. RBI controls the flow of currency in the country; it has the sole responsibility to monitor key indicators like Inflation, GDP etc.
  8. RBI is the licensing authority of India, No banks in India can function legally without a license from the RBI.

Structure of Indian Banking System – Understanding The Indian Banking Sector

Now you know why I asked you to consider the RBI as a supreme bank of India. With all these basic things being told, the Indian bank as we see today is classified into several sectors.

  1. Commercial Bank
  2. Public sector banks
  3. State bank group
  4. Other nationalized banks
  5. Private sector banks
  6. Indian
  7. Foreign
  8. Regional Rural bank
  9. Co-operative Bank
  10. State co-operative bank
  11. Central co-operative bank
  12. Primary credit Societies

1. Commercial Bank

A commercial bank is a type of bank that provides services like providing loans, provide basic investment products, and accept deposits. These banks also provide credits, bill discounting, demand draft, money at class etc.

The basic role of this type of bank is to provide its services to the public (Indian Citizens), for business purposes, for companies etc. They are also responsible for maintaining the economic stability and provide services that can ensure sustainable growth of the country’s economy. The commercial banks are divided into two

  1. Public sector banks and
  2. Private sector banks

Public sector banks –Public sector banks are those types of commercial banks whose majority stakes would be owned by the government. Majority stake means more than 50% shares of the bank. In India, there are almost 21 public sector banks.

  1. State banks groups and
  2. Other nationalized banks that include.
  1. Central Bank of India
  2. Corporation bank of India
  • Canara bank
  1. Bank of Baroda
  2. Bank of India
  3. Bank of Maharashtra
  • Allahabad bank
  • Indian Overseas Bank
  1. UCO bank
  2. Union Bank of India
  3. Vijaya Bank
  • United Bank of India
  • Syndicate Bank
  • Dena Bank
  1. Indian Bank
  • Oriental Bank of Commerce
  • Andhra Bank
  • Punjab National bank
  • Punjab & Sindh Bank

Private sector banks –Private sector banks are those types of commercial banks whose majority stakes are owned by private shareholders. Axis bank, ICICI, Federal Bank, Kotak Mahindra Bank Limited is a few of the private banks in India. According to the RBI records, there are almost 24 private banks in India. To get the list of private banks in India to click here

2. Regional Rural Banks

Regional Rural Banks as the name suggests are those banks that operate at regional levels in different states of our country. The primary purpose of these banks is to

  • Distribute government wages, distribution of pension etc.
  • To provide a banking facility to people in rural areas
  • Provide a Para-banking facility which includes locker facilities, credit card, debit card etc.

According to the RBI records, there are around 60 Regional Rural Banks in India today. Uttar Bihar Gramin Bank, Punjab Gramin Bank, and Bihar Gramin Bank are few of the RRB’s.

3. Co-operative Bank

Co-operative banks are those banks that are owned by their own customers. The co-operative banks are regulated by both banking and cooperative legislation. The co-operative banks in India are usually centered on a particular community, workplace, etc. A  Co-operative bank is a key constituent of the Indian financial system as it is the main source of loans, financial support for agriculture, small-scale industries, and also self-employed workers. Citizen Credit Cooperative Bank Limited, Kalyan Janata Sahakari Bank is two of the co-operative banks in India.

  1. State co-operative banks
  2. Central Co-operative banks
  3. Primary Credit Societies

Primary credit Societies –They are also known as Primary Co-operative Credit Society, these banks are an association of borrowers as well as non-borrowers. Main funds of this type of bank come from Central co-operative banks, shares, and deposit from its members.

Central Co-operative Banks – This type of bank is a federation of Primary Co-operative Credit Society. The central Co-operative banks can be classified into two, they are the ones with a membership of primary Co-operative Credit societies only, and the second type is the ones with a membership of both Primary Co-operative Credit Societies and individuals. The main source of funds for this bank comes from shares, loans, and overdrafts from State Co-operative banks, and deposits from members.

State Co-operative Banks –This type of bank is a federation of Central Co-operative banks. The sole purpose of this bank is to watch the functioning of the Central Co-operative banks. The main source of funds for this bank comes from shares, overdrafts, and loans from the Reserve Bank of India, and also from deposits of the members.

These are some of the major parts of the Banking system in India. Together all these branches of banks control the flow of credit and form the backbone of the Indian economy.

Hope this article helped you

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