Banking & its structure in India

You will be joining a commercial bank in near future. You are expected to know about banking in general and specifically the bank you have applied for. We at Way2Bank have planned a series of post on banking in India to make our readers well prepared for any banking interview. These posts will also help for General Awareness section of IBPS CWE.

What is Banking?

Section 5(b) of the Banking Regulation Act defines Banking as, ‘accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.’

This definition points to the three primary activities of a commercial bank which distinguish it from the other financial institutions. These are:

(i)                  maintaining deposit accounts including current accounts,

(ii)                issue and pay cheques, and

(iii)                collect cheques for the bank’s customers.

Quick Question #1

Which of the following institutions are not allowed to take deposits from the public?

1) Public Sector Banks
2) Non-Banking financial companies (NBFCs)
3) Private Sector Banks
4) Cooperative Banks
5) None of these

The answer to the above question is option 2. Non-Banking financial companies are not allowed to accept deposits from public. Only Banks can accept deposits repayable on demand, issue and pay cheques.

The main functions of a commercial bank can be segregated into three main areas:

(i)      Payment System – A payment refers to the means by which financial transactions are settled. Different payment systems used for settlement of transactions are cheque, drafts, electronic banking (NEFT & RTGS), and Credit & debit cards.

(ii)    Financial Intermediation – The second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation.

(iii)   Financial Services – Banks also offer wide variety of financial services such as investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services

Banking Structure in India

Scheduled banks are banks which are included in the second schedule of RBI Act 1934.

Scheduled banks comprise

1)      scheduled commercial banks and

2)      scheduled co-operative banks.

Scheduled Commercial Banking structure in India

Scheduled Commercial Banks are categorised as follows –

1)      Public Sector Banks: – are those banks in which majority of stake are held by the government. Eg. SBI, PNB, Syndicate Bank, Union Bank of India etc.

2)      Private Sector Banks: – are those banks in which majority of stake are held by private individuals. Eg. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc.

3)      Foreign Banks: – are the banks with Head office outside the country in which they are located. Eg. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd. etc.

4)      Regional Rural Banks:- Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government,concerned State Government and a sponsoring public sector commercial bank.

Scheduled Cooperative Banking in India

A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest.

Co-operative banks differ from stockholder banks by their organization, their goals, their values and their governance. Regulated by the Reserve Bank of India, they are governed by the Banking Regulations Act 1949 and banking laws (co-operative societies) act, 1965.

In the next post we will be discussing about Reserve bank of India (RBI) and its role as central bank, regulator and supervisor of commercial banks.




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