Indian Banking Structure
Scheduled vs Non-Scheduled, Public vs Private vs Foreign, RRBs, Cooperative Banks, Payments Banks, Small Finance Banks, FinTech, TechFin, NeoBank, NPCI, UPI, RTGS, NEFT — the complete landscape of Indian banking in one chapter.
Sections 1–3 — What is Banking and Why Structure Matters
Section 5(b) of BR Act + the bank hierarchy
Section 4 — All Bank Types in India
Complete structure from Scheduled to Cooperative — verified from textbook
Scheduled banks (2nd Schedule RBI Act) = can borrow from RBI, join clearing houses | Non-scheduled = cannot
Scheduled banks are those included in the second schedule to the Reserve Bank of India Act, 1934. In terms of RBI Act, the bank’s paid-up capital and raised funds must be at least Rs 5 lakhs to qualify. Scheduled banks are eligible to: borrow from RBI at Bank Rate and obtain membership in clearing houses. They must maintain CRR with RBI. Scheduled banks = Scheduled Commercial Banks + Scheduled Cooperative Banks. Commercial banks classified into 6 categories: Public Sector Banks, Private Sector Banks, Foreign Banks, Local Area Banks, Regional Rural Banks and Differentiated Banks (Payments Banks and Small Finance Banks).
🏛️ Public Sector Banks (PSBs)
SBI (SBI Act 1955) + presently 11 nationalised banks (Banking Companies (Acquisition) Acts 1970 and 1980). SBI had 7 associate banks — all merged with SBI between 2008 and 2017. 27 nationalised banks → after mergers = currently 12 PSBs. New Bank of India taken over by PNB in 1993.
🏢 Private Sector Banks
Constituted under Companies Act. No private bank licensed for ~25 years after 1969 nationalisation. Post-Narasimham 1991, private banks approved from 1994. ICICI Bank = first new private bank, June 1994, Vadodara. HDFC Bank = August 1994. Present: 21 private banks (12 old + 9 new). Min paid-up capital: Rs 500 crores. 25% branches in unbanked rural areas mandatory.
🌐 Foreign Banks
Established in countries other than India. Earlier known as “Exchange Banks” — focused on forex and foreign trade. FEDAI was originally an association of foreign banks. Three modes: Branches / Subsidiaries / Representative Offices. Post-GFC: new entrants must use Wholly Owned Subsidiary (WOS) model in certain cases. Min paid-up capital: Rs 500 crores. Minimum CRAR: 10% for first three years.
🌾 Regional Rural Banks (RRBs)
Established 1975 (Narasimham Committee recommendation). RRB Act enacted 1976. Objective: serve rural economy — credit to small/marginal farmers, agricultural labourers, artisans. Capital structure: Central Govt 50% + State Govt 15% + Sponsor Bank 35%. Authorised share capital: Rs 2000 crore. Priority sector target: 75% of ANBC. Can do all banking except forex (limited extent only).
💳 Payments Banks
Nachiket Mor Committee (2013) → licensed 2015. Objective: financial inclusion for unbanked/underbanked. Min paid-up capital: Rs 100 crores. Promoter min contribution: 40% for first 5 years. Max deposit: Rs 2 lakhs per customer. 75% of demand deposits in SLR-eligible govt securities; 25% in scheduled commercial banks. Can issue debit cards, NOT credit cards. Cannot lend. Cannot accept NRI deposits or term deposits. As on Aug 31, 2022: 6 payments banks operational.
🏪 Small Finance Banks (SFBs)
Objective: financial inclusion for unserved/underserved sectors. Min paid-up capital: originally Rs 100 crore, now Rs 200 crores (except UCBs converting). Priority sector target: 75% of ANBC. Min 50% of credit portfolio: loans up to Rs 25 lakhs. Promoter: min 40% first 5 years → max 30% in 10 years → max 15% in 15 years. Subject to all prudential norms (CRR, SLR). No restriction on area of operations. As on Aug 31, 2022: 12 SFBs operational.
Local Area Banks set up as per Government of India scheme announced August 1996. Jurisdiction: maximum three contiguous districts. Objective: mobilise rural savings for local investment. Registered as public limited company (Companies Act) but licensed under Banking Regulation Act, 1949. Local Area Banks are non-scheduled banks. Minimum start-up capital: Rs 5 crores. Family of promoters: not more than 40% equity. NRI promoters: not more than 20% of total promoters. Must lend at least 40% to priority sectors. Out of 10 approved LABs, only 2 operational as of March 2021 (Capital LAB converted to SFB in 2015).
Cooperative movement started with Cooperative Societies Act 1904. Three-tier rural credit structure: State Cooperative Bank (state level) → Central Cooperative Banks (district level) → Primary Agricultural Credit Societies/PACS (village level). PACS are NOT covered under Banking Regulation Act. UCBs are scheduled if NDTL ≥ Rs 200 crores. Rural cooperative banks supervised by NABARD. Urban Cooperative Banks (UCBs) supervised by RBI. Came under BR Act: 1 March 1966 (through Section 56, Act 23 of 1965). 2020 amendment gave RBI wider power over cooperative banks. Key difference from commercial banks: one shareholder = one vote (irrespective of shares held); commercial banks: voting rights proportional to shares.
FinTech vs TechFin vs NeoBank — New Age Financial Entities
| Entity | Definition | Examples | Regulated by RBI? |
|---|---|---|---|
| FinTech | Companies using technology to offer financial services; enables financial industry to use IT-enabled services for customer experience. Key tool for financial inclusion. | PayTM (digital payments), PolicyBazaar (insurance), Funding Circle (P2P lending) | Yes — regulated entities |
| TechFin | Large technology companies (already have huge customer base and data) expanding into financial services. E.g., Google, Amazon, Apple entering finance. | GooglePay, Amazon Pay, WhatsApp Pay, Alibaba, Reliance JIO | NOT regulated in their tech functions — creates unlevel playing field |
| NeoBank (Digital Only) | “Digital only banks” — NOT regulated by RBI. Have tie-up arrangements with regulated banks to offer services. Provide niche products like BNPL (Buy Now Pay Later). | RazorpayX, Open, Jupiter, Fi Money | NOT regulated by RBI directly |
Key Payment Systems (NPCI Products)
| System | Full Form / Description | Key Feature |
|---|---|---|
| RTGS | Real Time Gross Settlement | Real time + gross basis | Floor: Rs 2 lakh | Available 24×7 (from Dec 14, 2020) | Large Value Payment System | Introduced March 2004 |
| NEFT | National Electronic Funds Transfer | Operates in 48 half-hourly batches | 24x7x365 (from Dec 16, 2019) | No floor or ceiling | Centralised payment system by RBI |
| UPI | Unified Payments Interface | Instant real-time | Developed by NPCI | P2P and P2M | Smartphone application |
| IMPS | Immediate Payment Service | Real time retail | Managed by NPCI (NOT RBI like NEFT) | 24×7 availability |
| NACH | National Automated Clearing House | Bulk push/pull transactions | Electronic mandate platform | Aadhaar-based transactions |
| CCIL | Clearing Corporation of India Ltd | Set up April 2001 | Central Counter Party (CCP) | Novation process | Settles govt securities, forex, repo |
NPCI (National Payments Corporation of India): Set up by RBI + IBA under PSS Act 2007. Became functional 2009. Incorporated as “Not for Profit” company under Section 8 of Companies Act 2013. 10 core promoter banks include SBI, PNB, ICICI, HDFC, Citibank, HSBC.
Section 5 — Exam Angle Points
All 7 PYQ answers plus key facts
✅ Must-Know Facts — Verified from PDF
- Banking defined in: Section 5(b) of the Banking Regulation Act, 1949 (Q1 PYQ: Section 5 — note: answer given as Section 5 in PYQ but PDF says 5(b))
- RBI established: April 1, 1935 (Q2 PYQ: answer = 1935)
- Min capital for Universal Bank: Rs 500 crores (Q3 PYQ)
- Min capital for Small Finance Bank: Rs 200 crores (Q4 PYQ — originally Rs 100 cr, now Rs 200 cr)
- Max balance in Payment Bank per account: Rs 2 lakhs (Q5 PYQ)
- On-Us transaction: At ATM of the card issuing bank itself (Q6 PYQ)
- Google Pay: TechFin company (Q7 PYQ — NOT FinTech, NOT NeoBank)
- Scheduled bank minimum capital: Rs 5 lakhs (to qualify for 2nd Schedule)
- Non-scheduled banks: Cannot borrow from RBI normally; cannot join clearing houses
- Payments banks: Cannot lend | Cannot issue credit cards | Cannot accept NRI or term deposits
- Payments banks can: Accept deposits up to Rs 2 lakh | Issue debit cards | Handle third party products | Cross-border remittances
- Payments bank capital structure: 75% of demand deposits in SLR govt securities + 25% in scheduled commercial banks
- Small Finance Banks PSL target: 75% of ANBC | Min 50% loans up to Rs 25 lakhs
- RRBs capital structure: Central Govt 50% + State Govt 15% + Sponsor Bank 35%
- RRBs PSL target: 75% of ANBC
- Local Area Banks: Non-scheduled | Max 3 contiguous districts | Min capital Rs 5 crores | 40% priority sector lending
- Cooperative banks under BR Act: From 1 March 1966 (through Section 56, Act 23 of 1965)
- Cooperative banks: one shareholder = one vote (unlike commercial banks where voting is proportional to shares)
- UCBs scheduled if: NDTL ≥ Rs 200 crores
- RTGS: Floor Rs 2 lakh | 24×7 from Dec 14, 2020 | Real time + gross basis
- NEFT: 48 half-hourly batches | 24x7x365 from Dec 16, 2019 | No floor/ceiling
- PSS Act: Payment and Settlement Systems Act 2007 | In effect from August 12, 2008 | Only RBI can authorise payment systems (Section 4)
- NPCI: Set up by RBI + IBA | Functional 2009 | Not for Profit (Section 8 Companies Act)
📝 All 7 PYQ Answers from PDF
Section 6 — Memory Tricks
Trick 1 — Scheduled vs Non-Scheduled
Trick 2 — Payment Bank Restrictions
Trick 3 — FinTech vs TechFin vs NeoBank
Trick 4 — RRB Capital Structure
Sections 7–9 — Flash Cards and Summary
⚡ Chapter 21 Complete — Indian Banking Structure
- Banking = Section 5(b) BR Act: accept deposits for lending/investment, repayable on demand, withdrawable by cheque
- Two broad types: Scheduled banks (in 2nd Schedule RBI Act, min capital Rs 5 lakh) and Non-Scheduled banks
- Commercial banks: Public Sector (12) + Private Sector (21) + Foreign + RRBs + LABs + Differentiated (Payments + SFBs)
- PSBs: SBI + 11 nationalised banks | PSU banks consolidated from 27 to 12
- ICICI Bank = first new private bank, June 1994, Vadodara | Min capital for Universal Bank: Rs 500 crores
- Payments Banks: min capital Rs 100 crores | Max deposit Rs 2 lakhs | CANNOT lend or issue credit cards | 6 operational (Aug 2022)
- SFBs: min capital Rs 200 crores | 75% ANBC to PSL | 50% loans up to Rs 25 lakhs | 12 operational (Aug 2022)
- RRBs: 1975/1976 | Capital: Centre 50% + State 15% + Sponsor 35% | PSL: 75% ANBC | Authorised capital: Rs 2000 crore
- LABs: Non-scheduled | Max 3 contiguous districts | Min capital Rs 5 crores | Only 2 operational (March 2021)
- Cooperative banks: Three-tier (SCB → DCCB → PACS) | Under BR Act from 1 March 1966 | One shareholder = one vote
- FinTech = finance company using tech (regulated by RBI) | TechFin = tech company doing finance (Google Pay) | NeoBank = digital only, not regulated
- RTGS: Rs 2 lakh floor, 24×7 from Dec 14, 2020 | NEFT: 48 half-hourly batches, 24×7 from Dec 16, 2019
- NPCI: Set up by RBI + IBA | Not for Profit (Sec 8) | Manages UPI, IMPS, NACH, RuPay, BBPS, NETC
- PSS Act 2007 — in effect Aug 12, 2008 | Section 4: only RBI can authorise payment systems
Banky says: “Now I can answer ANY customer question about what type of bank we are!” 🎉
All 7 PYQs answered, complete banking structure mapped, Payment Banks vs SFBs clear, FinTech/TechFin/NeoBank distinction locked! 💪