Different Types of Banks in India

Banks in India

A bank is a financial institution whose purpose is to receive deposits and lend money to individuals and businesses, disburse payments, invest funds in securities for a return and safeguard money. It services savings and current (chequing) accounts, provides credit to borrowers in the form of loans and through credit cards, and acts as trustees of its clients. Banks perform all of these functions or some of them depending on their nature.

Other important banking activities are providing foreign exchange services for customers, financing foreign trade, operating in the money market, and providing a wide range of financial-cum-advisory services.

In India and other developing countries, the term ‘bank’ is applied to a variety of institutions which provide funds for various purposes. So banks are of different types: commercial banks, savings banks, investment (industrial) banks, merchant banks, land development banks, co-operative banks and above all, the central bank.

Different Types of Banks in India

We will now review different types of banks in India.

1. Organized and unorganized banking:

Indian banking system can broadly be classified into two categories:

(i) Organized banking and
(ii) Unorganized banking.

That part of Indian banking system which does not fall under the control of our central bank (i.e. Reserve Bank of India) is called as unorganized banking. For example, Indigenous banks. Whereas, organized banking system refers to that part of the Indian banking system which is under the influence and control of the Reserve Bank of India. For example. Commercial Banks, Industrial Banks, Agricultural Banks.

2. Scheduled and Nonscheduled banks:

Under the Reserve Bank of India Act, 1939, banks were classified as scheduled banks and non-scheduled banks.. The scheduled banks are those which are entered in the second schedule of RBI Act, 1939. Scheduled banks are those banks and which have a paid-up capital and reserves of the aggregate value of not less than Rs 5 lakhs and which satisfy RBI.

All Commercial Banks, Regional Rural Banks, State Cooperative Banks are scheduled banks. On the other hand, non-schedule banks are those banks whose total paid up capital is less than Rs 5 lakh and RBI has no specific control over these banks. These banks are not included in the second schedule of RBI Act, 1934.

3. Commercial banks:

Commercial banks are the most important types of banks. The term ‘commercial’ carries the significance that banking is a business like any other business. In other words, commercial banks are essentially profit-making institutions.

They collect deposits from the public and lend money to business firms (manufacturers), traders, farmers and consumers. Commercial banks normally meet the working capital needs of trade and industry and are a part of the money market.

The current account deposits of commercial banks are used as a medium of exchange, i.e., for making transactions. Deposits of other banks are not so used. These are specialized institutions which give loans to specific sectors of the economy. Here we are mainly concerned with commercial banks. So we generally use the term ‘banks’ to refer to commercial banks.

4. Development banks:

Development banks are parts of a country’s capital market. In India, they are called public financial institutions. They are specialized financial institutions which supply long-term finance to large and medium industries. They also perform various promotional functions for accelerating the rate of capital formation in the country.

In this way, they promote industrial development in particular and economic development in general. IFCI, IDBI and ICICI are examples of such banks. These institutions have assumed a crucial importance in providing an ever-increasing proportion of industrial finance and various types of development assistance to business enterprises in India.

5. Co-operative banks:

The co-operative banks are set up under the provisions of the co-operative society’s laws of a country. In India, such banks have been set up to provide credit to primary agricultural credit societies at low rates of interest. However, some co-operative banks also function in rural areas.

6. Indigenous Bankers:

From very ancient days indigenous banking as different from the modern western banking has been organized in the form of family or individual business. They have been called by various names in different parts of the country as Shroffs, Sethus, Sahukars, Mahajan, Chettis and so on. They vary in their size from petty money-lenders substantial shroffs.

7. Land development banks:

These banks (called land mortgage banks in India) provide long-term credit to farmers for land development. They also give long-term loans to farmers for acquiring new land.

8. Investment banks:

When a corporate entity wants to issue new equity or debt securities, an investment bank serves the role of an intermediary. They sometimes also make an investment in these companies through the purchase of equity shares.

9. Merchant banks:

A merchant bank helps a company to sell its new shares to the general public. The main job of a merchant bank is to raise money to lend to industry. They do not lend money themselves but instead help circulate money from those who want to lend to firms who wish to borrow.

10. Regional Rural Banks:

Regional Rural Banks (RRBs) are established in the rural areas to meet the needs of the weaker section of the rural population.

11. Foreign banks:

There are many foreign banks in India like the Citi Bank, the Hong Kong and Shanghai Bank and the Bank of America. These are not nationalized institutions like Indian commercial banks.

12. Central bank:

The central bank is the bankers' bank and is also the banker to the government. It controls the entire banking system of the country. The Reserve Bank of India (RBI) is India’s central bank and the Bank of England is that of England.