15.1 Structure of the Indian Banking System

15.1 Structure of the Indian Banking System

India's contemporary banking ecosystem is a multi-tiered, regulated institutional framework designed to bridge credit delivery, financial inclusion, and macroeconomic liquidity across urban and rural geographies. For candidates preparing for the SBI Clerk (Junior Associate) examination, understanding this structural hierarchy, the legal charters governing distinct bank categories, and their operational boundaries is indispensable.

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Historical Evolution of Indian Banking

The evolution of commercial banking in India progressed through three distinct phases: the pre-independence foundational era, the post-independence nationalization era, and the post-1991 economic reform era.

1. The Pre-Independence Era & The Imperial Bank

• Bank of Hindostan (1770): Established in Calcutta under European management, regarded as the earliest modern commercial bank in India.
• The Three Presidency Banks: The East India Company chartered three distinct presidency banks: the Bank of Calcutta (established 1806, renamed Bank of Bengal in 1809), the Bank of Bombay (1840), and the Bank of Madras (1843).
• Formation of Imperial Bank of India (1921): The three presidency banks were amalgamated on January 27, 1921, to create the Imperial Bank of India, which functioned as a quasi-central bank prior to the creation of the Reserve Bank of India in 1935.
• Genesis of State Bank of India (July 1, 1955): Following the recommendations of the All India Rural Credit Survey Committee (A.D. Gorwala Committee), the Government of India enacted the State Bank of India Act, 1955, nationalizing the Imperial Bank of India to form the State Bank of India (SBI) on July 1, 1955.

2. The Era of Bank Nationalization

To direct credit away from commercial monopolies toward agriculture, small enterprises, and neglected rural sectors, the Government of India undertook two historic waves of bank nationalization:

• First Phase (July 19, 1969): Under the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, the Government nationalized 14 major commercial banks, each possessing aggregate demand and time deposits exceeding Rs. 50 crore (e.g., Central Bank of India, Bank of India, Punjab National Bank, Bank of Baroda).
• Second Phase (April 15, 1980): Under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, the Government nationalized 6 additional commercial banks, each holding aggregate deposits exceeding Rs. 200 crore (including Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind Bank, and Vijaya Bank).

3. Public Sector Bank Consolidation (2019–2020)

To build mega-banks with global balance sheet scale and operating efficiencies, the Government merged multiple Public Sector Banks (PSBs). This consolidation reduced the total number of PSBs in India from 27 down to 12 (State Bank of India plus 11 nationalized banks: Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Bank of India, Indian Bank, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank). No further public sector bank merger had been notified as of September 2026.

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Scheduled Commercial Banks (SCBs)

A bank is designated as a Scheduled Commercial Bank if it satisfies the criteria laid out in Section 42(6)(a) of the Reserve Bank of India Act, 1934:

1. It must be included in the Second Schedule of the RBI Act, 1934.
2. Its paid-up capital and collected reserves must have an aggregate value of not less than Rs. 5 lakh.
3. It must satisfy the RBI that its operational affairs are not being conducted in a manner detrimental to the interests of its depositors.

Categories of Scheduled Commercial Banks

• Public Sector Banks (PSBs): Institutions where the Government of India holds a majority equity stake (greater than 50%). These comprise the State Bank of India (governed by the SBI Act, 1955) and 11 nationalized banks.
• Private Sector Banks: Classified into Old Private Sector Banks (incorporated prior to the 1993 banking deregulation, such as Federal Bank and South Indian Bank) and New Private Sector Banks (licensed following the 1991 Narasimham Committee-I recommendations, such as HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank).
• Foreign Banks: International financial institutions operating within India either through licensed branch networks (e.g., Standard Chartered Bank, Citibank, HSBC) or as Wholly Owned Subsidiaries (WOS) incorporated under Indian company law (e.g., DBS Bank India, State Bank of Mauritius India).

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Regional Rural Banks (RRBs)

Regional Rural Banks were conceived to combine the local familiarity and rural orientation of cooperatives with the modern business acumen and resource mobilization capability of commercial banks.

Legal Foundation & Ownership Matrix

• Origin: Established following the recommendations of the M. Narasimham Working Group on Rural Credit (1975), formalized under the Regional Rural Banks Act, 1976.
• First RRB: Prathama Bank, sponsored by Syndicate Bank, established on October 2, 1975, headquartered at Moradabad, Uttar Pradesh.
• Statutory Equity Structure: The issued share capital of an RRB is divided strictly according to Section 6 of the RRB Act, 1976: $\text{Central Government Share} = 50\%$ $\text{State Government Share} = 15\%$ $\text{Sponsor Commercial Bank Share} = 35\%$
• Supervisory Framework: While RRBs are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949, their statutory inspections, operational supervision, and developmental monitoring are entrusted to NABARD (National Bank for Agriculture and Rural Development).
• Priority Sector Lending (PSL): RRBs are mandated to allocate 75% of their Adjusted Net Bank Credit (ANBC) to priority sector advances (primarily agriculture, rural artisans, and microenterprises).
• Consolidation: Under the "One State, One RRB" amalgamation effective May 1, 2025, the number of RRBs fell from 43 to 28, covering 26 states and 2 union territories.

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Differentiated Banks: SFBs and Payments Banks

In January 2014, the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (chaired by Dr. Nachiket Mor) proposed the introduction of "differentiated" or "niche" banks. Rather than universal banks operating across all product verticals, differentiated banks target specific financial inclusion segments.

Key Small Finance Bank Regulations

• Target Demographics: Small business units, micro and small industries, unorganized sector entities, and marginal farmers.
• Loan Portfolio Cap: At least 50% of an SFB's aggregate loan portfolio must comprise loans and advances of ticket sizes up to Rs. 25 lakh.
• Promoter Lock-in: The promoter must hold at least 40% of paid-up equity capital for the initial 5 years from commencement of business.

Key Payments Bank Regulations

• Deposit Ceiling: Permitted to accept demand deposits (savings and current accounts) up to a maximum balance of Rs. 2,00,000 (Rs. 2 lakh) per individual customer at the close of business on any given day (enhanced from the original Rs. 1 lakh limit in April 2021).
• Investment Pattern: Required to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) eligible Government of India securities and Treasury Bills with maturities of up to one year. A maximum of 25% can be placed as current or term deposits with other scheduled commercial banks for operational liquidity.
• No Credit Risk: Because they cannot lend, Payments Banks bear zero credit/default risk, functioning primarily as transaction-processing and remittance utilities.

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Co-operative Banking Architecture & Dual Regulation

Co-operative banks operate on mutual aid and democratic member governance ("one member, one vote"), serving credit needs across agriculture, cottage industries, and urban retail segments.

Structural Divisions

1. Urban Co-operative Banks (UCBs): Also designated as Primary Co-operative Banks. Operating in single-state or multi-state urban and semi-urban jurisdictions.
2. Rural Co-operative Credit Structure:
   • Short-Term Tier (3 Tiers):
     • Village Level: Primary Agricultural Credit Societies (PACS) — non-scheduled, grassroot units.
     • District Level: District Central Co-operative Banks (DCCBs).
     • State Level: State Co-operative Banks (StCBs) — apex institution in the state.
   • Long-Term Tier: Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) operating under State Co-operative Agriculture and Rural Development Banks (SCARDBs) for long-term land development credit.

The Dual Regulation Reform (BR Amendment Act, 2020)

Historically, co-operative banks suffered from structural vulnerabilities due to dual regulation:

• Registrar of Co-operative Societies (RCS) (State Government or Central Registrar for Multi-State Co-operatives) governed incorporation, registration, administrative management, board elections, and liquidation.
• Reserve Bank of India (RBI) governed banking operations under the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies - AACS), including licensing, capital adequacy, and liquidity.

[!IMPORTANT] The Banking Regulation (Amendment) Act, 2020: Following systemic financial distress (e.g., the PMC Bank collapse), Parliament enacted the Banking Regulation (Amendment) Act, 2020. This statutory amendment brought Urban Co-operative Banks and Multi-State Co-operative Banks under the direct prudential oversight of the RBI regarding board appointments, statutory audits, management qualifications, and bank resolution powers, effectively curbing political interference and harmonizing supervisory oversight.