India's Banking System — Overview
India's banking system is bifurcated into the Reserve Bank of India (apex regulator) and the institutions it regulates — a wide range of banks, NBFCs, and payment service providers.
India's Banking System
├── RBI (Apex Central Bank)
├── Scheduled Commercial Banks
│ ├── Public Sector Banks (12)
│ ├── Private Sector Banks
│ ├── Foreign Banks (46+)
│ ├── Regional Rural Banks (43)
│ └── Small Finance Banks (12)
├── Payment Banks (6 operational)
├── Cooperative Banks
│ ├── Urban Cooperative Banks
│ └── State Cooperative Banks + District Central Cooperative Banks
└── Non-Banking Financial Companies (NBFCs)
Part 1 — Reserve Bank of India (RBI)
Establishment & Nationalisation
| Parameter | Details |
|---|---|
| Established | April 1, 1935 (RBI Act 1934) |
| Nationalised | January 1, 1949 |
| Headquarters | Mumbai (Central Office) |
| Governor | Sanjay Malhotra (since December 2024) |
| Founded as | Private shareholder bank (not government) |
| Owned by | Government of India (after nationalisation) |
Organisational Structure
- Governor — head; appointed by Government of India (5-year term)
- Deputy Governors — 4 DGs (including one from banking supervision)
- Central Board of Directors — oversees RBI operations
- Monetary Policy Committee (MPC) — 6 members (3 RBI + 3 external); decides repo rate
RBI's Key Functions
1. Note Issue (Currency Authority)
- Sole authority to issue currency notes in India
- Uses Minimum Reserve System (since 1956): Minimum gold/foreign currency reserve = ₹200 crore (gold minimum ₹115 crore)
- Exception: ₹1 note/coin issued by Ministry of Finance (Finance Secretary's signature, not RBI Governor)
- All other denominations: ₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2,000 (₹2,000 being withdrawn)
2. Monetary Policy & Credit Control Tools
| Tool | Description | Current Rate (approx 2024–25) |
|---|---|---|
| Repo Rate | Rate at which RBI lends to commercial banks (short-term) | 6.50% |
| Reverse Repo Rate | Rate at which banks park excess funds with RBI | 3.35% (standing deposit facility) |
| CRR (Cash Reserve Ratio) | % of NDTL banks must keep as cash with RBI; no interest paid | 4.00% |
| SLR (Statutory Liquidity Ratio) | % of NDTL banks must keep as liquid assets (cash + gold + govt securities) | 18.00% |
| Bank Rate | Rate for medium-term borrowing from RBI | 6.75% |
| MSF (Marginal Standing Facility) | Emergency overnight borrowing by banks at penalty rate | 6.75% |
| Open Market Operations (OMO) | RBI buys/sells govt securities to inject/absorb liquidity | Variable |
NDTL = Net Demand and Time Liabilities (deposits of commercial banks)
How monetary policy works:
- Inflation high → RBI raises Repo Rate → banks raise lending rates → less borrowing → less spending → inflation cools
- Recession → RBI lowers Repo Rate → banks lower lending rates → more borrowing → more spending → growth
3. Banker to the Government
- Manages Central and State Government accounts
- Issues Government securities (T-bills, G-Secs, State Development Loans)
- Manages public debt — raises loans for government
- Ways and Means Advances (WMA) — short-term credit to government
4. Foreign Exchange Management
- Manages India's foreign exchange reserves (≈ $680–700 billion in 2024)
- Administers FEMA (Foreign Exchange Management Act, 1999) — replaced FERA
- Intervenes in forex market to prevent excessive rupee volatility
5. Regulatory & Supervisory Role
- Issues banking licences; sets prudential norms (Capital Adequacy, NPA norms)
- Board for Financial Supervision (BFS) — oversight of banks and NBFCs
- Publishes bank-wise data; stress tests; Financial Stability Report
6. Developmental Functions
- Priority Sector Lending (PSL) — directs banks to lend 40% to agriculture, MSMEs, etc.
- Financial inclusion — Jan Dhan, RuPay card, PMJDY support
- Lead Bank Scheme — each district assigned to a lead bank for development
Part 2 — Scheduled Commercial Banks
Public Sector Banks (PSBs)
Banks where Government of India holds more than 50% equity.
Nationalisation history:
- 1969: 14 major banks nationalised by Indira Gandhi (banks with deposits > ₹50 crore)
- 1980: 6 more banks nationalised (deposits > ₹200 crore)
- 1991–present: Consolidation; weak banks merged
- 2019–2020: Mega merger — 10 PSBs merged into 4
Current 12 Public Sector Banks:
| Bank | HQ | Notes |
|---|---|---|
| State Bank of India (SBI) | Mumbai | Largest bank in India; 22,000+ branches; associate banks merged 2017 |
| Bank of Baroda | Vadodara | Merged with Vijaya Bank + Dena Bank (2019) |
| Bank of India | Mumbai | |
| Bank of Maharashtra | Pune | |
| Canara Bank | Bengaluru | Merged with Syndicate Bank (2020) |
| Central Bank of India | Mumbai | |
| Indian Bank | Chennai | Merged with Allahabad Bank (2020) |
| Indian Overseas Bank | Chennai | |
| Punjab & Sind Bank | New Delhi | |
| Punjab National Bank | New Delhi | Merged with OBC + United Bank (2020) |
| UCO Bank | Kolkata | |
| Union Bank of India | Mumbai | Merged with Andhra Bank + Corporation Bank (2020) |
SBI — formerly Imperial Bank of India (1921); nationalised 1955; SBI Act 1955
Private Sector Banks
Banks where private shareholders hold majority equity.
Old generation private banks (pre-1991): Karnataka Bank, Karur Vysya, City Union Bank, Tamilnad Mercantile Bank, Lakshmi Vilas Bank
New generation private banks (post-1991 liberalisation):
| Bank | HQ | Notes |
|---|---|---|
| HDFC Bank | Mumbai | India's largest private bank by assets; merged with HDFC Ltd (2023) |
| ICICI Bank | Mumbai | 2nd largest private bank |
| Axis Bank | Mumbai | Formerly UTI Bank |
| Kotak Mahindra Bank | Mumbai | Founded by Uday Kotak |
| Yes Bank | Mumbai | Failed 2020; rescued by SBI-led consortium |
| IndusInd Bank | Mumbai | |
| IDFC First Bank | Mumbai | Merged IDFC Bank + Capital First |
| Bandhan Bank | Kolkata | Converted from MFI to bank (2015) |
Foreign Banks in India
46+ foreign banks operate in India as branches (not subsidiaries): Citibank, Standard Chartered, HSBC, DBS, Deutsche Bank, BNP Paribas, Barclays.
Part 3 — Regional Rural Banks (RRBs)
- Established by RRB Act 1976 (Narasimham Committee recommendation)
- Ownership: Central Government (50%) + State Government (15%) + Sponsor Bank (35%)
- Purpose: Rural credit to small farmers, agricultural labourers, artisans, small entrepreneurs
- Current count: 43 RRBs (post-consolidation; was 196 in 2005)
- Headquarters: In the state they serve
- Supervision: NABARD (day-to-day) + RBI (licensing/regulation)
Tamil Nadu: Tamil Nadu Grama Bank (formed by merger of Pandyan Grama Bank + Pallavan Grama Bank)
Part 4 — Cooperative Banks
Structure
Cooperative Banking
├── Urban Cooperative Banks (UCBs) — in cities/towns
└── Rural Cooperative Credit Structure
├── State Cooperative Banks (SCBs) — state level
├── District Central Cooperative Banks (DCCBs) — district level
└── Primary Agricultural Credit Societies (PACS) — village level
- Regulation: Urban Cooperative Banks regulated by RBI + Registrar of Cooperative Societies; Rural cooperatives regulated by NABARD + State Registrar
- Multi-State Cooperative Societies Act 2002 governs UCBs operating in multiple states
Key cooperative banks:
- IFFCO (Indian Farmers Fertiliser Cooperative) — largest cooperative in India
- AMUL (Anand Cooperative) — milk cooperative
- NAFED — marketing cooperative for agriculture
- National Cooperative Bank of India — apex cooperative bank
Tamil Nadu cooperative banking: PACS network strong; Tamil Nadu State Apex Cooperative Bank; Aavin (dairy cooperative)
Part 5 — Payment Banks
Introduced by RBI (2015) based on Nachiket Mor Committee recommendation.
Key Features
| Feature | Details |
|---|---|
| Deposits | Up to ₹2 lakh per customer (raised from ₹1 lakh in 2021) |
| Loans | ❌ Cannot give loans or credit cards |
| Debit cards | ✅ Can issue debit cards and prepaid instruments |
| Products | Can sell insurance, mutual funds, pension (as agent only) |
| Investment mandate | 75% of deposits in government securities; 25% in scheduled commercial banks |
| Minimum capital | ₹100 crore |
Operational Payment Banks (as of 2024)
| Payment Bank | Promoter |
|---|---|
| Airtel Payments Bank | Bharti Airtel |
| India Post Payments Bank (IPPB) | Department of Posts |
| Fino Payments Bank | Fino PayTech |
| Jio Payments Bank | Reliance Jio |
| NSDL Payments Bank | NSDL |
| BSNL Mobile Money | BSNL |
Paytm Payments Bank — licence cancelled by RBI (January 2024) due to compliance violations; customers directed to migrate to other banks.
Part 6 — Small Finance Banks (SFBs)
Also introduced by RBI (2015).
Key Features
| Feature | Details |
|---|---|
| Deposits | No cap — full banking services |
| Loans | ✅ Can give loans |
| Priority sector | 75% of loans must be priority sector (vs 40% for commercial banks) |
| Focus | Microfinance, small farmers, MSMEs, unorganised sector |
| Minimum capital | ₹200 crore |
Examples of Small Finance Banks
AU Small Finance Bank (Jaipur) · Equitas SFB (Chennai) · Ujjivan SFB (Bengaluru) · Jana SFB · ESAF SFB (Kerala) · Suryoday SFB · North East Small Finance Bank · Utkarsh SFB · Capital SFB · Unity SFB
Tamil Nadu connection: Equitas Small Finance Bank — headquartered in Chennai; originated as microfinance institution.
Part 7 — NBFCs (Non-Banking Financial Companies)
What Makes an NBFC Different from a Bank?
| Feature | Bank | NBFC |
|---|---|---|
| Accepts demand deposits | ✅ Yes | ❌ No |
| Part of payment system | ✅ Yes | ❌ No |
| Deposit insurance (DICGC) | ✅ Yes | ❌ No |
| Issue cheques | ✅ Yes | ❌ No |
| CRR/SLR obligation | ✅ Yes | ❌ No |
| Can give loans | ✅ Yes | ✅ Yes |
| Regulated by | RBI | RBI |
Types of NBFCs
| Type | Focus |
|---|---|
| NBFC-MFI (Microfinance Institution) | Small loans to low-income borrowers |
| Infrastructure Finance Company (IFC) | Long-term infrastructure financing |
| Core Investment Company (CIC) | Invest in group companies; hold shares |
| Asset Finance Company (AFC) | Finance physical assets — vehicles, machines |
| Loan Company | General lending |
| Investment Company | Buy/sell securities |
| NBFC-Factor | Factoring (buying receivables) |
Systemically Important NBFCs (SI-NBFCs): Assets ≥ ₹500 crore; stricter regulation like banks.
Major NBFCs: Bajaj Finance · Muthoot Finance · Manappuram Finance · Shriram Transport Finance · IIFL Finance · Mahindra Finance · L&T Finance
NBFC Crises
- IL&FS Crisis (2018): Infrastructure Leasing & Financial Services — ₹91,000 crore default; triggered NBFC liquidity crisis; government took over; restructuring ongoing
- DHFL Crisis (2019): Dewan Housing Finance — ₹83,000 crore fraud; India's largest financial fraud at the time; DHFL resolved under IBC
Part 8 — MUDRA Bank & Financial Inclusion
MUDRA (Micro Units Development and Refinance Agency)
- Established: April 2015 (MUDRA Act)
- Under: SIDBI
- Purpose: Refinance and develop micro-enterprise credit
MUDRA loan categories (Pradhan Mantri MUDRA Yojana — PMMY):
| Category | Loan Amount | Target |
|---|---|---|
| Shishu | Up to ₹50,000 | Early-stage micro businesses |
| Kishore | ₹50,001 – ₹5 lakh | Growing micro businesses |
| Tarun | ₹5 lakh – ₹10 lakh | Established micro businesses |
| Tarun Plus | ₹10 lakh – ₹20 lakh | Expanded in Budget 2024 |
- Beneficiaries: 45+ crore loans sanctioned since 2015
- RuPay MUDRA card issued for working capital needs
Priority Sector Lending (PSL)
RBI mandates banks to direct 40% of Adjusted Net Bank Credit (ANBC) to priority sectors:
| Category | Target |
|---|---|
| Agriculture | 18% of ANBC |
| Micro enterprises | 7.5% |
| Weaker sections | 12% |
| Total PSL | 40% |
PSL Certificates: Banks unable to meet targets can buy PSL certificates from banks exceeding targets.
Part 9 — Key Banking Concepts
NPA (Non-Performing Assets)
- A loan becomes NPA when principal or interest remains unpaid for 90 days or more
- Gross NPA ratio: Total NPAs as % of total loans
- India's Gross NPA peaked at ~11.5% (2018); improved to ~3.7% (March 2024) — credit to IBC + bank recapitalisation
NPA categories:
- Substandard: NPA for less than 12 months
- Doubtful: NPA for more than 12 months
- Loss: Identified as uncollectible; needs full write-off
Capital Adequacy Ratio (CAR/CRAR): Capital as % of Risk-Weighted Assets; Basel III minimum = 10.5%; India mandates 11.5%; SBI CAR ≈ 14%.
Bank Recapitalisation
- Government injects capital into PSBs to strengthen their balance sheets
- 2017–2020: ₹3.5 lakh crore recapitalisation of PSBs
- Mechanisms: Budgetary allocation, Recapitalisation bonds, Market issuance
Deposit Insurance
- DICGC (Deposit Insurance and Credit Guarantee Corporation): Subsidiary of RBI
- Insures deposits up to ₹5 lakh per depositor per bank (raised from ₹1 lakh in 2020)
- Covers: Savings, fixed, current, recurring deposits
- Does NOT cover: Government deposits, inter-bank deposits, NBFC deposits
Banking Sector in Tamil Nadu
| Institution | HQ | Notes |
|---|---|---|
| Indian Bank | Chennai | Merged Allahabad Bank (2020); one of major PSBs |
| Indian Overseas Bank | Chennai | Government-owned PSB |
| City Union Bank | Kumbakonam | Old private sector bank; 120+ years old |
| Tamilnad Mercantile Bank | Thoothukudi | Private; good network in TN |
| Karur Vysya Bank | Karur | Private; south India focus |
| Equitas Small Finance Bank | Chennai | SFB from MFI background |
| Tamil Nadu Grama Bank | Madurai | RRB for Tamil Nadu |
| TNSC Bank | Chennai | Tamil Nadu State Apex Cooperative Bank |
| Airtel Payments Bank | National | Bharti Airtel — active in TN rural areas |
Board Exam Tips — Banking System
- RBI: April 1, 1935 (RBI Act 1934); nationalised January 1, 1949; HQ Mumbai
- ₹1 note = Ministry of Finance (Finance Secretary signs); all others = RBI (Governor signs)
- Repo Rate = RBI lends to banks; Reverse Repo = banks lend to RBI; CRR = cash with RBI (no interest); SLR = liquid assets
- PSBs = 12 (SBI + 11 others); Government holds >50% equity
- Bank nationalisation: 1969 (14 banks) + 1980 (6 banks) = 20 nationalised; merged to 12 now
- RRBs: 43 currently; ownership 50% Centre + 15% State + 35% Sponsor Bank; established 1976
- Payment Banks: deposits up to ₹2 lakh; NO lending; 75% in govt securities
- Small Finance Banks: Full banking + 75% PSL; focus on underserved
- NBFC: Cannot accept demand deposits; no payment system; no DICGC insurance
- MUDRA: Shishu (₹50K) + Kishore (₹5L) + Tarun (₹10L) + Tarun Plus (₹20L)
- DICGC: Insures deposits up to ₹5 lakh per depositor per bank
- NPA = 90 days overdue; India's Gross NPA improved from 11.5% (2018) to ~3.7% (2024)
- PSL = 40% of ANBC; Agriculture = 18%; Micro enterprises = 7.5%
- Indian Bank + Indian Overseas Bank = TN-headquartered PSBs
- MPC = 6 members (3 RBI + 3 external); decides Repo Rate; inflation target 4% ±2%
Frequently Asked Questions
India's banking system is a two-tier structure: (1) Reserve Bank of India (RBI) — apex institution; central bank; regulates all other banks; established 1935, nationalised 1949. (2) Commercial Banks — scheduled and non-scheduled. Scheduled Banks: Listed in Second Schedule of RBI Act 1934; must maintain CRR with RBI; entitled to borrowing from RBI; subclassified as: (a) Public Sector Banks — 12 banks (SBI + 11 nationalised banks); (b) Private Sector Banks — HDFC, ICICI, Axis, Kotak, Yes, IndusInd, etc.; (c) Foreign Banks — Citibank, Standard Chartered, HSBC, DBS; (d) Regional Rural Banks (RRBs) — 43 currently; (e) Cooperative Banks — Urban Cooperative Banks + State Cooperative Banks. Non-Scheduled Banks: Not listed in Second Schedule; no CRR obligation; can't borrow from RBI. New bank categories: (f) Payment Banks — 6 operational; limited deposit (₹2 lakh); no lending; (g) Small Finance Banks — 12 operational; full banking + focus on underserved.