Structure of the Indian Banking System and Types of Banks

India does not have one kind of bank. It has commercial banks in public, private and foreign ownership, cooperative banks in a tiered structure, regional rural banks created by a special statute, and differentiated banks licensed to do only part of the business of banking. Each category has a different constituting law, a different ownership pattern and, in some respects, a different regulatory regime. This note maps the structure and explains what turns on each classification.

Figure 1: The main categories of bank in India

1. Scheduled and Non-scheduled Banks

• Basis: a scheduled bank is one included in the Second Schedule to the Reserve Bank of India Act, 1934.
• Conditions (Section 42(6)): the Reserve Bank includes a bank in the Second Schedule if it satisfies the Reserve Bank that it has paid-up capital and reserves of an aggregate value of not less than five lakhs of rupees, that its affairs are not conducted in a manner detrimental to the interests of its depositors, and that it is a company, a State cooperative bank or an institution notified by the Central Government.
• Consequences of scheduling: the bank must maintain the cash reserve ratio with the Reserve Bank under Section 42(1), and in return obtains access to Reserve Bank refinance, the clearing house and the lender of last resort facility.
• Exclusion: the Reserve Bank may remove a bank from the Second Schedule if the conditions cease to be satisfied.
• Non-scheduled banks: a small residual category, which maintains cash reserves under Section 18 of the Banking Regulation Act instead.

2. Public Sector Banks

Figure 2: Consolidation of public sector banking

• State Bank of India: constituted under the State Bank of India Act, 1955 as successor to the Imperial Bank. Its associate banks and Bharatiya Mahila Bank merged into it in 2017.
• Nationalised banks: constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
• Consolidation of 2020: with effect from 1 April 2020, Punjab National Bank absorbed Oriental Bank of Commerce and United Bank of India, Canara Bank absorbed Syndicate Bank, Union Bank of India absorbed Andhra Bank and Corporation Bank, and Indian Bank absorbed Allahabad Bank. There are now twelve public sector banks.
• Legal character: they are statutory corporations rather than companies, so the Banking Regulation Act applies to them only to the extent provided by Section 51, and they are State within Article 12.

3. Private Sector and Foreign Banks

• Old private banks: banks that were not nationalised in 1969 or 1980 and continue as banking companies under the Companies Act and the Banking Regulation Act.
• New private banks: licensed under Reserve Bank guidelines from 1993 onwards, following the first Narasimham Committee, and later under the on tap licensing framework.
• Foreign banks: permitted to operate through branches under Section 22 and the branch authorisation policy, or through a wholly owned subsidiary under the Reserve Bank's scheme of 2013, which offers near national treatment in return for local incorporation.
• Ownership and voting: under Section 12(2), no shareholder may exercise voting rights on poll in excess of ten per cent of total voting rights, and the Reserve Bank may raise that ceiling in a phased manner to twenty six per cent.

4. Cooperative Banks

• Structure: urban cooperative banks serve towns and cities, while the rural structure is tiered, with State cooperative banks at the apex, district central cooperative banks in the middle and primary agricultural credit societies at the base.
• Dual control: registration, management and winding up as a society fall under the State cooperative societies law or the Multi-State Cooperative Societies Act, 2002, while banking functions fall under the Banking Regulation Act through Section 56.
• 2020 amendment: the Banking Regulation (Amendment) Act, 2020 strengthened Reserve Bank powers over cooperative banks on governance, capital and resolution, following failures such as that of the Punjab and Maharashtra Cooperative Bank.
• Supervision of the rural tier: NABARD supervises State and district central cooperative banks alongside the Reserve Bank.

5. Regional Rural Banks

• Statute: constituted under the Regional Rural Banks Act, 1976.
• Purpose: to provide credit and other facilities to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas.
• Shareholding: held by the Central Government, the State Government and a sponsor bank, in the proportions fixed by the Act.
• Consolidation: successive rounds of amalgamation have sharply reduced their number. The latest round, on the principle of one regional rural bank for each State, amalgamated twenty six of them with effect from 1 May 2025, leaving twenty eight. They are supervised by NABARD with the Reserve Bank.

6. Differentiated Banks

• Payments banks: licensed from 2015, they may accept demand deposits up to a limit per individual customer, currently ₹2 lakh, provide payments and remittance services and distribute financial products, but may not lend or issue credit cards. Minimum paid-up capital is ₹100 crore.
• Small finance banks: licensed from the same period to serve small borrowers. Under the on tap licensing guidelines of 5 December 2019, minimum paid-up voting equity capital is ₹200 crore, seventy five per cent of adjusted net bank credit must go to the priority sector, and at least fifty per cent of the loan portfolio must be loans of up to ₹25 lakh.
• Local area banks: an earlier experiment permitting banks confined to a few contiguous districts; very few remain.
• Rationale: differentiated licensing allows entities to specialise in payments or in small-ticket credit without bearing the full obligations of a universal bank.

7. Entities That Are Not Banks

• Non-banking financial companies: registered under Section 45-IA of the RBI Act, 1934, they lend and invest but cannot accept demand deposits withdrawable by cheque, and are regulated under a scale-based framework.
• Development finance institutions: NABARD, SIDBI, EXIM Bank and the National Bank for Financing Infrastructure and Development are constituted by their own statutes for sectoral finance.
• Primary agricultural credit societies: excluded from the definition of a cooperative bank for the purposes of the Banking Regulation Act.
• Payment system operators: entities authorised under the Payment and Settlement Systems Act, 2007 which operate payment systems without taking deposits.

8. Quick Revision

9. Frequently Asked Questions

What is a scheduled bank?

A bank included in the Second Schedule to the Reserve Bank of India Act, 1934. Under Section 42(6) it must have paid-up capital and reserves of at least ₹5 lakh, conduct its affairs in a manner not detrimental to depositors, and be a company, a State cooperative bank or a notified institution.

How many public sector banks are there in India?

Twelve, following the merger of ten banks into four with effect from 1 April 2020, which came after the State Bank merger of 2017 and the Bank of Baroda merger of 2019.

What is the difference between a payments bank and a small finance bank?

A payments bank may accept demand deposits up to ₹2 lakh per customer and provide payment services, but cannot lend. A small finance bank may both accept deposits and lend, but must direct seventy five per cent of adjusted net bank credit to the priority sector and keep at least fifty per cent of its loans at or below ₹25 lakh.

Why are cooperative banks said to be under dual control?

Because two authorities govern different aspects. Registration, management and winding up as a society fall under State law or the Multi-State Cooperative Societies Act, while banking functions fall under the Reserve Bank through Section 56 of the Banking Regulation Act, reinforced by the 2020 amendment.

Can a small finance bank become a universal bank?

There is no automatic conversion. The Reserve Bank has provided a route by which a small finance bank with a satisfactory track record, adequate net worth and asset quality may apply for a universal banking licence, which is considered on its merits.

10. Related Topics and Provisions

• Meaning of banking, banker and bank
• Licensing of banking companies (Section 22)
• Nationalisation and the Acquisition and Transfer Acts
• Cooperative banks and the 2020 amendment
• Regional Rural Banks Act, 1976
• Reserve Bank regulation of non-banking financial companies