The Indian banking system forms the backbone of the country’s financial system and plays a crucial role in economic development. It is designed to mobilise savings, provide credit, facilitate payments, and support growth in agriculture, industry, trade, and services. .
Structure of Indian Banking System
The Indian banking system is organised in a hierarchical and well-regulated structure, with the Reserve Bank of India (RBI) at the apex. Below RBI are various types of banks and institutions catering to different segments of the economy. This structure ensures stability, efficient credit delivery, and financial inclusion.
Reserve Bank of India (RBI) – Apex Institution
The Reserve Bank of India, established in 1935, is the central bank of the country and stands at the top of the banking structure. It regulates, supervises, and controls the entire banking system.
RBI performs multiple roles simultaneously. It issues currency, acts as banker to the government, manages foreign exchange, and controls credit in the economy. RBI also supervises banks to ensure financial stability and depositor protection. RBI is not a commercial bank but a monetary authority and regulator, and its policies directly influence the functioning of all other banks.
Commercial Banks
Commercial banks form the largest and most visible segment of the Indian banking structure. Their primary function is to accept deposits from the public and provide loans and advances.
Commercial banks in India are classified into:
- Public Sector Banks, where the government holds a majority stake
- Private Sector Banks, owned and managed by private entities
- Foreign Banks, operating in India through branches
These banks operate on a profit-oriented basis, but they are also required to fulfil social obligations such as priority sector lending, financial inclusion, and rural banking.
Regional Rural Banks (RRBs)
Regional Rural Banks were established in 1975 to bridge the gap between commercial banks and cooperative banks. They aim to provide banking and credit facilities to rural and semi-urban areas, particularly to small farmers, agricultural labourers, artisans, and small entrepreneurs.
RRBs combine the local knowledge of cooperatives with the financial strength and management expertise of commercial banks. Their structure includes sponsorship by a public sector bank, participation by the state government, and regulation by RBI and NABARD.
Cooperative Banking System
The cooperative banking system is designed primarily to serve the agricultural and rural sector. It operates on the principle of cooperation and mutual help.
The structure of cooperative banks is divided into:
- Primary Agricultural Credit Societies (PACS) at the village level
- District Central Cooperative Banks (DCCBs) at the district level
- State Cooperative Banks (SCBs) at the state level
Urban Cooperative Banks (UCBs) operate in urban and semi-urban areas. Although cooperative banks have wide outreach, their performance has often been affected by issues such as weak governance, political interference, and low capital base.
Development Banks and Specialised Banks
Apart from commercial banking, India has several specialised and development-oriented banks to meet specific credit needs.
Important specialised banks include:
- Small Finance Banks, focusing on small borrowers and micro enterprises
- Payments Banks, providing limited banking services without lending
- Development institutions like NABARD and SIDBI, which support agriculture, rural development, MSMEs, and refinancing activities
These institutions complement the commercial banking system and strengthen financial inclusion.
Functions of Indian Banking System
The functions of banks in India can be broadly divided into primary functions, secondary functions, and developmental functions.
Primary Functions of Banks
The most important function of banks is accepting deposits. Banks mobilise savings from the public in the form of savings accounts, current accounts, fixed deposits, and recurring deposits. These deposits form the base for lending operations.
Another primary function is granting loans and advances. Banks provide credit to individuals, businesses, agriculture, and industries in various forms such as cash credit, overdrafts, term loans, and bill discounting. Through lending, banks support economic activity and income generation.
Secondary Functions of Banks
Banks perform several secondary functions that facilitate trade, commerce, and financial management. These functions include payment and settlement services, such as issuing cheques, drafts, NEFT, RTGS, and UPI transfers.
Banks also provide agency services, acting on behalf of customers for collection of cheques, payment of taxes, pension distribution, and investment services. In addition, banks offer general utility services like locker facilities, foreign exchange services, and issuance of bank guarantees and letters of credit.
Developmental Functions of Banks
In a developing economy like India, banks play an important developmental role. They promote financial inclusion by opening basic savings accounts, extending credit to priority sectors, and supporting government welfare schemes.
Banks also contribute to capital formation by encouraging savings and investing funds in productive sectors. Through credit planning and directed lending, banks help reduce regional imbalances and promote balanced economic growth.
Regulatory and Social Responsibilities
Indian banks operate under a strong regulatory framework. They are required to maintain CRR and SLR, follow prudential norms, and comply with RBI guidelines. Social responsibilities such as lending to priority sectors, supporting MSMEs, and financing agriculture are integral to banking functions in India.