Indian Banking System
Indian Banking System
India's banking system spans 12 PSBs, 21 private banks, 43 RRBs, 12 Small Finance Banks, and 6 Payments Banks under RBI's regulatory umbrella. Exams test nationalisation dates, PSL sub-targets, Jan Dhan features, committee recommendations, and digital banking innovations. Know the structure cold for banking and UPSC papers.
Key Dates
Bank of Hindustan established in Calcutta — often cited as first bank in India (but it was a European trading bank, wound up by 1832)
Bank of Calcutta established (became Bank of Bengal in 1809) — first Presidency bank; followed by Bank of Bombay (1840) and Bank of Madras (1843)
Allahabad Bank established — oldest surviving public sector bank at the time (merged with Indian Bank in 2020)
Punjab National Bank established in Lahore — first swadeshi bank; founded by Lala Lajpat Rai and others
Three Presidency banks merged to form Imperial Bank of India — acted as quasi-central bank before RBI's establishment
Reserve Bank of India established (April 1) under RBI Act 1934 — took over central banking functions from Imperial Bank
Banking Regulation Act 1949 enacted — gave RBI supervisory and regulatory powers over commercial banks
Imperial Bank of India nationalised as State Bank of India (SBI) under SBI Act 1955 — to extend banking to rural areas
14 major commercial banks with deposits over Rs 50 crore nationalised (July 19) — social control of banking, rural credit expansion
Regional Rural Banks (RRBs) established under RRB Act 1976 — Prathama Bank in Moradabad, UP was the first RRB (October 2, 1975)
6 more commercial banks with deposits over Rs 200 crore nationalised — total PSBs reached 28
Narasimham Committee-I recommended banking sector reforms — reduced CRR/SLR, entry of new private banks, capital adequacy norms
Jan Dhan Yojana launched (August 28) — world's largest financial inclusion programme; 51+ crore accounts opened
First Small Finance Banks (SFBs) and Payments Banks licensed — differentiated banking for inclusion
Banks Board Bureau (BBB) established; later renamed FSIB (Financial Services Institutions Bureau) in 2022 for PSB leadership appointments
10 PSBs merged into 4 (effective April 1, 2020) — total PSBs reduced from 27 to 12; Lakshmi Vilas Bank merged with DBS India
Structure of Indian Banking — Comprehensive
RBI sits at the apex as regulator and supervisor. Scheduled Banks appear in the Second Schedule of RBI Act 1934 (paid-up capital/reserves of at least Rs 5 lakh, affairs not detrimental to depositors). Non-Scheduled Banks (mostly small cooperatives) do not. Public Sector Banks (12): Government holds 51%+ stake. SBI is the largest (Rs 63 lakh crore assets, 22,000+ branches). Others: Bank of Baroda, PNB, Canara Bank, Union Bank, Indian Bank, Bank of India, Central Bank, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Punjab & Sind Bank. Private Sector Banks (21): HDFC Bank is India's largest by market cap (Rs 13+ lakh crore post-HDFC Ltd merger, July 2023). Others: ICICI Bank, Axis Bank, Kotak Mahindra Bank, IndusInd, YES Bank, Federal, Bandhan, IDFC First, RBL, South Indian Bank, Karur Vysya Bank. Foreign Banks (46): About 270 branches. Major ones: Standard Chartered, HSBC, Deutsche Bank, DBS. Can operate as branches or wholly-owned subsidiaries. RRBs (43): Centre 50%, State 15%, Sponsor Bank 35%. Focus on last-mile rural credit. SFBs (12): Must lend 75% to priority sector; 50% of loans must be up to Rs 25 lakh. AU SFB is the largest. Payments Banks (6): Accept deposits up to Rs 2 lakh, cannot lend. India Post Payments Bank has 1.5 lakh+ access points. Paytm Payments Bank faced RBI restrictions in 2024 for compliance failures. Cooperative Banks: Three-tier short-term structure (StCBs, DCCBs, ~97,000 PACS). UCBs (~1,500) face governance challenges. The PMC Bank collapse (2019, Rs 11,000 crore fraud) exposed vulnerabilities. Exam essential: Know bank counts (12 PSBs, 21 private, 43 RRBs, 12 SFBs, 6 Payments Banks).
Bank Nationalisation — Rationale & Impact
First Phase (1969): 14 banks with deposits above Rs 50 crore were nationalised on July 19, 1969 by ordinance under PM Indira Gandhi. The Supreme Court struck down the ordinance in R.C. Cooper vs Union of India (1970) for violating Article 31 compensation rights. The government passed a fresh Banking Companies Act 1970. Banks nationalised: Central Bank, Bank of Maharashtra, Dena Bank, PNB, Syndicate, Canara, Indian Bank, Indian Overseas, Bank of Baroda, Union Bank, Allahabad, United Bank, UCO Bank, Bank of India. Rationale: Private banks served only urban industrial credit. Rural branches were scarce. Industrial houses (Tata, Birla) controlled banks. Government sought social control, rural expansion, and priority sector lending. Second Phase (1980): 6 more banks (deposits above Rs 200 crore): Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank, Punjab & Sind Bank, Vijaya Bank. New Bank of India later merged with PNB (1993). Impact: Branches grew from 8,262 (1969) to 72,000+ (1991). Rural branches jumped from 1,833 to 35,134. Population per branch fell from 64,000 to 14,000. Deposits rose from Rs 4,646 crore to Rs 2,05,000 crore. Agriculture credit share climbed from 2.2% to 18% of ANBC. Criticisms: Operational inefficiency, bloated workforce, political interference in lending, NPA accumulation from directed lending, and poor technology adoption. Exam tip: Memorise 1969 nationalisation (14 banks, Rs 50 crore threshold) and R.C. Cooper case.
Types of Modern Banks — SFBs, Payments Banks, Universal Banks
Small Finance Banks: Licensed since 2015 based on the Nachiket Mor Committee (2013). They serve unserved sections: small farmers, micro/small enterprises, and the unorganised sector. Requirements: 75% of ANBC to priority sector (vs 40% for commercial banks). 50% of loans must be advances up to Rs 25 lakh. Promoter holding must reduce to 26% within 12 years. First round (2015): AU, Capital, Disha (ceased), ESAF, Equitas, Fincare (merged with AU 2024), Jana, North East, Suryoday, Ujjivan, Utkarsh. Unity SFB (Centrum + PMC Bank JV) followed. Total SFB assets: Rs 3.5+ lakh crore (2024). AU SFB (Rs 1+ lakh crore assets) is a universal bank candidate. Payments Banks: Accept demand deposits up to Rs 2 lakh per customer. Cannot lend or issue credit cards. Can issue debit cards and offer internet/mobile banking. Must invest 75%+ of deposits in government securities (up to 1-year maturity). India Post Payments Bank reaches 1.5 lakh+ post offices. Of 11 licences granted, only 6 launched. Paytm Payments Bank was banned from new deposits (January 2024) for KYC and compliance failures. Universal Banking: One institution offers commercial banking, investment banking, insurance, and securities. Recommended by Narasimham Committee-II (1998) and Khan Working Group (1998). SBI, HDFC Bank, and ICICI Bank function as universal banks through subsidiaries. Exam favourite: SFB PSL target (75%) and Payments Bank deposit limit (Rs 2 lakh).
Banking Reforms & Key Committees
Narasimham Committee-I (1991): The watershed reform. Cut CRR from 15% to 3-5%, SLR from 38.5% to 25%. Introduced 8% CRAR. Established DRTs. Licensed new private banks (ICICI Bank, HDFC Bank, Axis Bank in 1993-94). Introduced 4-category asset classification and provisioning norms. Most recommendations were implemented. Narasimham Committee-II (1998): Recommended 10% CRAR, merging strong banks, reducing government PSB stake below 33% (not implemented), and international risk management adoption. P.J. Nayak Committee (2014): Recommended a Bank Investment Company to hold government stakes, independent PSB boards, and performance-linked CEO tenures. Identified PSB governance as the weakest link: government simultaneously acts as owner, regulator (RBI), and customer. Nachiket Mor Committee (2013): Recommended universal bank account access by January 2016, Payments Banks and SFBs. Led directly to PMJDY, SFB, and Payments Bank licences. EASE Framework (6 editions since 2018): Measures PSB performance across responsible banking, customer responsiveness, credit, financials, governance, and HR. PSB mergers (2019-20): OBC + UBI merged into PNB. Syndicate into Canara. Andhra + Corporation into Union Bank. Allahabad into Indian Bank. Dena + Vijaya into Bank of Baroda (2019). This cut PSBs from 27 to 12. FSIB (2022): Replaced Banks Board Bureau. Recommends MD/CEO and ED appointments for PSBs and financial institutions. Exam must-know: Narasimham-I recommendations and PSB merger map.
Financial Inclusion — Jan Dhan & JAM Trinity
PMJDY launched August 28, 2014. Features: Zero-balance savings account. RuPay debit card with Rs 1 lakh accident insurance. Rs 30,000 life insurance (for accounts opened August 15, 2014 to January 26, 2015). Overdraft facility of Rs 10,000 after 6 months of satisfactory operation. Progress: 53+ crore accounts (2024). Deposits: Rs 2.3+ lakh crore. 67% in rural/semi-urban areas. 56% held by women. Zero-balance accounts dropped from 76% (2014) to 13% (2024). 34 crore RuPay cards issued. The JAM Trinity (Jan Dhan + Aadhaar + Mobile) powers Direct Benefit Transfer. DBT eliminates intermediaries. Over Rs 34 lakh crore transferred. Government claims Rs 3.48 lakh crore in savings by eliminating ghost beneficiaries. Major DBT programmes: PAHAL (LPG subsidy), MGNREGA wages, PM-KISAN, scholarships, COVID relief, pensions. Business Correspondents: 17+ lakh BC outlets. BCs use AEPS (Aadhaar-Enabled Payment System) with biometric authentication. Micro-ATMs enable cash deposit/withdrawal via Aadhaar at doorstep. RBI's CFL programme established 1,526 centres in 715 districts. Challenges: Low financial literacy, dormant accounts, limited insurance/pension uptake, and patchy rural digital infrastructure. Exam essential: PMJDY account count, JAM Trinity components, and DBT savings figure.
Priority Sector Lending (PSL) Framework
PSL requires banks to direct credit to economically vital sectors. Overall target: 40% of ANBC (or CEOBE, whichever is higher) for domestic SCBs and foreign banks with 20+ branches. Agriculture: 18% of ANBC (10% for small/marginal farmers). MSMEs: 7.5% of ANBC. Weaker Sections: 12% of ANBC (SCs/STs, women, differently abled, SHGs, distressed farmers). Housing: Loans up to Rs 35 lakh in metros, Rs 25 lakh elsewhere qualify. Education: Loans up to Rs 20 lakh. Social infrastructure: Up to Rs 5 crore. Renewable energy: Up to Rs 30 crore per borrower. Shortfall consequences: Banks deposit shortfall in RIDF at NABARD at below-market rates (bank rate minus 2%). PSL Trading Certificates (PSLCs, since April 2016): Banks buy/sell PSLCs on RBI's platform to meet targets without actual lending. A bank with excess PSL sells the "priority" tag (loan stays with seller) to a bank with shortfall. Four PSLC categories: Agriculture, Small/Marginal Farmer, Micro Enterprise, General. Trading volume: Rs 16+ lakh crore (FY24). PSLCs created a market-based compliance mechanism, improving efficiency. Exam must-know: 40% overall target, 18% agriculture sub-target, and the PSLC mechanism.
Deposit Insurance & Bank Resolution
DICGC (wholly-owned RBI subsidiary, established 1962) provides deposit insurance. Coverage: Rs 5 lakh per depositor per bank (raised from Rs 1 lakh in February 2020 after the PMC Bank crisis). Covers savings, current, fixed, and recurring deposits. Excludes government deposits, inter-bank deposits, and foreign government deposits. Premium: 12 paise per Rs 100 of deposits per annum (raised from 10 paise in 2020). DICGC corpus: ~Rs 2 lakh crore. Coverage stats: 98% of accounts by number but only 43% of deposit amount (large deposits exceed the Rs 5 lakh limit). The DICGC Amendment Act 2021 mandated interim payment of Rs 5 lakh within 90 days of a bank being placed under restrictions. This responded to PMC Bank depositors losing access for months. The FRDI Bill 2017 proposed a Resolution Corporation for failing financial firms but was withdrawn in 2018 after public outcry over the "bail-in" clause (converting deposits to equity to rescue a bank, similar to Cyprus 2013). India currently lacks a comprehensive resolution framework for financial institutions outside IBC. Exam favourite: Rs 5 lakh coverage limit, premium rate, and the FRDI bail-in controversy.
Technology in Banking — UPI, CBS, Digital Lending
CBS (Core Banking Solution) implementation by all PSBs (completed 2012-13) enabled anywhere banking. UPI (2016, NPCI): 13+ billion transactions/month (2024). Zero-cost, real-time, 24/7 interbank transfers. PhonePe (~48% share), Google Pay (~36%), Paytm, BHIM. UPI 2.0 added overdraft and invoice features. UPI Lite handles small offline transactions. NEFT: Batch-based, now 24/7 (since December 2019). RTGS: Large values above Rs 2 lakh, 24/7 (since December 2020). IMPS: 24/7 real-time. NACH: Recurring bulk payments (EMIs, SIPs, salary, pensions). CTS: Image-based cheque clearing. RBI's Digital Lending Guidelines (September 2022) regulated fintech-NBFC partnerships. All loans must go directly into/from borrower's bank account. LSPs must disclose the regulated entity. APR must be disclosed. Data collection is limited to necessity. FLDG capped at 5% of portfolio. Account Aggregator (AA) framework: RBI-regulated consent layer for sharing financial data between FIPs (banks, AMCs, insurers) and FIUs (lenders). 8 licensed AAs operate. AAs enable cash flow-based lending by letting MSMEs share actual financial data (UPI history, GST returns, insurance) with lenders for credit decisions, expanding access beyond traditional CIBIL scores. Exam tip: Know UPI transaction volume, digital lending rules, and AA framework.
Cooperative Banking & Urban Cooperative Banks
Cooperative banks form the grassroots banking layer, vital for rural credit. Short-term structure: StCBs (34) then DCCBs (351) then PACS (~97,000). PACS directly disburse crop loans, collect deposits, and distribute inputs. Long-term structure: SCARDBs for land development, irrigation, and farm mechanisation. Total cooperative bank credit: ~Rs 10 lakh crore (2024). Cooperatives account for ~7% of banking assets but serve ~25% of rural credit needs. Model PACS bye-laws (2023) envision PACS as multi-service centres handling credit, input supply, marketing, storage, and CSC activities. Government approved Rs 2,516 crore for computerising 63,000 PACS. UCBs (~1,500): Concentrated in Maharashtra, Gujarat, Karnataka, and AP. Deposits: ~Rs 5.5 lakh crore. UCBs suffer from weak governance, political domination, poor audit, and regulatory gaps. PMC Bank (2019): Rs 11,000 crore fraud. 73% of loans went to one borrower group (HDIL Wadhawan family). RBI imposed withdrawal limits, trapping depositors. Resolved through merger with Unity SFB. The PMC crisis triggered: DICGC coverage increase to Rs 5 lakh, Banking Regulation Amendment Act 2020 (bringing UCBs under direct RBI control), and RBI power to supersede boards and order mergers. NAFSCOB coordinates the cooperative system. Multi-state cooperatives operate under the Multi-State Cooperative Societies Act 2002. Exam tip: Know the PACS count (~97,000) and UCB regulatory reforms post-PMC.
Banking Regulation & Supervision Framework
RBI regulates banking through multiple layers. Licensing: Section 22 of BR Act 1949 requires RBI licence. "On-tap" licensing operates for Universal Banks (since 2016) and SFBs (since 2019). Prudential regulation: Basel III minimum CRAR 9% + 2.5% CCB = 11.5%. D-SIBs carry additional buffers (SBI has 0.8%). Asset classification and provisioning norms apply. Income on NPAs cannot be booked on accrual basis. Single borrower exposure: 20% of capital funds. Group exposure: 25%. Large Exposure Framework caps total counterparty exposure at 25% of Tier-1 capital. Statutory requirements: CRR (currently 4%, no interest earned) and SLR (currently 18%, invested in G-Secs, earns interest). Both serve as monetary policy and liquidity tools. Supervision: On-site AFI and Risk-Based Supervision for larger banks. Off-site surveillance through bank returns. ICMTS digitises compliance monitoring. PCA framework triggers for weak banks. Section 35A gives RBI binding direction power. Section 45 allows moratorium applications. The 2020 amendment lets RBI initiate bank resolution without moratorium. Consumer protection: Integrated Ombudsman Scheme 2021 merged three schemes (banking, NBFC, digital). About 5 lakh complaints resolved in FY24. AML: KYC under PML Act 2002. FIU-IND receives STRs and CTRs (cash transactions above Rs 10 lakh). Exam essential: Basel III CRAR (11.5%), CRR (4%), SLR (18%), and Integrated Ombudsman Scheme.
Relevant Exams
Banking system is the core topic for all banking exams. IBPS and SBI exams test bank types, nationalisation dates, PSL targets and sub-targets, committee recommendations, digital banking innovations, and Jan Dhan Yojana details. UPSC tests the broader reform landscape, financial inclusion architecture (JAM Trinity), cooperative banking challenges, and the role of different bank types. SSC exams ask factual questions on first banks, mergers, the number of PSBs/private banks, SFB/Payments Bank features. DICGC coverage, PCA framework, and digital lending regulations are important for current affairs.