The banking system is an essential part of India's financial structure, ensuring economic stability and development. It plays a crucial role in monetary policy implementation, financial inclusion, and credit allocation. For MPSC aspirants, understanding the classification, structure, and functions of banks is vital for the Economy and Finance section.
This guide covers:
✅ Proper Classification of Banks in India
✅ Structure and Functions of Banks
✅ Important Banking Terms
✅ Recent Banking Reforms & Developments
Classification of Banks in India
The banking system in India is classified into two broad categories:
1️⃣ Organized Banking Sector (Regulated by the RBI)
- Scheduled Banks (Listed under RBI Act, 1934)
- Non-Scheduled Banks (Not listed under RBI Act, 1934)
2️⃣ Unorganized Banking Sector (Not regulated by the RBI)
- Money Lenders
- Chit Funds
- Indigenous Bankers
Detailed Classification of Organized Banks
The organized banking sector in India is further divided into:
A. Scheduled Banks (Regulated by RBI, Listed under RBI Act, 1934)
1. Commercial Banks (Profit-Oriented)
These banks provide financial services such as deposits, loans, and credit facilities.
➡️ Public Sector Banks (PSBs) – Government-Owned (51% or more ownership)
- Examples: State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda
- Comprise majority of the banking sector (Approx. 60% market share)
- Aim: Financial inclusion & economic development
➡️ Private Sector Banks – Owned by Private Companies or Individuals
- Examples: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank
- Offer better services and technology adoption
➡️ Foreign Banks – Headquartered Abroad but Operate in India
- Examples: HSBC, Citibank, Standard Chartered, Deutsche Bank
- Focus on corporate and high-net-worth individual (HNI) banking
➡️ Regional Rural Banks (RRBs) – Established for Rural Development (Since 1975)
- Funded by Central Govt. (50%), State Govt. (15%), and Sponsor Bank (35%)
- Examples: Vidarbha Konkan Gramin Bank, Maharashtra Gramin Bank
- Objective: Provide credit and banking facilities in rural areas
2. Cooperative Banks (Support Small Businesses & Rural Development)
These banks operate under a cooperative model to support small farmers, traders, and businesses.
➡️ Urban Cooperative Banks (UCBs)
- Located in cities, cater to small traders and businesses
- Example: Mumbai District Central Cooperative Bank
➡️ Rural Cooperative Banks (RCBs)
- Focus on farmers and rural enterprises
- Includes State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs), and Primary Agricultural Credit Societies (PACS)
3. Development Banks (Provide Long-Term Loans for Growth)
- NABARD (National Bank for Agriculture & Rural Development) – Supports rural and agricultural development
- SIDBI (Small Industries Development Bank of India) – Funds small and medium enterprises (SMEs)
- EXIM Bank (Export-Import Bank of India) – Provides financial assistance for international trade
- IDBI (Industrial Development Bank of India) – Supports industrial projects
B. Non-Scheduled Banks (Smaller Banks, Not Listed Under RBI Act, 1934)
- Do not have access to RBI’s financial assistance.
- Serve local and niche markets.
- Example: Some small cooperative banks and local area banks.
C. Unorganized Banking Sector (Non-Regulated Entities)
These institutions do not follow RBI regulations and include:
➡️ Money Lenders – Provide high-interest loans, often exploitative.
➡️ Chit Funds – Rotating savings schemes, partially regulated by the government.
➡️ Indigenous Bankers – Operate as informal banks, lending and accepting deposits.
The unorganized sector is declining due to government efforts like Jan Dhan Yojana and digital banking expansion.
Functions of Banks in India
Banks perform primary and secondary functions to ensure financial stability.
1️⃣ Primary Functions
✔ Accepting Deposits – Savings, Fixed, and Current Accounts
✔ Providing Loans – Agriculture, Personal, Business Loans
✔ Credit Creation – Issuing loans based on deposits
2️⃣ Secondary Functions
✔ Foreign Exchange Services – Currency exchange and remittances
✔ Government Services – Tax collection, salary payments, subsidies
✔ Digital Banking & Payments – UPI, NEFT, RTGS, IMPS
Important Banking Terms for MPSC
📌 Repo Rate – Interest rate at which RBI lends to banks.
📌 Reverse Repo Rate – Rate at which RBI borrows from banks.
📌 Cash Reserve Ratio (CRR) – Percentage of deposits banks must keep with RBI.
📌 Statutory Liquidity Ratio (SLR) – Banks must keep a portion of funds in government securities.
📌 Non-Performing Asset (NPA) – Loan unpaid for 90+ days.
📌 Basel Norms – Global banking regulations for financial stability.
Recent Banking Reforms & Developments
✔ Bank Mergers – PNB+OBC+UBI, SBI+Associate Banks merged to strengthen the banking system.
✔ Digital Banking – UPI, e-RUPI, Aadhaar-based banking improving financial inclusion.
✔ Privatization of PSU Banks – Government reducing ownership in some banks for better efficiency.
✔ Payments Banks – Small-scale banks like Airtel Payments Bank, India Post Payments Bank.
Why is Banking Important for MPSC?
✅ Frequently Asked in MPSC Prelims & Mains – Banking and finance are key topics.
✅ Maharashtra’s Financial Importance – Mumbai is India’s banking capital.
✅ Useful for Essays – Topics like financial inclusion, digital banking, NPAs are relevant for MPSC Mains.
Final Thoughts
The banking system in India is vast, covering commercial, cooperative, and development banks. For MPSC aspirants, understanding banking structure, RBI regulations, and financial reforms will help in scoring high in the Economy & Finance section.
📝 Study Tip: Make mind maps, follow current affairs, and revise with previous year MPSC questions! 🚀