Understanding The Structure of Banking System in India

Understanding the structure of banking system in India

The banking system in India, a sprawling tapestry of financial institutions and regulatory frameworks, stands as a testament to the nation’s economic evolution. It plays a pivotal role in shaping the financial landscape of the country. 

Its intricate structure, a result of historical evolution and regulatory developments, serves as a cornerstone for economic growth, financial stability and inclusivity. In this article we’ll understand in depth about the structure of banking system of India.

Understanding the structure of banking system in India

From the venerable public sector banks to the dynamic private sector counterparts, the cooperative institutions rooted in local communities. And the central regulatory authority embodied by the Reserve Bank of India (RBI). Each component plays a vital role in shaping the nation’s economic destiny.

Indian Banking: A overview 

The seeds of modern banking in India were sown in the early 19th century. With the establishment of banks like the Bank of Calcutta (now State Bank of India), Bank of Bombay, and Bank of Madras. These banks laid the foundation for what would become the Imperial Bank of India in 1921. 

Nationalization of the Imperial Bank in 1955 led to the birth of the State Bank of India. Which remains a titan in India’s banking sector.

Banking structure in India

Reserve Bank of India (RBI) is termed as the central bank of India. Which regulates the functions and banking system of India. 

The Reserve Bank of India (RBI) was established on April 1, 1925. It became the central bank of India and took over the functions of the Imperial Bank of India. Which was previously the central banking authority in the country.

The RBI was established through the Reserve Bank of India Act, 1934. It has since played a pivotal role in formulating and implementing monetary policy, regulating the banking sector, issuing currency. Also in maintaining the stability of the Indian financial system.

Note: We also have a detailed write-up on Small Finance Banks Of India. To know more, check it once!

Structure of Banking System in India 

The Indian banking system in India can be broadly classified into three categories under RBI, i.e. Commercial Banks (Scheduled banks), Cooperative Banks (Non-Scheduled banks), and Development Banks (Specialized financial entities). 

(A)Commercial Banks 

Which are also termed as Scheduled Banks. Commercial banks are the linchpin of modern economics, serving as the financial intermediaries that facilitate the flow of funds, support economic activities, and promote growth. 

These institutions are an integral part of our daily lives, offering a wide array of services, from saving accounts to loans and mortgages. 

These banks are included in the second schedule of Reserve Bank of India Act 1934, are considered to be Scheduled banks/ Commercial banks. 

These banks primarily engaged in providing banking services to individuals, businesses, and other entities. They play a multifaceted role in the financial system. For example – State Bank of India (SBI), HDFC Bank, ICICI Bank, Dena Bank, etc.

Commercial bank of India

Its key functions include – 

  • Accepting Deposits
  • Providing Loans
  • Facilitating Payments
  • Wealth Management
  • Currency Exchange

Types of Commercial Banks 

Commercial banks come in various types, each tailored to serve specific customer segments or meet particular financial needs. 

Public Sector Banks

Public sector banks, in contrast, are owned and operated by the government. They often serve a broader customer base, including individuals, small businesses, and large corporations. Public sector banks are essential for financial inclusion and play a significant role in the economic development of a nation. 

Public sector banks may receive financial support or bailout packages from the government in times of financial distress to maintain stability. 

Examples: State Bank of India (SBI) the government holds 57.5% of shares in SBI, Bank of Baroda (BoB) government holds 63.97% of total shares. Etc.

State bank of India - commercial bank

Private Sector Banks

As the name suggests, they are owned and operated by private individuals or corporations. Government has less hold on the shares of these banks. They often cater to a specific clientele, including high net-worth individuals and businesses, and are known for their personalized services and customized financial solutions. 

Private banks provide specialized services like wealth management, investment advisory, and estate planning. 

Examples: HDFC Bank, ICICI Bank, Axis Bank, etc. Private sector banks hold around 27.1% shares in the total banking sector of India.

ICICI bank- private sector bank

Foreign Sector Banks

These are the banks that operate in a country other than their home country. They offer banking and financial services similar to domestic banks and often cater to both local and international clients. Foreign banks contribute to financial globalization and provide access to international financial markets. 

They offer a wide range of financial products and services, including corporate banking, trade finance expertise and can facilitate international trade and investment. 

Examples: HSBC Bank (from the United Kingdom), Citibank (from the United States), etc. 

Regional Rural Banks (RRBs)

RRBs are a unique category of banks in India, created with the specific mandate of promoting rural banking and financial inclusion. They operate in rural and semi-urban areas, catering to the financial needs of local communities.

Established in 1975, under Regional Rural Banks Ordinance, to ensure the sufficient help for agricultural and other rural sectors and to bridge the credit gaps. 

Examples: Saptagiri Gramin Bank, Andhra Pragathi Grameena Bank, etc.

(B)Cooperative Banks

Cooperative banks are financial institutions that operate based on the principles of cooperation, mutual assistance, and self-help. They are typically owned and controlled by their members, who are also their customers. 

Cooperative banks are prevalent in many countries and serve both urban and rural communities, playing a crucial role in local economic development and financial inclusion.

Banking structure of Cooperative bank of India

Cooperative banks often have a strong local or regional focus. They are deeply rooted in the communities they serve and aim to address the specific needs of their members. 

These banks are not scheduled under the second section of the Reserve Bank of India Act, 1934, and are termed as non-scheduled banks/ Cooperative banks. 

For example: Saraswat Co-operative Bank, Cosmos Co-operative Bank, Shamrao Vithal Co-operative Bank, etc.

Types of Cooperative Banks

Cooperative banks can be categorized into various types based on their scope, focus, and area of operation. 

Urban Cooperative Banks (UCBs)

These operate in urban and semi-urban areas, catering to the financial needs of local communities. They provide a wide range of banking services, including savings and current accounts, personal loans, housing loans, and small business loans. UCBs are regulated by the Reserve Bank of India (RBI) in India and other relevant regulatory authorities of other states.

Saraswat cooperative bank

Examples: Apna Sahakari Co-Op Bank Ltd, Ahmedabad Mercantile Co-Op Bank, Mehsana Urban Co-Op Bank, Saraswat Co-Operative Bank etc.

Rural Cooperative Banks (RCBs)

They serve the rural population and are vital for agricultural and rural development. They often specialize in agricultural loans, crop loans, livestock financing, and other financial products tailored to rural needs. 

RCBs are regulated by RBI and other relevant authorities in India, similar to UCBs. They can be classified into long term and short term. 

  • In the long term, banks included either State Cooperative Agriculture and Rural Development Banks (SCARDBs), or the Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
  • In short term, banks include different categories like, State Co-Operative Banks, District Central Co-Operative Banks, and Primary Agricultural Societies.

(C)Development Banks 

Development banks, also known as Development Finance Institutions (DFIs), are specialized financial institutions established with the primary goal of promoting economic development and growth within a country or region.

They differ from traditional commercial banks in that their main focus is not on maximizing profit but on financing and facilitating projects. That contributes to broader economic and social development objectives.

Development banking structure of India

Development banks play a critical role in supporting infrastructure development, industrialization, and poverty reduction. 

For example: IFCI (Industrial Finance Corporation of India), IDBI (Industrial Development Bank of India), etc. 

Long-term Financing: Development banks provide long-term financing for projects that may have a significant economic impact but require substantial investment over an extended period. These projects can include infrastructure development, industrial expansion, and initiatives aimed at improving living standards.

Risk Tolerance: They are often more willing to assume higher levels of risk compared to commercial banks, as their primary mission is to support economic development rather than maximize short-term profits. This allows them to finance projects that may not be feasible for commercial banks. 

Development Banking structure in India

Social and Environmental Responsibility: Many development banks incorporate social and environmental considerations into their project evaluations to ensure that projects are sustainable, environmentally responsible, and inclusive.


The structure of the banking system in India is diverse and multifaceted , catering to the financial needs of a vast and varied population. While it has come a long way since its inception, it continues to evolve to meet the demands of a rapidly changing economic landscape. Understanding its structure and functioning is crucial for anyone interested in the Indian economy and financial sector.

As the nation embraces technology and innovation, the future of Indian banking promises to be both challenging and transformative, offering immense opportunities to enhance financial inclusion, stimulate economic development, and contribute to the nation’s progress on the global stage.

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Published By: Aashita Singh
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