Q: What is the difference between “Scheduled” and “Non-Scheduled” banks in India?
A: According to the RBI Act, 1934, Scheduled banks are those included in the Second Schedule of the Act. To be in this list, a bank must satisfy certain criteria (like a minimum paid-up capital and reserves) specified by the RBI. Being “scheduled” has practical benefits: these banks automatically become members of the clearinghouse system (for inter-bank settlements) and are eligible to borrow from RBI at the bank rate. In contrast, Non-Scheduled banks are those not in the Second Schedul...
Q: How do public sector banks differ from private sector banks?
A: The difference lies in ownership. Public sector banks (PSBs) are those where the government (Central or State) holds a majority stake (more than 50%). For example, State Bank of India (with 57% held by Govt) and Punjab National Bank are PSBs. Private sector banks are owned by private shareholders and promoters (e.g. HDFC Bank, ICICI Bank). Functionally, both types accept deposits and make loans, and both are largely regulated by the RBI. However, PSBs often have mandates to fulfill soc...
Q: What are Regional Rural Banks (RRBs), and what role do they play?
A: RRBs are banks meant to combine the strengths of commercial banks and cooperatives to serve rural areas. Established beginning 2 October 1975 under the Regional Rural Banks Act, 1976, the first five RRBs were sponsored by larger banks (e.g. Syndicate Bank sponsored Prathama Grameena Bank). Ownership is split 50% Government of India, 35% sponsor bank, 15% state government. RRBs are scheduled commercial banks focused on districts: they operate in limited areas (one or few districts) and...
Q: What are Cooperative Banks?
A: Cooperative banks are financial institutions owned and run by their members (who are usually from the community they serve, like farmers or traders). They exist at various levels: Urban Cooperative Banks (UCBs) serve city/town areas (small businesses, professionals), and Rural Cooperative Banks are tiered as State Cooperative Banks (at state level), District Central Co-operative Banks, and Primary Agricultural Credit Societies (at village level). Cooperative banks traditionally focus o...
Q: What are Payment Banks and Small Finance Banks?
A: These are new types of niche banks licensed by the RBI in 2014–15 to improve financial inclusion.
- Payment Banks: These banks can accept small deposits (initially up to ₹1 lakh per customer, now ₹2 lakh) and offer payment/remittance services, but they cannot lend. The idea was to reach those without access (e.g. rural or migrant populations) through mobile wallets or banking correspondents. Examples include India Post Payments Bank, Airtel Payments Bank, Paytm Payments Bank, etc. They provide savings accounts, ATM/debit card services, and mobile banking, but park ...
- Small Finance Banks (SFBs): These are banks focused on providing basic banking (deposits & loans) to underserved segments: small business units, marginal farmers, micro industries, and low-income individuals. Unlike payment banks, SFBs can lend to customers (subject to priority-sector requirements). They must focus 50% of loans on individual loans up to ₹25 lakh and 75% of loans on priority sectors. SFB promoters can be local entrepreneurs, MFIs, or corporates (not co...
These differentiated banks (payment and SFBs) aim to fill niche gaps in financial services, as recommended by RBI to broaden access.
Q: What do “universal banking”, “narrow banking”, and “investment banking” mean? How do these models fit into India’s system?
A: These terms describe different banking philosophies:
- Universal Banking: A universal bank is a one-stop financial shop – it offers both commercial banking (deposits/loans) and investment banking (underwriting securities, corporate advisory). For example, SBI historically functioned somewhat like a universal bank (especially through its affiliates or subsidiaries like SBI Capital Markets). Universal banking maximizes cross-selling and diversification. In India, while we don’t have a strict separation of banking activities...
- Narrow Banking: This is a conservative model where banks hold assets (like government securities) equal to deposits, minimizing risk. The idea is that “narrow” banks would not make risky loans or invest depositor money in markets. While this is an academic idea (especially after financial crises), India’s commercial banks are not strictly narrow banks – they lend widely. However, NBFCs or payment banks approach a narrower scope (payment banks hold government bonds equ...
- Investment Banking: These banks focus on capital markets rather than consumer deposits. They underwrite stock/bond issues, advise on mergers, and trade securities. Examples globally include Goldman Sachs or Morgan Stanley. In India, pure investment banking as a distinct license does not exist; such services are provided by merchant banking divisions of banks (registered with SEBI) or by separate firms (brokerage houses, non-banking finance companies) licensed by SEBI....
In practice, Indian regulators have generally allowed universal banking by commercial banks (they can do many financial services via subsidiaries), rather than enforcing a Glass–Steagall style split between commercial and investment banking. The focus remains on prudential norms (capital, risk management) rather than rigid categories. Investment banking activities in India are regulated under SEBI rather than RBI, so banks and firms must register accordingly.