Legal Definition of Banking

• Defined under the Banking Regulation Act, 1949
• Banking = Accepting deposits for lending/investment, repayable on demand/otherwise, withdrawable by cheque, draft, or order.

Classification of Commercial Banks in India

A. Based on Ownership

(1) Public Sector Banks (PSBs)

• The majority stake held by the Government of India
• 12 PSBs after consolidation (post-2019 mergers)
• Example: SBI, PNB, Bank of Baroda
• Role: Financial inclusion, priority sector lending

(2) Private Sector Banks

• The majority stake is held by private shareholders
• Old Private Banks (e.g., Karur Vysya Bank)
• New Private Banks (post-1991 reforms)

Prominent post-liberalization banks:

• HDFC Bank
• Axis Bank
• ICICI Bank
• IndusInd Bank
• Kotak Mahindra Bank
• Yes Bank
• Bandhan Bank
• IDFC First Bank

(3) Foreign Banks

• Incorporated outside India but operates branches in India
• Examples:
  • Citibank
  • HSBC
  • Bank of America

(4) Regional Rural Banks (RRBs)

• Established in 1975
• Joint ownership: Centre (50%), State (15%), Sponsor Bank (35%)
• Focus: Rural credit & priority sector

Historical Evolution of Banking in India

Phase 1: Pre-Independence (Before 1947)

• ~600 banks existed
• First bank: Bank of Hindustan (1770) – Closed in 1832
• First commercial bank: Oudh Commercial Bank
• Surviving 19th-century banks:
  • Allahabad Bank
  • Punjab National Bank

Features:

• Presidency Banks
• Weak regulation
• Frequent bank failures

Phase 2: Post-Independence (1947–1991)

Major Developments:

• Nationalization (1969 & 1980)
• Financial inclusion focus
• Priority sector lending

Creation of Specialized Institutions:

• NABARD (Agricultural credit)
• Export-Import Bank of India (Trade finance)

Objective:

• Extend banking to rural & neglected sectors

Phase 3: LPG Era (1991–Present)

• Liberalization, Privatization, Globalization
• Entry of new private banks
• Foreign banks expansion
• Digital banking revolution (UPI, Core Banking)

Key features:

• Competition & efficiency
• Decline in new nationalizations
• Technology-led banking

Scheduled vs Non-Scheduled Banks

Scheduled Banks

Listed in the 2nd Schedule of the Reserve Bank of India Act, 1934

Conditions:

• Minimum paid-up capital: ₹5 lakh
• Maintain CRR with RBI

Benefits:

• Refinancing facility from the RBI
• Clearinghouse membership
• Currency chest facility

Include:

• PSBs
• Private Banks
• Foreign Banks
• RRBs

Non-Scheduled Banks

• Not listed in RBI Act 2nd Schedule
• Maintain CRR with themselves
• Smaller capital base (< ₹5 lakh historically)
• Limited operational area
• Higher risk profile

Functions of Commercial Banks

(1) Accepting Deposits

Types:

• Current Deposits → No/low interest
• Savings Deposits → Moderate interest
• Fixed/Time Deposits → Higher interest

Mobilizes savings → Capital formation

(2) Lending & Investment

Methods:

• Loans & Advances
• Overdraft facility
• Cash Credit
• Discounting Bills of Exchange/Hundi

Investments:

• Government Securities
• Shares & Debentures
• Gold & Insurance-backed lending

(3) Credit Creation (Money Creation)

• Banks lend more than deposits (Fractional Reserve System)
• Deposits → Loans → New Deposits
• Multiplier Effect

Formula:
Money Multiplier = 1 / CRR

(4) Agency & Utility Functions

• Locker facility
• Collection of bills
• Payment of insurance premiums
• Trustee & executor services
• Foreign exchange dealings