Unit 1: Origin & structure of Indian banking
Banking Laws & Services notes · PTU syllabus (BCOP 621-18)
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Unit summary
India's banking system has grown from a handful of agency houses to one of the world's largest networks of banks. This unit covers the origin and evolution of Indian banking, the types of banks — commercial, small finance, payments, co-operative, public sector, private sector, foreign banks and RRBs — the role of RBI as regulator, and the changing functions of commercial banks.
After this unit you can
- Trace the origin and evolution of banking in India
- Classify the types of banks in India
- Explain the role of RBI as regulator
- Explain the changing functions of commercial banks
PTU syllabus topics
- Origin and evolution of Indian banking
- types of banks — commercial
- small finance
- payments
- cooperative
- public sector
- private sector
- foreign banks and RRBs
- role of RBI as regulator
- changing functions of commercial banks
Public sector
Government-owned majority, e.g. SBI
Private sector
Privately owned
Foreign banks
Branches of overseas banks
Small finance and payments banks
Inclusion-focused
Cooperative and regional rural banks
Local and rural credit
Topic 1
Origin and evolution of Indian banking
- 1
Pre-independence
Bank of Hindustan (1770), Presidency Banks of Bengal, Bombay, Madras; Allahabad Bank (1865), Punjab National Bank (1894, Lahore)
- 2
1921
Presidency banks merged into the Imperial Bank of India
- 3
1935
Reserve Bank of India set up
- 4
1949
Banking Regulation Act; RBI nationalised
- 5
1955
Imperial Bank became State Bank of India
- 6
1969 and 1980
Nationalisation of 14 and 6 banks
- 7
1991–1998
Narasimham reforms; new private banks (1994)
- 8
2014 onwards
Payments and small finance banks, PMJDY, UPI, PSB mergers (2017–2020), IBC
- Swadeshi movement encouraged Indian-owned banks (PNB was founded with Lala Lajpat Rai's involvement).
- Objectives of nationalisation: social control, rural branch expansion, priority sector credit, reduce concentration of economic power.
Topic 2
Types of banks
Commercial banks
Public sector, private sector, foreign banks, RRBs
Small finance banks
Small loans to unserved sections; 75% priority sector lending
Payments banks
Deposits up to ₹2 lakh, payments and remittances, no lending
Co-operative banks
Urban co-operative banks, state and district central co-operative banks
Development banks
NABARD, SIDBI, EXIM Bank, NHB, NaBFID
| Type | Ownership | Examples |
|---|---|---|
| Public sector banks | Government holds majority | SBI, PNB, Bank of Baroda, Canara Bank (12 PSBs) |
| Private sector banks | Private shareholders | HDFC Bank, ICICI Bank, Axis, Kotak, IndusInd |
| Foreign banks | Incorporated abroad (branches or WOS) | Standard Chartered, HSBC, DBS Bank India (WOS) |
| Regional Rural Banks | Centre 50%, sponsor bank 35%, state 15% | Punjab Gramin Bank |
| Small finance banks | Private | AU SFB, Ujjivan, Equitas |
| Payments banks | Private/Government | Airtel Payments Bank, India Post Payments Bank |
| Co-operative banks | Members | Saraswat Co-op Bank, Punjab State Co-op Bank |
- Scheduled vs non-scheduled: scheduled banks are in the Second Schedule of the RBI Act — eligible for RBI facilities.
Topic 3
Role of RBI as regulator
- Licensing of banks (Section 22, BR Act) and branch authorisation.
- Prudential regulation: capital adequacy, income recognition, asset classification, provisioning, exposure limits, liquidity (LCR, NSFR).
- Corporate governance: approval of appointments of chairpersons, CEOs and directors of private banks; fit-and-proper criteria.
- Supervision: on-site inspection, off-site monitoring, Prompt Corrective Action (PCA) framework for weak banks.
- Resolution powers: moratorium, amalgamation (e.g., Yes Bank reconstruction, 2020), supersession of boards.
- Customer protection: Integrated Ombudsman Scheme, fair practices, KYC/AML directions.
- Regulation of NBFCs, co-operative banks, payment systems, foreign exchange.
Topic 4
Changing functions of commercial banks
Focus
Accepting deposits and lending
One-stop financial supermarket
Channels
Branches
Digital — internet, mobile, UPI, APIs
Products
Savings, current, FDs, loans, overdrafts
Insurance, mutual funds, wealth management, credit cards, forex, investment banking
Customers
Mostly urban, business
Universal, financial inclusion
Risk management
Basic
Advanced — Basel III, ALM, analytics
- New functions: bancassurance, depository services, merchant banking subsidiaries, factoring, digital lending partnerships, co-lending with NBFCs, payment aggregation, green finance, Account Aggregator data sharing.
Key terms
- Nationalisation
- Government taking over ownership of private banks
- Small finance bank
- Niche bank for small borrowers with mandatory priority lending
- Payments bank
- Bank accepting small deposits and providing payments without lending
- Prompt Corrective Action
- RBI framework restricting weak banks until they recover
- Scheduled bank
- Bank included in the Second Schedule of the RBI Act
Quick revision
- Evolution: Presidency banks → Imperial Bank → SBI → nationalisation 1969/1980 → reforms 1991.
- Types: PSBs, private, foreign, RRBs, SFBs, payments banks, co-operative banks.
- RBI: licensing, prudential regulation, supervision, PCA, resolution, consumer protection.
- Banks now offer insurance, MFs, wealth, cards, digital services.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.When was SBI formed?
- Q2.State the objectives of bank nationalisation.
- Q3.What is a small finance bank?
- Q4.What is a payments bank?
- Q5.What is the PCA framework?
- Q6.State two modern functions of commercial banks.
Long-answer questions
- Q1.Trace the origin and evolution of banking in India.
- Q2.Explain the different types of banks in India.
- Q3.Explain the role of RBI as the regulator of banks.
- Q4.Discuss the changing functions of commercial banks.
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