Unit 1: Structure of the Indian banking system
Banking Services Management notes · PTU syllabus (BCOP 521-18)
On this page
Unit summary
Banks mobilise savings and lend them to productive uses — the lifeblood of an economy. This unit covers the definition, importance and functions of a bank, the structure and organisation of commercial, regional rural and co-operative banks, and the role of banks in economic development.
After this unit you can
- Define a bank and explain its importance and functions
- Describe the structure of the Indian banking system
- Explain the organisation of commercial, regional rural and co-operative banks
- Explain the role of banks in economic development
PTU syllabus topics
- Definition
- importance and functions of a bank
- structure and organisation of commercial
- regional rural and cooperative banks
- functions of banks in economic development
Commercial banks
Public, private, foreign
Regional rural banks
Rural credit
Cooperative banks
Urban and rural cooperatives
Small finance and payments banks
Financial inclusion
Topic 1
Definition and importance of a bank
Banking (Section 5(b), Banking Regulation Act, 1949): "accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."
- Essential features: dealing in money, accepting deposits from the public, lending/investing, repayable on demand, withdrawable by cheque, profit and service orientation.
- Importance: mobilises savings, creates credit, facilitates payments, supports trade and industry, implements monetary policy, promotes financial inclusion.
Topic 2
Functions of a bank
Primary — accepting deposits
Savings, current, fixed and recurring deposits
Primary — lending
Loans, cash credit, overdraft, discounting of bills
Agency functions
Collecting cheques and dividends, paying bills and insurance premiums, buying and selling securities, acting as trustee or executor
General utility functions
Lockers, letters of credit, bank guarantees, remittances (NEFT, RTGS, UPI), forex, credit cards
Credit creation
Deposits multiply through loans
Financial inclusion
Jan Dhan accounts, DBT, micro-credit
Credit multiplier
1 ÷ Reserve ratio
Total deposits created
Initial deposit × (1 ÷ Reserve ratio)
Example
Initial deposit ₹1,000 and reserve ratio 20%: the banking system can create total deposits up to ₹5,000 (₹4,000 of new credit).
Topic 3
Structure of the Indian banking system
Scheduled commercial banks
Public sector banks (12), private sector banks, foreign banks, regional rural banks, small finance banks, payments banks
Scheduled co-operative banks
State co-operative banks, urban co-operative banks
Non-scheduled banks
Some urban and rural co-operative banks
Development financial institutions
NABARD, SIDBI, EXIM Bank, NHB, NaBFID
- Scheduled bank: listed in the Second Schedule of the RBI Act, 1934 (paid-up capital and reserves of at least ₹5 lakh and affairs not detrimental to depositors) — eligible for RBI refinance and must maintain CRR with RBI.
Topic 4
Commercial, regional rural and co-operative banks
Commercial banks
- Public sector banks: majority government-owned — SBI and 11 nationalised banks (after the 2019–20 mergers). Nationalisation in 1969 (14 banks) and 1980 (6 banks).
- Private sector banks: old (pre-1993) and new (HDFC Bank, ICICI Bank, Axis Bank, Kotak).
- Foreign banks: branches or wholly owned subsidiaries (Citibank's retail business sold to Axis in 2023; SBM, DBS India).
- Organisation: head office → zonal/regional offices → branches; board of directors; functional departments (credit, treasury, retail, risk, IT).
Regional Rural Banks (RRBs)
- Set up under the RRB Act, 1976 (Narasimham Working Group, 1975) to provide credit to small farmers, labourers and artisans in rural areas.
- Ownership: Central Government 50%, sponsor bank 35%, state government 15%.
- Amalgamated over time to improve viability (about 28 RRBs after the 2025 consolidation — "one state, one RRB").
Co-operative banks
- 1State Co-operative Bank (apex)
One per state
- 2District Central Co-operative Bank
District level
- 3Primary Agricultural Credit Societies (PACS)
Village level — short-term crop loans
- Urban co-operative banks (UCBs): serve urban and semi-urban areas; under dual control (RBI for banking functions, Registrar of Co-operative Societies for management) — strengthened by the Banking Regulation (Amendment) Act, 2020.
- Long-term credit: State/Primary Co-operative Agriculture and Rural Development Banks.
- Features: owned by members, one member one vote, service motive, cheaper credit.
Law
Banking Regulation Act, Companies Act/special Acts
Co-operative Societies Acts + BR Act (as applicable)
Ownership
Shareholders/Government
Members
Objective
Profit
Service to members
Area
Nationwide
Usually local
Control
RBI
RBI + Registrar (dual)
New-generation banks
- Small Finance Banks (2015): small loans to unserved segments; 75% of ANBC to priority sector.
- Payments Banks (2015): deposits up to ₹2 lakh per customer, no lending — Airtel Payments Bank, India Post Payments Bank.
Topic 5
Role of banks in economic development
- Capital formation: mobilise savings into investment.
- Industrial and agricultural finance: priority sector lending — 40% of ANBC (agriculture 18%, weaker sections 12%, micro enterprises 7.5%).
- Balanced regional growth: branch expansion in rural areas after nationalisation.
- Entrepreneurship and employment: MUDRA, Stand-Up India, start-up finance.
- Financial inclusion: PMJDY (2014) — over 50 crore accounts; RuPay cards, DBT, micro-insurance.
- Implementing monetary policy and maintaining payment systems (UPI, NEFT, RTGS).
- Foreign trade: letters of credit, export finance, forex.
Key terms
- Banking
- Accepting public deposits for lending or investment, repayable and withdrawable by cheque
- Scheduled bank
- A bank in the Second Schedule of the RBI Act, 1934
- Regional Rural Bank
- Bank set up under the RRB Act, 1976 for rural credit
- Credit creation
- Multiplication of deposits through lending
- Priority sector lending
- Mandatory lending to sectors such as agriculture and MSMEs
Quick revision
- Section 5(b) BR Act defines banking.
- Functions: deposits, lending, agency, utility, credit creation.
- Structure: RBI → scheduled commercial (PSBs, private, foreign, RRBs, SFBs, payments banks) and co-operative banks.
- RRB ownership 50:35:15; co-operatives under dual control.
- Banks drive capital formation, priority sector credit, inclusion (PMJDY).
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.Define banking.
- Q2.State the primary functions of a commercial bank.
- Q3.What is a scheduled bank?
- Q4.What is the ownership pattern of RRBs?
- Q5.What is a payments bank?
- Q6.What is priority sector lending?
Long-answer questions
- Q1.Explain the functions of a commercial bank.
- Q2.Describe the structure of the Indian banking system.
- Q3.Explain the organisation of regional rural banks and co-operative banks.
- Q4.Discuss the role of banks in the economic development of India.
Stuck on this unit?
Message SBS on WhatsApp for help with Banking Services Management, or to ask about studying B.Com at Synetic.