System and classification of banks

System and classification of banks

The origin of the banking system can be traced back in the Vedic period when the merchants played the role of potential bankers in the society. These merchants were involved in the rotation and distribution of money by way of loans, securities etc., although, there was no existence of any structured platform for these merchants which lead establishment on banks in India and abroad.

Before the independence, India was not having a well-established banking system. The number of banks in working was high but the output from them was not sufficient due to lack of support from the powerhouse of the government. It was then in 1935, the Reserve Bank of India came into existence and later on was nationalized in the year 1949.

After independence, various public and private sector banks were allowed to provide services in the country, taking in view, the needs of the Nation. The Nationalization of banks in the year 1969 can be considered as a landmark step in accelerating the growth of the Banking system in India.

Hence, it is important to understand the working of different kinds of banks that exist and the various dimensions in which they work for the people and provide a strong base to the economic platform of a country.

Nationalization of banks

Nationalization basically means, to transfer a particular group of productions (here banks) from private sector to the government and further, allow the government sector to take all the major decisions of that production. The major objectives of this process in this context are to provide an expanded network to the banking sector and reduce the monopoly of the private sector banks.

Before 1969, The State bank of India (earlier known as the Imperial Bank of India) was the only major bank which was nationalized by the SBI Act, 1955. But, in the year 1969, various banks including Bank of Baroda, Canara Bank, Indian Bank, Union Bank, Punjab National Bank etc. were nationalized and this process was further paced up.

Although, the private sector banks were also allowed to continue providing services and no major restrictions were imposed upon them. An attempt was made to bring a balance between the private and the public sector banks by way of nationalization.

Kinds of banks

Various types of Banks exist in India which perform different functions and provide different services with different working mechanisms. These are discussed below –

Commercial Banks

The commercial banks can be broadly categorized as private and public sector banks. These banks work under the provisions and guidelines laid down the banking regulation Act, 1949. The main aim of these banks is to provide a platform to the general public for exchange of funds and secure their deposits.

It is the duty of the commercial banks to establish a customer friendly relationship and provide them with services such as granting loans, introducing various governmental schemes and act as an intermediator in certain cases such as issuance of shares and securities.

Examples include state bank of India. Punjab national Bank etc.

Payments Banks

The concept of payments bank has been recently introduced in India and has gained popularity since then. Rather than following the general working model of banks which includes establishment of branches in end number of places in a state, the owners of the payment banks prefer working via online mode.

The private sector holds the majority of this industry and provides various services such as net/mobile banking, small loans and banking cards.

Examples include Paytm payments bank ltd, Airtel payments bank ltd etc.

Foreign Banks

The banks which have their branches in a foreign nation are known as the Foreign banks. These banks are established abroad and open its branches in other nations in order to increase the linking and chaining of its bank. Foreign banks are obliged to follow the rules and regulations of the origin country as well as the country in which they establish their branches.

Examples include Deutsche Bank, Bank of America, Bank of Ceylon etc.

Small Finance Banks

Section-22 of the Banking Regulation Act, 1949 explicitly provides for the concept of these banks and states that the RBI is the governing body which can provide license to the companies in order to provide services as financing banks subject to some conditions and restrictions.

Examples include Jana Small Finance Bank ltd., Capital Small Finance Bank Ltd. Etc.

Working of the banking system

In India

In order to interpret the basic working structure of the banking system in India, it is important to understand the working model of the Reserve bank of India.

Efficient working of banks depends upon the extent to which, the RBI is able to maintain symmetry among banks which is done by way of legal statutes such as SBI Act, 1955, Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and 1980, RRB Act, 1976 etc. The legal framework plays an important role in regulating banks in India.

The roles of RBI in working of the banking system in India are as follows:


Keeping an eye over the Banks in order to safeguard the interests of the general public and protecting the banking system from flaws.

Monetary Research-

To prepare Monetary Policy Report (MPR) and make sure that the flow of funds is accurate. Credit amounts of the banks are also to be assessed from time to time.

Regulation and Reorganization of Banks-

Make sure that the banks are following all the laid down principles and guidelines. Also, in case a bank is suffering from a loss, compensate the same by providing funds or reorganize/club the banks.

Technological Improvements and Securitization-

Introduce methods to analyze the statistical data by way of technological advancements and protect the same from anti-national organizations which tries to steal the data.

Management of funds-

The Reserve bank of India is the whole and sole keeper of the financial assets of the nation and all the banks work within the limits of these monetary fund’s hence, it is essential to manage the same.


The system of working of the banks outside India varies according to the developmental status of the nations. On one hand where the banks of the United States and the United Kingdom can be considered as the most profitable banks in the world, on the other hand, some Asian countries which are developing in the 21st century still does not have a well-established banking network in their countries.

The difference can be made out in the working on the basis of principles of Liquidity, profits, securities and investments. In the Indian Banking system, there is a huge investment sector that exists due to the fact that India is a developing nation. Although, the developing nations have a well-developed market which tends to deviate the investment sector in to the profitable sector.

Difference between public and private sector banks

Public Banks

Private Banks

Banks having a major holding of the shares by the Government.

Banks having a major holding of the shares by the private individuals.

They own a comparatively higher market in terms of number of customers.

They own a comparatively lower market in terms of number of customers.

A lower rate of interest is charged by the public sector banks.

A higher rate of interest in charged by the private sector banks.

Less efficient in providing banking services due to no job risk.

Efficient in providing banking services due to competitive working atmosphere.

Examples- State bank of India, Punjab national bank.

Examples- Axis Bank, HDFC Bank.


It is evident to say that Banking system in India has evolved since independence and excelled with great achievements. Certain turning points can be observed since then which includes nationalization of banks in 1969 and 1980, introduction of payment banks and many more.

Although, there still exists a scope of improvement in the India banking system. It lacks ability to manage situations where some so-called businessman, after taking huge amount of loans from various banks, abscond. A new set of rules need to be introduced in the legal system to tackle these kinds of problems.

The economical setup of the country is majorly in the hands of the banks which carry the savings, deposits and earnings of almost every citizen, hence we owe a duty to protect the money and ensure the citizens regarding same.

Frequently Asked Questions

What are scheduled and non-scheduled banks?

A. Scheduled Banks– Nationalized, cooperative, regional, rural and foreign banks are covered under the ambit of scheduled banks. These banks have to follow the principles and guidelines laid down by the Reserve bank of India.

These banks are listed in the second schedule of the RBI Act, 1934 and have to submit returns on the regular basis.

Non-Scheduled Banks– These are the banks which are not listed in the second schedule of the RBI Act, 1934. They are not obliged to follow all the rules and regulations that are laid down by the Reserve Bank and are not bound to submit returns at a regular interval.

What is meant by the foreign exchange policy of banks?

Foreign exchange refers to trading of funds (money) from one currency to another. The exchange rate plays a vital role in determining the foreign exchange. For e.g.- Exchanging dollar (USD) from Rupees (INR). These exchanges take place on the daily basis between the banks of different economies.

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 


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My name is Aniket Vashisth and I am a student pursuing Bachelor's in Law from Indraprastha University (Maharaja Agrasen Institute of Management Studies). Being a student of law, I have a keen interest in Researching and exploring new ideas from the existing laws and establish a reasonable interpretation. Currently, I am in 3rd year of my 5-year integrated BALLB Program. My future target is to crack Delhi Judicial Services and become an important part of the Indian legal system in order to inculcate my ideas and serve the Nation. I am an active participant in various National Moot Court Competitions organized across the Country every year.