Lok Sabha Passes Banking Laws Amendment Bill, 2024

Banking System in India

The Banking System in India refers to the network of financial institutions, such as banks and credit unions, which facilitate financial transactions and offer services to individuals, businesses, and governments.

These institutions primarily act as intermediaries between those with money (savers) and those who require it (borrowers). The core services provided by Indian banks include:

1. Accepting Deposits: Collecting funds from the public.
2. Lending Money: Providing loans to businesses, individuals, and governments.
3. Facilitating Transactions: Handling payments, transfers, and other financial transactions.
4. Offering Financial Products: Providing savings accounts, loans, credit cards, and more.

Classification of Banks in India:

Banks in India are primarily divided into two categories:

1. Scheduled Banks
2. Non-Scheduled Banks

Key Differences Between Scheduled and Non-Scheduled Banks:

Structure of the Banking System in India

The Reserve Bank of India (RBI) is the apex institution and sits at the top of India's banking structure, regulating and overseeing the operations of various banks and financial institutions. Below the RBI, there are various types of banks and financial entities.

1. Reserve Bank of India (RBI)

The RBI is the central bank of India, responsible for regulating the country's financial system. Its functions include:

1. Monetary Policy: Managing the money supply and interest rates to control inflation and promote economic growth.
2. Regulation of Banks: Ensuring the stability and efficiency of the banking sector.
3. Issuer of Currency: Issuing and managing the national currency, the Indian Rupee.

2. Commercial Banks

Commercial banks are profit-oriented institutions that offer a range of services, including deposit acceptance, loans, and facilitating payment transactions. These banks are regulated by the Banking Regulation Act, 1949.

Types of Commercial Banks:

1. Public Sector Banks: Banks where the government holds a majority stake (e.g., State Bank of India, Punjab National Bank).
2. Private Sector Banks: Banks where the majority of shares are owned by private entities (e.g., HDFC Bank, ICICI Bank).

3. Cooperative Banks

Cooperative Banks operate on principles of cooperation and mutual benefit for their members. Customers of these banks are also the owners. These banks typically serve rural areas and smaller businesses.

1. Types of Cooperative Banks:
   1. Urban Cooperative Banks: Serve urban areas and focus on small loans and deposits.
   2. Rural Cooperative Banks: Focus on rural regions, providing financial services to farmers and small businesses.

4. Development Banks

Development Banks are specialized financial institutions that provide long-term finance to sectors that are unable to access funding from commercial banks. These sectors often include agriculture, infrastructure, and manufacturing.

1. Examples: Industrial Finance Corporation of India (IFCI), National Bank for Agriculture and Rural Development (NABARD).

5. Differentiated Banks

Differentiated Banks cater to specific customer needs or niches. These banks offer specialized products and services to distinct market segments.

1. Types:
   1. Payments Banks: Focus on providing basic banking services such as savings accounts and payments, but cannot lend money.
   2. Small Finance Banks: Provide loans to underserved sectors, such as micro, small, and medium enterprises (MSMEs) and small farmers.

6. Non-Banking Financial Companies (NBFCs)

NBFCs are financial entities that provide services similar to banks, like loans and investments, but do not hold a banking license. They are governed by the Companies Act, 1956, and regulated by the RBI.

Key Differences Between Banks and NBFCs:

Basel Norms

The Basel Norms are a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS). These norms are aimed at ensuring that financial institutions maintain enough capital to cover risks and avoid large-scale financial failures.

1. Basel I: Focused on credit risk and set a minimum capital requirement of 8% of Risk-Weighted Assets (RWA).
2. Basel II: Introduced more comprehensive risk management, including operational and market risks.
3. Basel III: Implemented after the 2008 financial crisis, focusing on capital adequacy, liquidity, and leverage ratios to strengthen the banking system.

Emerging Trends in India's Banking System

1. Domestic Systemically Important Banks (D-SIBs)
   D-SIBs are banks that are considered "too big to fail" due to their significant size and impact on the economy. These banks include State Bank of India (SBI), ICICI Bank, and HDFC Bank.

2. Neobanks
   Neobanks are digital-first financial institutions that operate entirely online without physical branches. They leverage technology to offer low-cost, personalized banking services. Examples in India: RazorpayX, Jupiter, and Open.