Before studying the types of banks in India or classification of banks first we should understand the bank. Banks are financial institutions that perform deposits and lending of money.
There are various types of banks in India and each is responsible to perform different functions as per the formation and guidance of RBI, which reflects that India is a mixed economy.
The banking system is a core pillar of any nation’s economy. For that, each country has a central bank that regulates the banking system by controlling all banks in that country.
In this article we will do a deep study of the classification of banks in India but, if you want to study the types of banks in India thoroughly then we should start with the history of Indian banking.
Table of Content
History of the Indian Banking System
Before studying the types of banks in India, first we will have to understand the chronology of banking.
A vast chronicle of banking history describes that people were banking on the concept of the barter system. Actually, that was not banking, that was simply a combination of need, demand, and supply.
The organized banking system in India began in the late 18th century. As per the history of banking in India, the banking system was introduced by Europeans.
Alexander and company was the first European company that introduced the banking system in India but over a period of time, different types of banks were introduced in India as per the need.
As per RBI Act 1934: the Reserve Bank of India is the central bank of India. Reserve Bank of India regulates all different types of Banks in India.
- The First bank was “The Bank of Hindostan” in the banking history which was established in the year 1770 in Calcutta by “Alexander and Company” which was a European company.
- In the year 1806 Bank of Calcutta was established which was renamed in the year 1809 as Bank of Bengal.
- In the year 1840 Bank of Bombay and in the year 1843 Bank of Madras were established.
- In the year 1921, The Imperial Bank of India came into existence by the amalgamation of all three presidency banks (Bank of Bengal, Bank of Bombay, and Bank of Madras).
- In the year 1865 India’s oldest first commercial & joint-stock Bank “Allahabad Bank” was established.
- In the year 1894 Punjab National Bank was founded in Lahore, Pakistan.
- After independence on 1 July 1955, the imperial bank of India was nationalized and renamed as State Bank of India as per SBI Act 1955.
- In the year 1975, the Regional Rural Banks were established.
- In the year 1991, post-liberalization, the concept of a new generation private bank was introduced.
- In the year 2013, The RBI introduced the modern generation of private banks that is Small finance banks and Payments banks.
The Indian banks are divided into several sorts as per their functions and responsibilities. Let us learn about the classification of banks.
Banks are classified into various types. Given below are the different types of Banks in India:
Reserve Bank of India:
Classification of Banks starts from the central bank of India i.e. Reserve Bank of India.
The Reserve Bank of India is a governing body under the Ministry of Finance, Government of India that regulates all types of banks in India.
The central bank acts as the Government’s Bank. In other words, the Reserve Bank of India may also be known as the banker’s bank as it provides assistance to the other banks of the country.
Given below are the functions of the Reserve Bank of India
- Financial Supervision
- Regulator and supervisor of the financial system
- Issue of currency
- Regulator of the Banking system
- Banker and debt manager to government
- Banker’s Bank
- Implementing the monetary policies
- Custodian to Foreign exchange
- Monitoring of all different types of banks in India.
Scheduled Banks:
Bank Classification in India starts with scheduled banks. Scheduled Banks are the banks that are listed in the second schedule of the RBI Act, 1934 Section 2(e). In the second schedule, only those banks are get listed that satisfy the criteria of RBI Act 1934, Section 42.
Scheduled Banks have to maintain a paid-up capital of Rs. 5 lakhs and above along with the average daily Cash Reserve Ratio balance with the Reserve Bank of India at a prescribed rate. The RBI allows scheduled Banks to raise debts and loans at bank rates.
All 4 types of banks in India commercial banks, co-operative banks, small finance banks, and payment banks, fall under the scheduled bank’s category. All 4 types of banks are members of the RBI clearinghouse.
Scheduled bank classification in India into:
- Commercial banks
- Co-operative banks
- Small finance banks
- Payments banks
1. Commercial Banks
Commercial banks are regulated by the Banking Regulation Act 1949. Commercial Banks operate with a head office and network of branch offices spread throughout the country. Commercial banks are one of the types of banks in India.
The main functions of commercial banks are: to accept deposits from the public and grant loans to individuals, traders, and industries at a defined rate of interest in order to earn profit and to offer other basic financial services to business organizations.
They also provide other services like remittance of funds, locker facility, collection of cheques, issue letter of credit, bank guarantees, business loans, cash credit limit facility, overdraft facilities, purchase and sale of bonds and securities, etc.
Commercial banks are divided into:
- Public Sector Banks
- Private Sector Banks
- Regional Rural banks
- Foreign Banks
1.1 Public Sector Banks
- Classification of banks in India starts from public sector scheduled banks.
- Public sector banks are nationalized banks.
- In public sector banks, the majority of shares i.e. more than 50% are held by the Government of India.
- 14 private banks that accounted for 85% of bank deposits in the country at that time were nationalised on July 19, 1969. The net demand and time liability was Rs. 50 crore and above for all 14 banks.
- 6 private banks also nationalised in the year 1980 with a net demand and time liability of Rs. 200 crores and above
- From time to time the government of India took the decision to restructure the banking system. In the year 2017, all associate banks along with Bhartiya Mahila Bank were merged with the State Bank of India.
- In the year 2019, Dena Bank and Vijaya Bank both merged with Bank of Baroda.
- And the recent merger was completed in the year 2021, in which 10 public sector banks were merged and formed 4 banks.
There are a total of 12 nationalised banks in the country namely below:
| Anchor Bank | Merged Banks | Head Quarter | Established Year |
| Bank of Baroda | Vijaya Bank, Dena Bank | Vadodara, Gujrat | 1908 |
| Bank of India | Mumbai | 1906 | |
| Bank of Maharashtra | Pune | 1935 | |
| Canara Bank | Syndicate Bank | Bengaluru, Karnataka | 1906 |
| Central Bank of India | Mumbai | 1911 | |
| Indian Bank | Allahabad Bank | Chennai, Tamilnadu | 1907 |
| Indian Overseas Bank | Chennai, Tamilnadu | 1937 | |
| Punjab and Sindh Bank | New Delhi | 1908 | |
| Punjab National bank | Oriental Bank of Commerce, United Bank of India | Newdelhi | 1894 |
| State Bank of India | State Bank of Saurashtra, State Bank of Indore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, Bhartiya Mahila Bank | Mumbai | 1955 |
| UCO Bank | Kolkata | 1943 | |
| Union Bank of India | Andra Bank, Corporation bank | Mumbai | 1919 |
1.2 Private Sector Banks
- Banks in which a major stake or equity is held by private shareholders. All the banking rules and regulations laid down by the RBI will be applicable to private sector banks as well.
- When the economic reforms were taking place in the early nineties the role of private banks was recognized.
- Financial sector reforms were set up in the year, 1991 under Shri M. Narasimham Committee.
- From the year 1993 to the year, 2020 RBI issued banking licenses to different types of banks in India.
- In the year, 1993 the initial minimum paid-up capital was raised from ₹100 crores to ₹200 crores, which was required to be raised further to ₹300 crores within three years of commencement of business.
- The objective of financial reforms and providing licenses to the private banks in the year,1991 was to bring competition and efficiency to the banking industry.
Given below is the list of private-sector banks in India-
| Bank name | Established | Headquarter |
| Axis Bank | 1993 | Mumbai, Maharashtra |
| Bandhan Bank | 2015 | Kolkata |
| CSB Bank | 1920 | Thrissur, Kerala |
| City Union Bank | 1904 | Thanjavur, Tamilnadu |
| DCB Bank | 1930 | Mumbai, Maharashtra |
| Dhanlaxmi Bank | 1927 | Thrissur, Kerala |
| Federal Bank | 1931 | Kochi, Kerala |
| HDFC Bank | 1994 | Mumbai, Maharashtra |
| ICICI Bank | 1994 | Vadodara, Gujarat |
| IDBI Bank | 1964 | Mumbai, Maharashtra |
| IDFC First Bank | 2015 | Mumbai, Maharashtra |
| IndusInd Bank | 1994 | Mumbai, Maharashtra |
| Jammu & Kashmir Bank | 1938 | Srinagar, Jammu & Kashmir |
| Karnataka Bank | 1924 | Mangaluru, Karnataka |
| Karur Vysya Bank | 1916 | Karur, Tamil Nadu |
| Kotak Mahindra Bank | 2003 | Mumbai, Maharashtra |
| Nainital Bank | 1922 | Nainital, Uttarakhand |
| RBL Bank | 1943 | Mumbai, Maharashtra |
| South Indian Bank | 1929 | Thrissur, Kerala |
| Tamilnad Mercantile Bank | 1921 | Thoothukudi, Tamil Nadu |
| Yes Bank | 2004 | Mumbai, Maharashtra |
1.3 Regional Rural Banks
As we are studying the classification of banks in India. Regional Rural Bank is one of them. RRBs were established to serve rural India.
- Regional Rural Banks were established under the provisions of an ordinance passed on 26 September 1975 and the RRB Act 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors. As a result, five RRBs were set up on 2 October 1975 on the recommendations of the Narsimha Committee on Rural Credit.
- RRBs are joint ventures among the Central government (50%), the State government (15%), and Commercial Bank (35%). Authorized paid-up capital for RRBs is Rs 5 crores.
- These are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural labours, marginal farmers, and small enterprises. They usually operate at regional levels in different states of India and may have branches in selected urban areas as well.
- There are a total of 56 Regional Rural Banks in India.
- Functions of RRBs are decided by the sponsor bank with the consultation of NABARD.
Other important functions carried out by RRBs include-
- Providing banking and financial services to rural and semi-urban areas
- Government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc.
- Para-Banking facilities like debit cards, locker facilities, etc.
1.4 Foreign Banks
Foreign banks are supposed to provide banking services to multinational clients, industries, corporates, etc.
- A bank that has to follow a dual banking regulation system in a country is known as a foreign bank.
- These banks follow the regulations of their home country as well as the country in which they are operating.
- Such types of banks in India have their headquarters in a foreign country but operate in India.
- Foreign banks have presence in India with 2 models. Either through branches or Wholly Owned Subsidiaries.
- The initial minimum paid-up equity capital shall be 5 billion.
2. Co-operative Bank
In different types of banks in India cooperative banks are also scheduled banks same as commercial banks.
Cooperative banks are small-sized financial institutions that are structured on a cooperation basis, established under the Co-operative Societies Act of different states and are regulated by the Reserve Bank of India (RBI).
All cooperative banks in India are owned by their customers or members who are farmers, small traders and others. Cooperative banks work on the principle of “no profit, no loss”.
The objectives of cooperative banks are to provide different types of banking services like deposits and granting loans, protecting the poor people from the local money lenders by providing loans at low rates, like farmers, poor people, small businesses, local small industries, small funds for self-employment in urban and rural areas, major finance to agriculture-based activities like farming, horticulture, livestock and hatcheries.
Cooperative banks are divided into two types of banks
- Urban Co-operative Banks (UCBs)
- State Cooperative Bank (SCBs)
- Urban Cooperative Banks: Urban cooperative banks provide services to urban and rural areas. Urban cooperatives banks raise their working capital from share capital contributed by cooperative societies, deposits, borrowings and other sources.
- State Cooperative Banks: State cooperative banks are state-owned cooperative banks. State cooperative banks also raise their working capital from share capital contributed by cooperative societies, deposits, borrowings and other sources. State cooperative banks manage the urban cooperatives banks by accepting deposits and granting loans. Urban cooperative banks are not allowed to accept surplus cash from each other. They route the cash flow through state cooperative banks.
3. Payment Bank
Payments banks are modern generation banks in the category of different types of banks in India.
The introduction of payment banks to the Indian banking system was a revolutionary step taken by RBI. These types of banks are introduced for financial inclusion, benefit of small businesses, low-income households and migrant workers.
In the year 2013 RBI formed a committee for bringing the unserved and underserved sections of the society into the mainstream of financial inclusion. The committee was headed by Mr. Nachiket Mor.
On the recommendation of the Nachiket Mor Committee, in the year 2014 RBI released the guidelines for payment banks.
Finally, in the year 2015 RBI granted banking licenses under section 22 (1) of the banking regulation act, 1949.
Initially, RBI issued payment bank licenses to 11 entities to launch payment banks but out of these 3 entities surrendered the license.
List of banks who got payment bank license under classification of banks.
| Payment Bank | Year of Establishment | Headquarters | Current status |
| Cholamandalam Distribution Services | 2017 | surrendered the license | |
| Sun Pharmaceuticals | 2017 | surrendered the license | |
| Tech Mahindra | 2017 | surrendered the license | |
| Aditya Birla Payments Bank | 2018 | defunct payments banks in 2019 | |
| Vodafone m-pesa Limited | 2017 | defunct payments banks in 2019 | |
| Airtel payments Banks | 2017 | New Delhi, Delhi | Operational |
| India Posts payments banks | 2018 | New Delhi, Delhi | Operational |
| Fino payments banks | 2017 | Mumbai, Maharashtra | Operational |
| Jio payments banks | 2018 | Mumbai, Maharashtra | Operational |
| Paytm payments banks | 2017 | Noida, Uttar Pradesh | Operational |
| NSDL Payments Banks | 2018 | Mumbai, Maharashtra | Operational |
As various types of banks in India, payment banks are also scheduled banks like commercial banks. As per RBI guidelines, payment banks have to fulfill all the necessary parameters for a banking license like:
- The minimum paid-up equity capital of Rs. 100 Crores was decided for payment banks. Banks have to maintain net demand and time liability of 100 crores and above to set up a payment bank.
- Payment banks have to maintain the Cash Reserve Ratio (CRR) with RBI as other commercial banks do.
Important RBI Guidelines and Features of Payment Banks:
Payment banks are scheduled banks like commercial banks. Payment banks are allowed to serve all banking services to the customers like various types of banks in India but with certain restrictions.
- Payment banks can open savings and current accounts. Payment banks pay interest on saving account deposits as other commercial banks pay.
- All types of current accounts can be opened: individual current account, a sole proprietorship firm, partnership firm, limited liability partnership firm (LLP), private limited company, public limited company, trust, society, an association of persons(AOP), Hindu undivided family(HUF)
- As per the RBI guidelines, initially at the time of license payment banks could hold a maximum day-end balance of ₹ 1 lakh per customer. On April 8, 2021, RBI had doubled the limit, the maximum balance a customer can hold at end of the day in a Payment Bank is ₹2 lakh.
If the customer’s deposit with a payment bank at the end of the day exceeds Rs 2 lakh, an auto sweep arrangement allows the payment bank to open a fixed deposit account with another commercial bank on behalf of the customer to park the surplus amount in form of fixed deposit.
This day-end balance limit is imposed on the sum of your wallet balance, savings account balance and current account balance.
The total balance in your Current Account is the sum of your Current Account balance and FD invested. - Payment banks can issue ATM or debit cards to their customers but cannot issue a credit cards.
- As per the RBI guidelines, Payment Banks cannot offer loans/credits facilities to the customers.
- Payment bank customers are allowed to make payments using IMPS, NEFT, RTGS, and UPI.
- RBI allows payment banks to issue chequebook.
- Payment banks are allowed to transfer payments through any channels like branches, Automated Teller Machines (ATM), business correspondents etc.
- RBI allows payment bank’s current account customers to make personal payments and receive remittances from the cross border in the current accounts.
- As per RBI, payment banks are strictly restricted to accept deposits from Non-Resident Indians (NRIs).
- RBI allows payment banks to work as a partner with other commercial banks and also can sell mutual funds, pension products, and insurance products.
- Payment banks provide internet and mobile banking services to customers.
4. Small Finance Banks
Like Payment banks, Small Finance Banks are also modern generation banks in the category of various types of banks in India.
There was a huge gap in society regarding financial inclusion. In society, there was a huge section of the population who was unserved and underserved by the financial and banking services.
For any developing and growing nation, it is very important to bring society into the mainstream of financial inclusion with the help of classification of banks.
For filling up the financial inclusion gap, RBI introduced a new generation of modern banks into the banking system. These are called Small Finance Banks.
The objectives of small finance banks are to provide financial inclusion services to small business enterprises, small and marginal farmers, micro and small industries and various other entities of the unorganized sector.
On the recommendation of the Usha Thorat Committee, in the year 2014 RBI added one more types of bank in the category of classification of banks.
In the year 2014 RBI introduced and released the guidelines for small finance banks. RBI gave the small finance bank license to the NBFCs and Urban Co-operative Banks (UCBs),
Important RBI Guidelines and Features of small finance Banks:
- The minimum paid-up equity capital for a small finance bank is Rs.200 crore at the time of commencement of business.
Minimum paid-up capital of Rs. 200 crore is applicable for NBFCs who transiting to Small Finance Bank.
But Urban Co-operative Banks (UCBs) that transiting to Small Finance Bank, the minimum paid-up equity capital of Rs. 100 Crores was decided at the time of commencement of business. - Banks will have to increase the minimum paid-up equity capital to Rs. 200 crores within five years from the date of commencement of business.
- Small Finance Banks have to open at least 25 percent of their banking outlets in unbanked rural centers.
- The small finance bank will be required to use the words “Small Finance Bank” in its name in order to differentiate it from other banks.
- Small finance banks have to maintain a minimum capital adequacy ratio of 15 percent of their risk-weighted assets (RWA) on a continuous basis.
- As per RBI guidelines, promoters shall hold a minimum of 40 percent of the paid-up equity capital of the bank, which shall be locked in for a period of five years from the date of commencement of business of the bank.
The promoter’s stake should be brought down up to 30 percent of the paid-up equity capital of the bank in 10 years and up to 15 percent of the paid-up equity capital of the bank in 15 years from the date of commencement of business of the bank. - Foreign Direct Investment (FDI) in small finance banks is applicable as per the Foreign Direct Investment (FDI) policy for private sector banks.
- Small finance banks have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI guidelines.
- Small finance banks can serve financial services like mutual funds, insurance products, pension products, etc but with the prior approval of RBI.
- Small finance banks can transform into full-fledged banking (universal bank) units after fulfilling the norms set by RBI.
- To fulfilling the objectives of RBI for which small finance banks are set up, banks are required to extend 75 percent of their Adjusted Net Bank Credit (ANBC) to the priority sector lending (PSL).
- At least 50 percent of its loan portfolio should constitute loans and advances of up to Rs.25 lakh. The criteria for the upper limit of Rs.25 lakh shall be borrower wise.
- The small finance bank cannot be a Business Correspondent (BC) for another bank. it can have its own Business Correspondent (BC) network.
- Small finance banks come under RBI’s Banking Ombudsman Scheme, 2006.
Non Scheduled Banks:
In the category of different types of banks in India, Non-Scheduled banks are special types of banks.
Non-Scheduled banks are not listed in the second schedule of the Reserve Bank of India Act, 1934, that is why these banks do not adhere to RBI’s regulations. Therefore it is difficult to serve and protect the depositor’s interests. Like scheduled banks.
Non-scheduled banks also have to maintain the cash reserve but not with Reserve banks, but with themselves. These banks are small and risky to do business due to their financial limitations.
Non-Scheduled banks have below 5 lakh reserve paid-up capital.
As per classification of banks, Non-scheduled banks are divided into three categories:
1. Non-Scheduled State Cooperative Banks
2. Non-Scheduled Urban Cooperative Banks
3. Non-Scheduled Local Area Banks.
As per the latest updated list by the Reserve Bank of India, there are 10 Non-Scheduled State cooperative banks and 1470 non-scheduled urban cooperative banks in India.
List of Non-Scheduled State Co-operative Banks (10)
| Sr. No. | Name of State Co-operative Bank |
| 1 | The Andaman and Nicobar State Co-operative Bank Ltd. |
| 2 | The Arunachal Pradesh State Co-operative Apex Bank Ltd. |
| 3 | The Assam Co-operative Apex Bank Ltd. |
| 4 | The Chandigarh State Co-operative Bank Ltd. |
| 5 | The Jammu and Kashmir State Co-operative Bank Ltd. |
| 6 | The Jharkhand State Cooperative Bank Ltd. |
| 7 | The Manipur State Co-operative Bank Ltd. |
| 8 | The Mizoram Co-operative Apex Bank Ltd. |
| 9 | The Nagaland State Co-operative Bank Ltd. |
| 10 | The Daman and Diu State Co-operative Bank Ltd. *** |
*** Unlicensed: The Daman and Diu State Co-operative Bank Ltd is a bank that is not licensed by the Reserve bank of India.
Earlier there were 4 non-scheduled Local Area Banks, among them one local area bank that was Capital Local Area Banks Ltd. was converted into Capital Small Finance Banks on April 24, 2016.
The Reserve Bank of India on December 24, 2020, canceled the Banking Licence of Subhadra Local Area Bank Ltd under section 22 of the banking regulation act, 1949.
At present, there are only two non-scheduled local area banks that are in function
| Sr. No. | Name of Non-Scheduled Local Area Banks |
| 1 | Coastal Local Area Bank Ltd. |
| 2 | Krishna Bhima Samruddhi Local Area Bank Ltd. |
In different types of banks in India, Non-scheduled Banks are not eligible for any kind of financial assistance from the Reserve Bank except in emergencies. Even Non-Scheduled Banks are not allowed to facilitate inter-bank financial transactions with scheduled banks and the clearance of cheques.
Reference: “List of Banks in India”: Wikipedia
Reference: “Foreign Banks“: RBI Circular