Banking System in India: History, Types, Structure, Functions

A farmer in rural Bihar depositing cash into a Regional Rural Bank account, and a tech professional in Bengaluru transferring salary through HDFC Bank’s app, are both plugged into the same underlying system — one built, restructured, and rebuilt over more than two centuries, ultimately answering to a single central authority in Mumbai. India’s banking system is a genuinely layered structure, spanning the Reserve Bank of India at the top down through public sector giants, private challengers, foreign institutions, cooperative societies, and specialised differentiated banks. Understanding how it’s actually organised matters whether you’re studying for a banking exam, running a business, or just trying to make sense of why your bank behaves the way it does. Here’s a complete breakdown.

A Brief History of Indian Banking

Understanding today’s structure requires knowing how India’s banking system actually evolved, since each major phase left a permanent mark on how the system is organised now.

• Modern Indian banking traces back to institutions like the Bank of Calcutta, founded in 1806, which eventually evolved into the State Bank of India
• The Reserve Bank of India was established in 1935 and nationalised in 1949, becoming the country’s central regulatory authority
• On July 19, 1969, the government nationalised 14 major commercial banks, fundamentally reshaping who controlled Indian banking
• Private banks were only licensed again after the market liberalisation of the early 1990s, giving rise to institutions like HDFC and ICICI Bank
• More recent decades brought new categories entirely — small finance banks and payment banks were introduced in 2015 specifically to expand financial inclusion

The Reserve Bank of India: The Apex Authority

Every bank operating in India, regardless of category, ultimately answers to the RBI, which sits at the top of the entire structure.

• Functions as India’s central bank, responsible for formulating monetary policy to ensure price stability and economic growth
• Regulates and supervises all scheduled banks, conducting inspections and enforcing compliance
• Manages currency issuance, foreign exchange reserves, and the broader payment and settlement infrastructure
• Introduced off-site surveillance systems and strengthened the role of auditors to improve banking sector oversight over the years

Scheduled vs Non-Scheduled Banks

This is the most fundamental classification in Indian banking, and it determines what privileges and obligations a bank actually has.

• Scheduled Banks are listed in the Second Schedule of the Reserve Bank of India Act, 1934, and must meet specific capital and reserve conditions
• Scheduled status grants access to RBI facilities including borrowing at the Bank Rate and participation in the RBI-managed clearing and settlement system
• Non-Scheduled Banks are typically smaller institutions not included in the Second Schedule, facing a lesser degree of regulation and fewer privileges
• As of 2026, most functioning Indian banks — public, private, foreign, cooperative, and regional rural — fall under the Scheduled category

Commercial Banks: The Core of the System

Commercial banks dominate the Indian banking sector by both assets and branch network, and they’re further divided into four distinct sub-categories.

• Public Sector Banks (PSBs): Majority government-owned, including State Bank of India and 12 nationalised banks, accounting for roughly 60 percent of total banking assets
• Private Sector Banks: Domestically owned by private shareholders, including HDFC Bank, ICICI Bank, and Axis Bank, holding roughly 30 percent of assets
• Foreign Banks: Institutions headquartered outside India but operating through branches or subsidiaries, such as HSBC, Standard Chartered, and Citibank, holding roughly 5 percent of assets
• Regional Rural Banks (RRBs): Sponsored by public sector banks specifically to extend credit to agriculture, small industry, and rural livelihoods

Differentiated Banks: A Newer Category

Introduced by the RBI specifically to serve underserved segments, differentiated banks operate with narrower mandates than full-service commercial banks.

• Small Finance Banks (SFBs): Licensed specifically to serve micro-enterprises, small businesses, and low-income households, with at least 75 percent of credit mandated toward priority sectors
• Payments Banks: Can accept deposits up to ₹2 lakh per customer but are legally barred from issuing loans or credit cards
• Local Area Banks (LABs): A smaller, largely legacy category focused on very specific local geographic areas
• These categories reflect RBI’s deliberate strategy of creating narrower banking licences to reach populations traditional full-service banks found economically difficult to serve

Co-operative Banks: The Community Banking Model

Co-operative banks operate on a fundamentally different ownership principle from commercial banks, built around member ownership rather than shareholder profit.

• Organised on a “one-person-one-vote” principle rather than proportional shareholding
• Divided into Urban Co-operative Banks (UCBs) serving city and town populations, and Rural Co-operative Credit Institutions serving agricultural communities
• Rural cooperative structure further splits into State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies
• Regulated jointly by the RBI and NABARD, though history has shown occasional gaps in oversight, as the 2019 PMC Bank crisis demonstrated

Development Financial Institutions (DFIs)

Beyond deposit-taking banks, India maintains specialised development institutions that fund specific sectors of the economy rather than serving retail customers directly.

• NABARD (National Bank for Agriculture and Rural Development): Funds agricultural and rural development initiatives nationwide
• SIDBI (Small Industries Development Bank of India): Focuses specifically on financing small and medium enterprises
• EXIM Bank: Supports India’s export and import financing needs for businesses trading internationally
• NHB (National Housing Bank): Focuses specifically on housing finance sector development and regulation

Key Functions Across the Entire System

Regardless of category, every layer of India’s banking system performs a core set of functions that keep the broader economy running.

• Accepting deposits from individuals, businesses, and institutions across savings, current, and fixed deposit accounts
• Extending credit through loans, overdrafts, and other lending instruments to individuals and businesses
• Facilitating payments and fund transfers through cheques, UPI, NEFT, RTGS, and other settlement mechanisms
• Supporting monetary policy transmission, since RBI’s interest rate decisions ripple through every bank’s lending and deposit rates
• Identifying certain large institutions as Domestically Systemically Important Banks (D-SIBs) — currently SBI, ICICI Bank, and HDFC Bank — given their outsized impact on financial stability if they were to fail

Frequently Asked Questions

Q1. What’s the practical difference between scheduled and non-scheduled banks for a customer?

Scheduled banks offer stronger regulatory oversight and access to RBI-backed facilities, generally making them a safer choice, while non-scheduled banks carry lesser regulation and typically serve very localised customer bases.

Q2. Are small finance banks and payment banks the same thing?

No, small finance banks can accept deposits and extend loans like a regular bank within specific limits, while payment banks can only accept deposits and process payments — they cannot lend money or issue credit cards at all.

Q3. How many public sector banks exist in India today?

As of 2026, India has 12 public sector banks, a number significantly reduced from decades ago through multiple rounds of government-led mergers and consolidation.

Q4. Why does India have both commercial banks and cooperative banks doing similar work?

Cooperative banks operate on a member-owned, community-focused model prioritising financial inclusion over profit, while commercial banks operate as profit-driven, shareholder-owned institutions — both serve overlapping but philosophically distinct roles in India’s financial system.