The banking structure in India is a critical component of the financial system, regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. This chapter explores scheduled and non-scheduled banks, public sector, private sector, and foreign banks, tailored for UPSC Prelims preparation.
Scheduled Banks
Scheduled banks are listed in the Second Schedule of the RBI Act, 1934, and meet specific criteria, such as a minimum paid-up capital of ₹5 lakh (revised to ₹500 crore in recent guidelines). They enjoy privileges like access to RBI’s liquidity facilities.
Criteria: Adequate capital, sound financial health, and national or public interest.
Types: Include commercial banks (public, private, foreign) and cooperative banks.
Privileges: Access to RBI’s repo/reverse repo, CRR/SLR compliance, and refinancing facilities.
Example: State Bank of India (SBI) and HDFC Bank are scheduled commercial banks, benefiting from RBI’s Liquidity Adjustment Facility (LAF).
Non-Scheduled Banks
Non-scheduled banks are not listed in the Second Schedule of the RBI Act, 1934, and typically have limited operations and capital. They are regulated by RBI but lack access to its liquidity support.
Characteristics: Small-scale operations, often local or regional cooperative banks.
Regulation: Subject to Banking Regulation Act, 1949, but no CRR/SLR obligations.
Examples: Certain urban cooperative banks not meeting scheduled bank criteria.
Example: Some small cooperative banks in rural areas, like local credit societies, operate as non-scheduled banks with limited RBI support.
Public Sector Banks (PSBs)
Public sector banks are commercial banks where the government holds a majority stake (over 50%). They dominate India’s banking sector, focusing on financial inclusion and priority sector lending.
Number (2025): 12 PSBs after mergers (e.g., Punjab National Bank merged with Oriental Bank of Commerce in 2020).
Role: Support government schemes like PMJDY, MUDRA, and agricultural credit.
Challenges: High Non-Performing Assets (NPAs), recapitalization needs (e.g., ₹2.6 lakh crore infused from 2016-2021).
Example: SBI, India’s largest PSB, handles 23% of banking sector deposits and advances, supporting schemes like Jan Dhan Yojana.
Private Sector Banks
Private sector banks are owned by private entities or individuals, known for efficiency, technology adoption, and customer-centric services.
Number (2025): 21 private banks, including HDFC Bank, ICICI Bank, and new entrants like Airtel Payments Bank.
Regulation: Strict RBI oversight, including 40% priority sector lending target.
Growth: Private banks held 36% of deposits and 38% of credit in 2024, per RBI data.
Example: HDFC Bank, India’s largest private bank by market cap, leads in digital banking with innovations like UPI-integrated services.
Foreign Banks
Foreign banks operate in India as branches or wholly-owned subsidiaries, regulated by RBI and their home country’s central bank.
Number (2025): ~46 foreign banks, including Standard Chartered, HSBC, and Citibank.
Role: Focus on corporate banking, trade finance, and wealth management; limited rural presence.
Regulation: Must meet 40% priority sector lending, with sub-targets for agriculture and MSMEs.
Example: Standard Chartered, operating since 1858 in India, provides trade finance for exporters, contributing to India’s global trade.
Key Concepts for Prelims
Understanding related terms is crucial for UPSC Prelims.
Priority Sector Lending (PSL): Mandatory 40% of adjusted net bank credit for sectors like agriculture, MSMEs, and weaker sections.
Non-Performing Assets (NPAs): Loans overdue for 90+ days; PSBs reported 5.0% gross NPAs in 2024, per RBI.
Bank Nationalization: 14 banks nationalized in 1969, 6 in 1980, forming the backbone of PSBs.
Insolvency and Bankruptcy Code (IBC), 2016: Facilitates NPA resolution, recovering ₹3.1 lakh crore by 2024.
Key Points for Prelims
RBI, established in 1935, regulates banks under Banking Regulation Act, 1949.
Scheduled banks dominate India’s banking sector; non-scheduled banks are marginal.
PSBs merged from 27 to 12 by 2020 to enhance efficiency and scale.
Private banks lead in digital innovation; foreign banks focus on corporate clients.
Financial inclusion is driven by PSBs through schemes like PMJDY (50 crore accounts by 2024).
Summary of Banking Structure in India
Category
Description
Examples
Scheduled Banks
Listed in RBI Act, access to RBI facilities
SBI, HDFC Bank, HSBC
Non-Scheduled Banks
Small-scale, no RBI liquidity support
Local cooperative banks
Public Sector Banks
Government-owned, focus on inclusion
SBI, Punjab National Bank
Private Sector Banks
Privately owned, tech-driven
HDFC Bank, ICICI Bank
Foreign Banks
Foreign-owned, corporate focus
Standard Chartered, Citibank
Frequently Asked Questions (FAQs)
Q1: What distinguishes scheduled banks from non-scheduled banks?
Ans: Scheduled banks are listed in the RBI Act’s Second Schedule, have access to RBI’s liquidity facilities, and meet stringent criteria, while non-scheduled banks lack these privileges and operate on a smaller scale.
Q2: Why are public sector banks critical for financial inclusion?
Ans: PSBs implement government schemes like PMJDY and provide credit to priority sectors, ensuring banking access in rural and underserved areas.
Q3: What challenges do foreign banks face in India?
Ans: Foreign banks struggle with limited branch networks and high PSL requirements, restricting their rural outreach compared to domestic banks.
Practice Questions for Prelims
Explain the differences between scheduled and non-scheduled banks with examples.
Discuss the role of public sector banks in India’s financial inclusion efforts.
How do private sector banks contribute to India’s banking sector growth?
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