UPSC CSEMAINSGS 3ECONOMICPillar 1B1) BANKS CLASSIFICATION

B1) BANKS CLASSIFICATION

TABLE OF CONTENTS

  • 13. Financial Intermediaries → Banks (Definition and Classification)
  • 13.11. Reserve Bank of India (RBI) (History, Composition, Governors, Functions)
  • 13.12. Agency Banks of RBI
  • 13.13. RBI’s Notable Portals (UDGAM, PRAVAAH, Daksh, E-Kuber, etc.)
  • 13.14. Scheduled Banks vs. Non-Scheduled Banks
  • 13.15. Commercial Banks: Pre-Independence History
  • 13.15.1. Nationalization of Banks After Independence (Rounds 1 & 2)
  • 13.16. Consolidation of PSBs (Mergers and Privatization)
  • 13.17. Private Sector Banks (PvB) (Licensing rounds, On-Tap system)
  • 13.18. Foreign Banks (Investment limits, Reciprocal licensing)
  • 13.19. Differential Banks (RRB, LAB, SFB, PB)
  • 13.19.8. Dept of Post: POSB vs. IPPB
  • 13.19.10-13. Digital Banking (Digital Banks, DBUs, Neobanks)
  • 13.20. Cooperative Banks (Urban vs. Rural, Dual Regulation, 2020 Amendment)
  • 13.21. NUCFDC (Umbrella org for UCBs)
  • 13.22. Formal FI → Non-Banking Financial Institutions (DFIs and AIFIs)
  • 13.22.6. NBFCs vs. Commercial Banks (Detailed comparison)
  • 13.23. NBFC Credit Card Issuance (2022 Reform)
  • 13.24. NBFCs Regulated by RBI (ARC, MFI, HFC, Gold Loan, etc.)
  • 13.25. FinTech Companies (P2P, Account Aggregators, Payment Aggregators)
  • 13.26. Self-Regulatory Organisations (SRO)
  • 13.27. NBFCs Regulated by SEBI (Stock Brokers, Mutual Funds, REITs)
  • 13.28. NBFCs Regulated by Others (IRDAI, PFRDA, MCA)
  • 13.29. Shadow Banking
  • 13.30. Islamic Banking (Pro-Bank vs. Anti-Bank arguments)
  • 13.31. Informal Financial Intermediaries (Moneylenders, Indigenous Bankers)

13. FINANCIAL INTERMEDIARIES (FI)

  • Definition: An entity acting as a middleman between lenders (households/investors) and borrowers (entrepreneurs/firms).
  • Subdivisions:
    1. Formal: Regulated (Banks, NBFCs, AIFIs).
    2. Informal: Unregulated (Moneylenders).

13.11. RESERVE BANK OF INDIA (RBI)

Historical Timeline:

  • 1913: Monitoring was lax; no CRR/SLR/Basel norms.
  • 1926: Hilton Young Commission (Royal Commission on Indian Currency) recommended a central bank.
  • 1929: Great Depression caused collapse of 450+ banks in India; Govt became serious about RBI.
  • 1934: RBI Act enacted.
  • 1935 (April): RBI became operational. 1st Governor: Sir Osborne Smith. 1st Viceroy: Willingdon. Govt ownership was only ~4.4%.
  • 1935 (July): 2nd Schedule of RBI Act created "Scheduled Banks" (required to keep CRR).
  • 1943-49: C.D. Deshmukh became the first INDIAN Governor.
  • 1948-49: RBI transferred to Govt ownership via RBI Transfer of Ownership Act 1948.
  • 1949: Banking Regulation Act empowered RBI to license banks, permit branches, prescribe auditing/SLR, and force mergers.

13.11.1. RBI Central Board Composition:

  • Official Directors: Governor + Max 4 Deputy Governors (Tenure: Usually 3 years, re-appointment possible). Selected by FSRASC (headed by Cabinet Sec) and approved by ACC (headed by PM).
  • Non-Official Directors: 2 Govt officials, 10 directors nominated by Govt, 4 directors from local boards (West, East, North, South).

13.11.3. Notable RBI Governors:

  • 1st: Sir Osborne Smith (1935-37).
  • 3rd: C.D. Deshmukh (1st Indian Gov) (1943-49).
  • 13th: M. Narasimham (1st RBI officer to become Gov, 1977).
  • 15th: Manmohan Singh (1982-85).
  • 23rd: Raghuram Rajan (2013-16) – introduced SFB/PB and 2-6% CPI target.
  • 24th: Urjit Patel (2016-18) – Demonetization.
  • 25th: Shaktikanta Das (2018-24) – Withdrew ₹2000 notes.
  • 26th: Sanjay Malhotra (2024 onwards).

13.11.5. Functions of RBI:

  1. Controller of Money Supply: Issues M0, makes Monetary Policy.
  2. Controller of Foreign Exchange: Via FEMA Act.
  3. Banker to Govt: Banker to Union & State; Public Debt Manager.
  4. Banker’s Bank: Lender of Last Resort.
  5. Regulator: Of all Banks (BR Act '49) and NBFC-D/AIFI.
  6. Promotional Roles: Customer protection (Ombudsman) and Financial Inclusion (PSL norms).
  7. Data Publication: Financial Stability Report.
  8. International Cooperation: Member of BASEL, IMF, G20-FSB. Joined NGFS (Network for Greening the Financial System) in 2021.
  • Note: State Bank of Sikkim is outside RBI regulation due to Article 371-F.

13.12. AGENCY BANKS OF RBI

RBI cannot handle all Govt work (tax collection, pension, salary) alone. It appoints Agency Banks (can be both Public and Private sector banks) to perform these on its behalf.

13.13. RBI’S NOTABLE PORTALS

  1. UDGAM (2023): Unclaimed Deposits Gateway to Access inforMation. Search unclaimed deposits (10+ years old) in one place.
  2. PRAVAAH (2023): Platform for Regulatory Application, Validation And AutHorisation. Online licensing for Banks/NBFCs.
  3. Daksh (2022): Web system for Banks/NBFCs to send reports for supervision.
  4. E-Kuber: Core Banking Solution (CBS) of RBI. Handles NEFT, RTGS, Repo, OMO. Retailers can buy G-Secs here.
  5. New Domain Names (April 2025): ‘bank.in’ for banks, ‘fin.in’ for NBFCs to reduce phishing.
  6. FREE-AI (2024-Dec): Ethical AI framework in financial sector.
  7. MuleHunter AI (2024-Dec): Identifies "Mule Accounts" used for money laundering.
  8. Digital Payments Intelligence Platform (2024): To reduce fraud (Hota Committee).
  9. RB-CRIS (2024-Oct): Climate Risk Information System.
  10. Sachet Portal: Lodge complaints regarding investment frauds.
  11. Connect 2 Regulate: Portal for ideas/inputs to RBI.
  12. RBI Podcast (2024-Dec): Wider dissemination of info.

13.14. SCHEDULED BANKS (⚖)

Listed in 2nd Schedule of RBI Act 1934.

  • Conditions: (1) Paid-up capital + Reserves ≥ ₹5 Lakhs. (2) Business not harmful to depositors.
  • Benefits: Access to RBI window (Repo, MSF), more trust, eligible for Govt schemes (PMJDY).
  • Non-Scheduled Banks: Can keep CRR in their own vaults; RBI access is discretionary.

13.15. HISTORY OF COMMERCIAL BANKS

  • 1770: Bank of Hindustan (Calcutta) - European owned.
  • 1806-42: Presidency Banks (Bengal, Bombay, Madras). In 1921, they merged into Imperial Bank of India, which became SBI in 1955.
  • 1894: PNB (Lala Lajpat Rai).
  • 1908: Bank of Baroda.
  • 1940s: Associated Banks of SBI (Bikaner, Jaipur, etc.) merged into SBI in 2017.

13.15.1. Nationalization of Banks

  • Round 1 (1969): 14 private banks with ₹50cr+ deposits (PNB, BoB, Canara, etc.). "Old Private Banks" (Dhanlaxmi, Ratnakar) weren't nationalized because they didn't meet the deposit threshold.
  • Round 2 (1980): 6 banks with ₹200cr+ deposits (Vijaya, Corporation).
  • Reasons: Nexus between industrialists and banks (elite control), reckless lending to directors, failure to open rural branches (financial inclusion).

13.16. CONSOLIDATION OF PSBs

  • A) Merger: Transferring customers/staff/deposits to an "Anchor Bank."
    • Example: SBI merged with its 5 associates + Bharatiya Mahila Bank (2017).
    • 2019 Merger: 10 banks into 4 Anchor Banks (PNB, Canara, Union Bank, Indian Bank). Total PSBs left: 12.
  • B) Privatization: Selling 51%+ shareholding to private parties (e.g., IDBI Bank, Axis Bank).

13.17. PRIVATE SECTOR BANKS (PvB)

  • M. Narasimham Committee (1991): Suggested reducing CRR/SLR and allowing new private banks to solve politicization/union issues.
  • Licensing Rounds:
    • Round 1 (1993-95): ICICI, HDFC, UTI (Axis), IndusInd.
    • Round 2 (2001-04): Kotak Mahindra, Yes Bank.
    • Round 3 (2013-16): Bandhan, IDFC.
  • ‘On-Tap’ Licensing (2016): No need to wait for RBI window; apply anytime if eligibility (10 yrs XP, ₹500cr capital) is met.

13.18. FOREIGN BANKS

  • Incorporated abroad but have subsidiaries in India.
  • Licenses: Given on "Reciprocal Basis."
  • Investment Limits: PSU Banks (Max 20%); Private Banks (Upto 49% automatic, 74% govt approval).

13.19. DIFFERENTIAL BANKS

  • Universal Banks (SBI, HDFC): Do everything.
  • Differential Banks: Specific geography or product focus.
    • RRB (1976): Based on Narasimham Comm. 50% Union, 15% State, 35% Sponsor Bank. PSL: 75%.
    • LAB (1996): Local Area Bank (e.g., Subhadhra). Max 3 districts.
    • Small Finance Bank (SFB): High PSL (75%), 25% rural branches. Minimum capital ₹100cr. Can give loans.
    • Payment Banks (PB): Max deposit ₹2 Lakh. Cannot give loans or credit cards. Must invest deposits in G-Secs. (Airtel, IPPB, Paytm).

13.19.8. POSB vs. IPPB

  • POSB (Post Office Savings Bank): Founded 1873. Deposits go to NSSF. Offers Sukanya Smriddhi.
  • IPPB (India Post Payments Bank): Public Ltd Co (2016). No NRI deposits. Can link with POSB via "SWEEP" facility.

13.19.10-13. DIGITAL BANKING

  • Digital Banks (Proposed): NITI Aayog idea (2021). No physical branches.
  • Digital Banking Units (DBU): Physical kiosks by commercial banks (Budget 2022).
  • Neo-Banks: Completely online platforms (e.g., Jupiter, Fi). RBI has not permitted them yet; they act as UI for licensed banks.

13.20. COOPERATIVE BANKS

  • Features: One Member = One Vote (not based on shareholding). Service motive over profit.
  • Rural Coop: State Coop → DCCB → PACS (Primary Agricultural Credit Societies). Note: PACS are not banks and not regulated by RBI.
  • 2020 Amendment: Urban Coop Banks (UCB) and Multi-State Coop Banks moved from "Dual Regulation" to "RBI ONLY" supervision for banking functions to prevent scams (like PMC Bank).

13.22. FORMAL FI → NON-BANKING (DFIs & AIFIs)

  • DFIs (Development Finance Institutions): Provide medium-to-long term loans for infra/industry. (IFCI, IDBI, NaBFID). They do not accept deposits from public.
  • AIFIs (All India Financial Institutions):
    1. EXIM (1982): Exports/Imports.
    2. NABARD (1982): Agriculture/Rural development. Regulates RRB/Coop.
    3. NHB (1988): Housing finance. (RBI sold its 100% stake to Govt in 2019).
    4. SIDBI (1990): MSME development.
    5. NaBFID (2021): 5th AIFI. Chairman: K.V. Kamath. Targets National Infra Pipeline.

13.22.6. NBFC vs. COMMERCIAL BANKS

ParameterCommercial BanksNBFCs
RegulationRBI (BR Act)RBI/SEBI/IRDAI etc.
DepositsTime & Demand (CASA)Only Time Deposits (if NBFC-D)
DICGC InsuranceYes (up to ₹5 Lakh)No
Chequebook/Debit CardYesNo
CRRApplicableNot Applicable
Credit CardYesYes (Directly since 2022)

13.24. NBFCs REGULATED BY RBI

  • Investment & Credit Co: SREI (machinery).
  • BNPL/Consumer Durable: Bajaj Finserv, Zestpay.
  • Core Investment Co (CIC): Long-term investment in cos (Tata Capital, IL&FS).
  • Infrastructure Debt Fund (IDF): L&T IDF.
  • ARC (Asset Reconstruction): Buy bad loans (NPA).
  • Micro Finance (MFI): Small loans to poor without collateral. Regulated by RBI + Ministry of Corporate Affairs. Borrower income < ₹1.25L (rural) / ₹2L (urban).
  • MUDRA (2015): Owned by SIDBI. Indirect loans for Micro enterprises.
  • Home Loan Companies: Regulated by RBI since 2019 (previously NHB).

13.25. FINTECH COMPANIES

  • P2P Lenders: Connect borrowers and lenders (Faircent, CRED Mint).
  • Account Aggregators (AA): Consolidate financial data (NeSL).
  • Payment Aggregators: Help sellers accept payments (Razorpay).
  • Digital Lenders: RBI Group 1 (Regulated by RBI), Group 2 (Regulated by SEBI/others), Group 3 (Illegal/Unauthorized).

13.26. SRO (Self-Regulatory Organisation)

  • Non-govt org that regulates its own industry to reduce RBI workload (e.g., FACE for FinTech).

13.26.2. CIC vs. CRA

  • CIC (Credit Information Co): Regulated by RBI. Check worthiness of Individuals (e.g., CIBIL). Numerical scores.
  • CRA (Credit Rating Agency): Regulated by SEBI. Rate Companies/Govts (e.g., CRISIL, Moody’s). Alphabetical symbols (AAA).

13.29. SHADOW BANKING

Operating outside traditional banking rules. High risk. Includes HFCs (DHFL), Liquid Debt Mutual Funds (LDMFs), and Retail NBFCs.

13.30. ISLAMIC BANKING

  • Based on "Sharia" (No interest/Riba). Uses profit-sharing (Musharaka/Murbaha).
  • Opposed in India by RBI (2017) because PMJDY is sufficient and specialized manpower is required.

13.31. INFORMAL FINANCIAL INTERMEDIARIES

  • Indigenous Bankers: (Shroff, Marwari) Mobilize via Hundi/bills.
  • Moneylenders: High interest, muscle power. 33% of rural debt.
  • Regulation: Not by RBI, but by State Laws (e.g., Bombay Moneylenders Act 1947).

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🏁 ALL PREVIOUS YEAR QUESTIONS (PYQs)

Q1. (UPSC Prelims 2009) Which was the earliest event to take place? A) Nationalization of insurance companies B) Nationalization of State Bank of India C) Enactment of Banking Regulation Act D) Introduction of first Five year plan (Ans: C - 1949)

Q2. (UPSC Prelims 2012) RBI acts as a bankers’ bank. What does it mean?

  1. Other banks retain their deposits with the RBI.
  2. The RBI lends funds to the commercial banks in times of need.
  3. The RBI advises the commercial banks on monetary matters. Codes: (a) 2 & 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3

Q3. (UPSC Prelims 2013) RBI regulates the commercial banks in matters of:

  1. Liquidity of assets 2) Branch expansion 3) Merger of banks 4) Winding-up of banks Answer Codes: (a) 1 & 4 only (b) 2, 3 & 4 only (c) 1, 2 & 3 only (d) 1, 2, 3 & 4

Q4. (UPSC Prelims 2021) In India, the central bank’s function as the ‘lender of last resort’ means:

  1. Lending to trade and industry bodies when they fail to borrow from other sources.
  2. Providing liquidity to the banks having a temporary crisis.
  3. Lending to governments to finance budgetary deficits. Codes: a) 1 and 2 b) 2 Only c) 2 and 3 d) 3 Only

Q5. (UPSC Prelims 2018) Consider following events:

  1. 1st democratically elected communist party govt in a State in India.
  2. Imperial Bank of India renamed State Bank of India.
  3. Air India nationalised.
  4. Goa became part of independent India. Codes: A) 4–1–2–3 B) 3–2–1–4 C) 4–2–1–3 D) 3-1-2-4

Q6. (UPSC Prelims 2020) Find correct statements:

  1. DCCBs deliver more credit in comparison to Scheduled Commercial Banks and RRBs to agri sector.
  2. Important function of DCCBs is to provide funds to the PACS. Answer Codes: [a) 1 only [b) 2 only [c) Both 1 and 2 [d) Neither 1 nor 2

Q7. (UPSC Prelims 2016) Find correct Statement(s) about Payment Banks?

  1. Mobile telephone companies and supermarket chains are eligible to be promoters.
  2. Payment Banks can issue both credit cards and debit cards.
  3. Payment Banks cannot undertake lending activities. Codes: (a) 1 and 2 only (b) 1 and 3 only (c) 2 only (d) 1, 2 and 3

Q8. (UPSC Prelims 2022) Correct about credit rating agencies (CRA) in India?

  1. They are regulated by the Reserve Bank of India.
  2. ICRA is a public limited company.
  3. Brickwork Ratings is an Indian credit rating agency. Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Q9. (CDS 2018) Find correct about IPPB?

  1. It has been incorporated as a Public Limited Company.
  2. It started operations with pilot branches at Hyderabad and Varanasi. Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
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