5. Banking System in India

Public sector banks

Government owns the majority stake, such as State Bank of India and Bank of Baroda

Private sector banks

Majority owned by private shareholders, such as HDFC Bank and ICICI Bank

Foreign banks

Headquartered abroad, operating through branches or subsidiaries in India

Regional Rural Banks (RRBs)

Set up in 1975 (RRB Act, 1976) to serve rural areas. Owned 50% Centre, 15% State, 35% sponsor bank

Small Finance Banks (SFBs)

Serve small borrowers and unserved groups. At least 75% of credit must go to the priority sector

Payments Banks

Accept deposits and offer payment services, but cannot lend. Deposit limit is Rs 2 lakh per customer

Local Area Banks

Small banks working within a few districts; introduced in 1996

Cooperative banks

Owned by members: Urban Cooperative Banks, State and District Cooperative Banks, and Primary Agricultural Credit Societies (PACS) at village level

Remember

• Small Finance Banks and Payments Banks were suggested by the Nachiket Mor Committee (2014).

• The first Payments Bank to start work was Airtel Payments Bank in 2016.

• Cooperative banks were brought under closer RBI supervision by the Banking Regulation (Amendment) Act, 2020.

1770

Bank of Hindustan, among the earliest banks

1806 to 1843

Presidency Banks: Bank of Bengal, Bank of Bombay and Bank of Madras

1921

The three Presidency Banks merged into the Imperial Bank of India

1935

Reserve Bank of India set up

1949

RBI nationalised; Banking Regulation Act, 1949 passed

1955

Imperial Bank became the State Bank of India

19 July 1969

14 major banks nationalised (deposits above Rs 50 crore)

15 April 1980

6 more banks nationalised (deposits above Rs 200 crore)

1991 onwards

Liberalisation, entry of private banks, and the Narasimham Committee reforms

2017 to 2020

Merger of public sector banks, reducing their number from 27 to 12

Narasimham Committee I (1991)

Reduce SLR and CRR; free interest rates; introduce prudential norms and capital adequacy; set up special tribunals for loan recovery (leading to Debt Recovery Tribunals in 1993)

Narasimham Committee II (1998)

Raise capital adequacy to 9%; merge strong banks; reduce NPAs; strengthen the banking system after the 1991 reforms

Basel I (1988)

Minimum capital to risk-weighted assets of 8%; focus on credit risk

Basel II (2004)

Three pillars: minimum capital, supervisory review and market discipline

Basel III (after 2008)

Better quality capital, a capital conservation buffer, a leverage ratio and liquidity ratios (LCR and NSFR)

Sub-standard asset

NPA for up to 12 months

Doubtful asset

NPA for more than 12 months

Loss asset

Considered uncollectable by the bank or auditors

Debt Recovery Tribunals (DRTs)

Set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993

SARFAESI Act, 2002

Lets banks take over and sell the security of a defaulter without going to court; does not apply to agricultural land

Asset Reconstruction Companies (ARCs)

Buy bad loans from banks and try to recover them

Insolvency and Bankruptcy Code (IBC), 2016

Time-bound resolution through the NCLT, with a limit of about 330 days; regulated by the Insolvency and Bankruptcy Board of India (IBBI)

Prompt Corrective Action (PCA)

RBI restrictions on weak banks, triggered by low capital, high NPAs or poor profitability

National Asset Reconstruction Company Ltd (NARCL)

The "bad bank" set up in 2021 to take over large stressed loans

Remember

• Indradhanush (2015) was a seven-point plan to revive public sector banks: Appointments, Bank Board Bureau, Capitalisation, De-stressing, Empowerment, Accountability and Governance reforms.

• The Asset Quality Review (2015) forced banks to recognise hidden bad loans.

• The 4Rs of bank clean-up: Recognition, Resolution, Recapitalisation and Reforms.

Pradhan Mantri Jan Dhan Yojana (2014)

Zero-balance bank accounts, a RuPay card, accident insurance cover and an overdraft facility

PM Mudra Yojana (2015)

Collateral-free loans to micro enterprises, in three stages: Shishu, Kishore and Tarun

Stand-Up India (2016)

Bank loans for women and for SC/ST entrepreneurs to start new businesses

Atal Pension Yojana

Pension scheme for workers in the unorganised sector

NEFT

Electronic funds transfer in batches; available 24x7

RTGS

Real-time settlement for large payments; minimum Rs 2 lakh

IMPS

Instant interbank transfer through mobile, available 24x7

UPI

Instant mobile payments, launched in 2016 by the National Payments Corporation of India (NPCI)

e-Rupee (CBDC)

Digital form of the rupee issued by the RBI, in pilot since 2022

Quick Recall

• Bank nationalisation: 14 banks in 1969; 6 banks in 1980.

• Imperial Bank became SBI in 1955; public sector banks reduced from 27 to 12 after mergers.

• NPA: overdue for more than 90 days; categories are sub-standard, doubtful and loss.

• SARFAESI Act 2002; IBC 2016; DRTs 1993.

• DICGC insurance: Rs 5 lakh per depositor per bank.

• SFBs: 75% priority sector lending; Payments Banks cannot lend.

• Basel III: CRAR 9% + 2.5% conservation buffer in India.