The Indian Banking System, what do you know about banks? The function of banks.

What do you know about Banks?

A bank is a financial institution where main purpose is to accept money deposits and lend them to borrowers. It is an intermediary between the depositors and investors. Initially, the main function of banks is accepting money, lending money and investing in various bonds and securities. As the sector evolves, its functions are also expanded. Presently, all kinds of financial transactions are undertaken by banks.

The functions of Banks

  • Banks normally accepts deposits from the public in the form of Savings account, Current account or Term deposits.
  • It lends this money in the form of loans and advances to the public again. Loans may be car loans, personal loans, housing loans, loans related business etc.
  • Banks accept money on behalf of the Government for various purposes such as tax payments.
  • It allows the public to transfer money anywhere in the globe. Earlier demand drafts, banker’s cheques, and money orders were predominantly used for fund transfers. With the onset of digitization in the banking sector, electronic fund transfers replace the maximum of transactions done in old fashion as it has been proven more effective and less time-consuming.
  • Banks offer services such as safe deposit and safe custody facilities.
  • ATM facilities are one of the basic necessities which banks provide.
  • Banks offer an exchange of unusable money which are torn or damaged/mutilated bank notes.
  • It deals with foreign exchange transactions where buying and selling of foreign currencies are done.
  • Banks also deal with other subsidiary products such as Insurance and mutual funds.
  • Various utility payment services are provided by the banks which normally pay with the instructions of customers. This utility service includes telephone, electricity, water bills and school, college fees etc.

The Indian Banking System

In India banks are classified into 2 categories, one is scheduled banks and the others are non-scheduled banks. Those which come under the second schedule of the Reserve Bank of India Act 1934 are called scheduled banks.

The schedule banks are further classified into 4 categories

Public Sector Banks

A bank such as the State Bank of India, nationalized banks and IDBI comes under the category. The majority ownership of these banks is the Government of India which is above 51 percent share capital.

Private Sector Bank

The bank’s shares are held by the public. There are old private-sector banks and new private-sector banks. The banks which were incorporated post-1993 are considered new private sector banks. Other than these, banks such as foreign banks, payment banks and small finance banks are included in this category.

Regional Rural Banks

These banks were established for rural development normally confined to rural areas only. The financial services provided by these banks are far less than those of commercial banks. The majority of the ownership is held by Central Government which is 50 percent. The concerned State Government own 15 percent and the sponsoring bank owned 35 percent.

Co-operative Banks

These banks have a balance sheet much smaller than commercial banks. And not all cooperative banks enjoy the scheduled status. They are registered under the State Cooperative Act. Their regulators are either State Government or Central Government. Cooperative banks which operate in multiple states are under the supervision of the Central Government. In India, we have Urban Cooperative Banks, District Central Cooperative Banks and Land Development Banks.

Difference between scheduled and non-scheduled banks

So, these are some of the basics of the Indian Banking System. It is a vast network of the financial system. Considering the demographic and the diversity of cultures and landmarks, the banking system in the country is quite impressive. On the other hand, there are lots of places, especially in the rural areas where the banking system is yet to introduce.

Hopefully, these days more and more bank branches are opening in these places and people in the unbank areas are starting to have the facilities. Not in the full package but partially as a Customer Service Point or Kiosk where link branches look after its operation. 

The banking sector in India is yet to develop and achieve more milestones in terms of certain areas. Digitisation has helped a huge leap in the past couple of years. 

References are taken from Wikipedia, and RBI websites

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