Detailed Analysis of the Indian Banking Structure & Its Market Size

India’s banking system forms a core part of the country’s economy. It consists of several individuals and entities who provide financial services to consumers and businesses, thereby contributing to the smooth flow of the nation's economy.

In this blog, you will find a detailed analysis of the Indian Banking system, its structure, market size and more.

History of the Indian banking system

India’s banking system has a history that dates back to way before independence was achieved in the country.

Early years
The first bank was established in Calcutta in 1770 and was called the Bank of Hindustan. It was run by the British and its operations continued till 1832.
Then, the English started to build their factories in different parts of the country and 3 different banks were set up - Bank of Bengal (1809), Bank of Bombay (15 April 1840) and Bank of Madras (1 July 1843).
For a long time, these three banks worked like quasi-central banks and in 1861, got the rights to issue currency. Then, in 1921, these three banks joined forces and became the Imperial Bank of India. In 1955, this bank became nationalised and was renamed the State Bank of India.
Gradual growth
Several new banks were slowly being established - Allahabad Bank (1865), Punjab National Bank (1894), Bank of India (1906), Bank of Baroda (1908) and more. In 1911, the Central Bank of India started its operations. It was India’s first commercial bank that was entirely run by Indian people.
In 1946, the Bank of India set its foot on foreign soil, opening its first branch in London and in 1974, it opened a branch in Paris. Now, up till this time period, most of the banks were privately owned. This caused a major problem as most of the farmers and common people still had to rely on moneylenders for their credit needs.

Formation of nationalised banks

In 1949, the Indian Government passed the Banking Regulation Act and the process of nationalising major banks was initiated. As a result, several top banks like Punjab National Bank, Dena, Bank of Baroda, Corporation Bank, Oriental Bank of Commerce, etc. were nationalised.

Now, before the Reserve Bank of India (RBI) came into being, the Imperial Bank of India was functioning as the nation’s central bank. The first proposal to establish the RBI came up in 1926 from the Royal Commission on Indian Currency or the Hilton Young Commission.

Then, in 1934, the British passed the Reserve Bank of India Act and established the RBI. At first, the reserve bank worked majorly as a private entity of which the government did not have much share.

However, on January 01, 1949, all of RBI’s shares were transferred to the Central Government and the bank became nationalised. Furthermore, the Banking Regulation Act of 1949 granted RBI the power to issue licences to corporations for opening banks, granting permission to existing banks for opening new branches, making it mandatory for them to follow liquidity and auditing standards, etc.

Structure of the Indian banking system

India’s banking structure can be divided into the following:

Central bank

The central bank or the Reserve Bank of India is the apex of India’s banking system. It acts as a regulatory body for all the banks in the country and makes rules and regulations to ensure the proper functioning of the entire banking network. Moreover, it also enforces rules and takes strict action against non-compliance.

Commercial banks

Below the central bank lie the commercial banks. These are financial institutions that offer banking services to the general public, businesses and governments.

Their main functions include accepting deposits, providing loans and advances, discounting bills of exchange, providing locker facilities, buying and selling securities and more.

The commercial banking segment can be further classified into the following categories:

Public Banks
Private Banks
Regional Rural Banks
Foreign Banks

Some popular examples of Indian commercial banks are the State Bank of India (SBI), Punjab National Bank (PNB), Housing Development Finance Corporation (HDFC) Bank, etc.

Co-operative Banks
Co-operative banks are small financial institutions in which the founding members themselves are the customers of the bank. They are usually formed by people belonging to the same profession or region and have the aim to help the economically deprived sections of their community.
These banks work on the principles of 'no profit, no loss' and 'one shareholder, one vote'. Thus, they have a completely different organisational setup, operation scopes, interest rates, governance mechanisms, etc. that sets them apart from commercial banks.
The types of co-operative banks are as follows:
A few examples in this regard are the Gujarat State Co-operative Bank, Bihar State Co-operative Bank, Andhra Pradesh State Co-operative Bank, etc.
- State Co-operative Banks
- Urban Co-operative Banks
- Primary Co-operative Banks
- Area Development Banks
Small finance banks
Small finance banks are entities that operate in underdeveloped and rural areas. They aim to promote financial inclusion by providing banking services to marginal farmers, small businesses and individuals belonging to the underserved sections of the society.
Like other banks, they can take deposits and issue loans to their customers. Furthermore, these institutions can also take part in foreign exchange transactions and deal in mutual funds, pensions and insurance products with prior permission from the RBI.
Examples are Capital Small Finance Bank Limited, Ujjivan Small Finance Bank Limited, North East Small Finance Bank and more.
Scheduled banks
Scheduled banks are financial institutions that are present under Schedule II of the 1934 Reserve Bank of India Act. They are mainly banks that work under the RBI, requiring to have raised funds and paid-up capital of minimum ₹5 lakhs.
These banks are also members of clearing houses and help maintain the required average daily cash ratio set by the RBI. They can belong to the public, private or foreign sector and provide all the banking services permitted by the central bank.
A few examples in this regard are State Bank of India, Axis Bank Ltd., etc.
Non-scheduled banks
Non-scheduled banks are entities that do not fall under RBI guidelines and are not mentioned in the Schedule II of the 1934 Reserve Bank of India Act. They are not under the obligation to maintain a daily average cash ratio with the central bank and operate on a small scale.
Baroda City Co-operative Bank and Kolhapur's Subhadra Local Area Bank Ltd. are a few examples.
Payments banks
Payment banks are financial institutions that provide banking services in underbanked and unbanked regions. They generally operate on a small scale and aim to propagate financial inclusion by assisting small businessmen, low-income groups, migrant labour force, etc.
They can take a maximum deposit of ₹2 lakh from each customer and can accept demand deposits via savings and current accounts. However, payment banks do not have the authority to issue loans and credit cards.
Airtel M Commerce Services Limited, Vodafone M-Pesa Limited, Paytm, etc., are some examples.

Role of RBI in the Indian banking system

The Reserve Bank of India is the head of all banking institutions in India. Take a look at the roles it plays:

This entity acts as a supervisor for the entire banking system. All commercial banks, financial entities, etc., are under the obligation to adhere to its guidelines and can be subject to penalties in case of non-compliance;
RBI has the sole right to manage all foreign exchange transactions and take measures to develop India’s foreign exchange market. Moreover, the gold and Forex exchanges also fall under the RBI’s jurisdiction;
The central bank is the only financial institution in India which can issue and regulate the Indian Rupee (₹). It can create or destroy money as necessary and acts as the Indian Government’s agent to mint and distribute coins;
RBI also acts as a banker to the Government of India. It issues securities and bonds to generate income for the latter and performs several other functions. In addition, the central bank also serves as a banking institution for commercial banks. They maintain an account with the RBI to balance their cash reserves and also get credit facilities if necessary;
It enforces monetary policies to control the money flow in the economy and ensure its smooth functioning. Moreover, RBI sets the bank rate, repo rate, and reverse repo rate to keep inflationary and deflationary trends low and stable thereby maintaining the country's economic stability;
The central bank also sets the Mumbai Interbank Offer Rate (MIBOR), which is the rate at which commercial banks provide loans to each other.

Importance of Banking in a developing economy

In a developing economy like India, the banking system plays several roles. Some of them are mentioned below:

Helps promote savings
Commercial banks provide the facility of savings accounts where people can safely store their money and get interest in exchange. This encourages them to develop the habit of saving money and it also provides banks with a huge corpus to provide credit.
Easy access to funds
Thanks to online banking services, individuals can gain easy access to their funds anytime and anywhere. Due to this factor, there is an increasing propensity among people to make online investments and increase the nation’s overall economic activity.
Promotes business activities
Entrepreneurs can get loans from banks at competitive interest rates and start new business ventures. This helps them adopt new production means and enhance trade and production within the economy. Furthermore, these credit facilities also help create employment opportunities for a large number of people thereby promoting economic growth.
Maintains economic balance
The banking system also helps in maintaining economic balance by transferring excess capital from developed regions to underdeveloped ones. Thus, people in these regions get adequate funding to start their businesses and this in turn helps bring an overall economic balance to the country.
Agricultural development
Credit facilities by commercial banks to farmers and rural small-scale industries help them develop at a rapid pace. It increases their income and thus creates a demand for industrial and agricultural goods. This, in turn, results in the overall growth of the agricultural industry.

Market size of the Indian banking system

The banking sector reports from the financial years 2016 to 2022 show that it has developed at a CAGR of 0.62%. Additionally, in this period, deposits grew by 10.92% and by November 04, 2022, had reached ₹173.70 trillion.

As of January 2023, the Indian banking system has 12 banks in the public sector, 22 in the private sector and 46 in the foreign sector. Apart from these, there are 1485 urban cooperative banks, 56 regional rural banks, and 96,000 rural cooperative banks. Furthermore, the number of ATMs in India has reached 213,145, with rural and urban areas occupying 47.5% of them.

As per reports by India Ratings & Research, the percentage of credit growth is all set to hit double digits in the coming 8 years, with the bank credit standing at ₹129.26 lakh crore as of November 04, 2022. Furthermore, on the same date, credit to non-food related industries was recorded at ₹128.87 lakh crore.

Indian banking system – future prospects

Thanks to enhanced infrastructure, continuous reforms and speedy implementation of new projects, banks can provide businesses and individuals with credit and secured rapid growth in the time to come. Moreover, with the introduction of internet and mobile banking services, banks can gain a wider audience and also provide their clientele with an enhanced experience.

Recently, there has been an uptrend of microfinancing and fintech in the Indian banking sector. According to experts, digital lending is set to rise from USD 75 million to USD 1 trillion between FY2018 and FY2023.

Additionally, India's fintech market has brought in an average of USD 29 billion between January 2017 to July 2022. This accounts for almost 14% of the global fintech market's funding, taking India to the second position when it comes to securing deals.

Apart from these aspects, experts also predict the Indian fintech market to hit ₹6.2 trillion by 2025.

Now you have a comprehensive idea of how the banking system works in India. It is quite clear that by keeping your money in a bank account, transacting using it or taking loans to meet your financial requirements, you are also doing your share in contributing to the country’s economy.