Banking Landscape in India: Principles, Functions, and Types Explained
The banking system in India, regulated by the Reserve Bank of India (RBI), consists of Scheduled Banks and Non-Scheduled Banks.
Core Functions of a Bank
- Accepting Deposits: Collecting money from the public.
- Enabling Withdrawals: Allowing customers to withdraw money via cheques or other means.
- Lending or Investing: Using deposited funds for loans or investments.
Basic Principles of Banking
1. Principle of Intermediation
- Role: Banks act as a bridge between depositors (savers) and borrowers (users).
- Risk: They take on the credit risk (borrower defaults) and manage it.
- Earnings: Earn interest as a reward for their services.
2. Principle of Liquidity
- Definition: Balancing deposits and loans to meet withdrawal demands anytime.
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RBI Regulations:
- Cash Reserve Ratio (CRR): Banks must keep 4.75% of their deposits with RBI.
- Statutory Liquidity Ratio (SLR): Invest 25% of deposits in government-approved securities.
3. Principle of Profitability
- Income Source: Difference between interest on loans and deposits (spread).
- Key Factors: Total deposits, loans, and interest rates determine a bank’s profits.
4. Principle of Solvency
- Financial Health: Checked using ratios like Capital Adequacy Ratio and Non-Performing Assets (NPA).
- Key Attributes: Includes liquidity, profitability, and capital strength.
5. Principle of Trust
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Customer Confidence: Built over time through:
- Strong financial performance.
- Good governance.
- Safety and dependability.
Types of Banking Groups in India
1. Scheduled Banks
- Listed in the 2nd Schedule of the RBI Act, 1934.
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Eligibility:
- Minimum capital of ₹5 lakhs.
- Current requirement for new banks: ₹100 crores.
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Privileges:
- Access to RBI financial support.
- Prestige and safety for depositors.
Subcategories of Scheduled Banks:
(i) Co-operative Banks
(ii) Commercial Banks:
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Indian Scheduled Banks:
- Private Sector Banks
- Public Sector Banks
- Foreign Scheduled Banks
2. Non-Scheduled Banks
- Not listed in the 2nd Schedule of the RBI Act.
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Drawbacks:
- Lack privileges like RBI support and credibility.
- Fewer regulatory benefits compared to scheduled banks.
Key Differences: Scheduled vs. Non-Scheduled Banks
| Feature | Scheduled Banks | Non-Scheduled Banks |
|---|---|---|
| Regulation | Strict RBI supervision | Lesser RBI monitoring |
| Privileges | RBI financial support | No direct support |
| Credibility | High | Comparatively low |
Tips to Remember
PRo-Li-Pro-So-Tru for Principles of Banking:
- PRo: Intermediation (Profit through risk-taking).
- Li: Liquidity (Manage funds for withdrawals).
- Pro: Profitability (Interest spread = income).
- So: Solvency (Financial health and ratios).
- Tru: Trust (Customer confidence = growth).
Scheduled Banks = "Prestige + RBI Support".
Non-Scheduled Banks = "Limited Privileges".
