Types of Banks in India

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TYPES OF BANKS

There are various types of banks in India that attempt to meet the financial requirements of different people belonging to different categories. These categories can be differentiated on the basis of industries, demographic characteristics of people, occupation or professions of people, etc. Banks in India can be Scheduled Banks and Unscheduled Banks as shown in the picture below:

1. SCHEDULED BANKS  

The Scheduled Banks are defined as “banks included in the second schedule of Reserve Bank of India (RBI) act, 1934 that consists on criteria laid down vide section 42 (6) (a) of the act[2]

  • Paid-up capital[3] and reserves[4] of at least Rs 5 lakh (Rs 0.5 million)
  • Affairs not conducted in a prejudicial manner to the interests of its depositors”

Banks that comply to the requirements stated in the definition are scheduled banks and be further differentiated into commercial and cooperative banks whose functions and customers vary on the basis of the financial needs of the country.

1.1. Scheduled Commercial Banks (SCBs)   

Scheduled Commercial Banks (SCBs) as the term states are financial institutions or banks that cater to commercial needs of their customers. There are four types of SCBs – public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRBs). Public sector banks have majority of stake (share capital) held by the government or RBI, private sector banks have majority of their stake held by private individuals and are registered as companies with limited liability, whereas foreign banks are registered banks with headquarters in a foreign country but operate through their branches in India. Alternatively, RRBs are jointly owned by Government of India (GoI), concerned state government and sponsor banks (27 scheduled commercial banks and one State Cooperative Banks). Examples for public, private, foreign banks and RRBs are as follows:

  1. Public sector banks – SBI and their associates, Bank of Baroda, Canara Bank, Dena Bank, etc
  2. Private sector banks – Vysya bank, Federal bank, Yes bank, Kotak Mahindra bank, etc
  3. Foreign Banks – Standard & Chartered Bank, Hong Kong and Shanghai Banking Corporation (HSBC), American Express, Citibank, Bank of America, etc
  4. Regional Rural Banks (RRBs)[5] – Chaitanya Godavari Grameen Bank (sponsor Andhra Bank), Maharashtra Grameen Bank (sponsor Bank of Maharashtra), Haryana Grameen Bank (sponsor Punjab National Bank), etc.

Accordingly, these institutions enable savings and investments for individuals, businesses and governments are commercial banks. The functions of SCBs can be categorized as – (A) Primary Functions; (B) Secondary Functions and (C) Agency Functions – through which SCBs offer relevant financial services.

(A) Primary Functions

Primary functions include financial services such as

(i)     Accepting deposits – The savings of all individuals are held by banks in deposit accounts. SCBs offer different types of deposit account that can be differentiated on the basis of its purpose, interest rates offered by SCBs on the deposits, type of savers and time duration as shown in Table 1. Accepting deposits from different individuals is one of the primary financial services offered by SCBs. The remainder of incomes minus household expenditures can be saved in various savings options offered by SCBs. The savings options are as follows:

  • Current or Checking Account – Money can be held in the checking account but does not earn any interest rate. This account is useful for individuals who require ready cash on a daily basis and can withdraw money by either using cheques or from ATMs. For example, State Bank of India (SBI) offers free ATM or Debit card after opening a current account with no restrictions on number of payments and withdrawals, no interest rate and no passbook facility. SBI however charges an account maintenance fee for opening a current account.
  • Savings Account– The savings account is the traditional account meant for savings that earns an interest rate. This implies that the interest rate is paid by the bank to the saving account holder for the savings held in bank. Savings accounts are for money that one does not intend to use for daily expenses. For example, one can open a savings account in ICICI bank that offers Debit-cum-ATM card, Internet banking, mobile banking, customer care, cheque book facility and interest rate of 4%. The average minimum balance to be maintained on a quarterly basis is Rs 10,000 in metro and urban locations

Table 1: Types of Deposits

Source: Investopedia.com, RBI, Axis Bank, State Bank of India, ICICI Bank

  • Recurring Deposit Account – Recurring account allows individuals to build up their savings through regular monthly deposits of a fixed sum over a fixed period of time. For example, Axis bank accepts monthly installments of a minimum of Rs 1000 and above that can be opened for a 12-month period and also for 120-month period and interest rates started from 6.25% for 3 months to 9.25% for a year and 8.5% for 2 years and more on deposits less than Rs 15 lakh. Interest rates on recurring deposit account are mostly higher (and competitive) than interest rates on savings account. Banks try to attract individuals to open these accounts with banks at higher interest rates that can get converted into savings account after the recurring deposit matures. Some banks also encourage individuals for opening a savings account to use the recurring deposit account’s facilities
  • Term or Fixed account – These accounts are similar to recurring deposits except for the minimum deposit amount which is higher than the minimum deposit amount in a recurring deposit, shorter maturity period (15 days to 5 years) and there is no need fixed monthly deposits. For example, Axis Bank offers reinvestment fixed deposits with a minimum deposit amount of Rs 10,000 for a minimum period of 6 months at 7.75% interest rate for deposits below Rs 15 lakhs. Interest rates could increase to 8.5% if the deposit is retained for more than 6 months.

(ii)   Granting loans – Loans are one of the primary function and sources of incomes for banks. Loans are credit facilities granted by banks for specific time period to individuals and businesses. These are financial services and major types of loans include car loans, house loans, loans for setting up a business, personal loans etc. Banks lend a certain amount of money as loans for an interest rate that varies from bank to bank. For example, SBI offers loans on new two-wheelers (scooters, motorbikes, etc) at 18% interest rate for individuals earning a minimum net annual income of Rs 75,000 (Rs 6,250 per month)

(iii) Granting advances – Advances are also financial services similar to loans but these are granted for a shorter time period for loans. Advances are credit facilities that aim at meeting the day to day requirements of businesses and the rate of interest charged on the same varies from bank to bank. Examples of advances include cash credit, overdraft and discounting of bills. Cash credit is short-term cash loan to a company (example: credit card) and overdraft is when a company can borrow from a bank even if a company’s account has no funds to cover it whereas discounting of bills is cashing a bill of exchange (money or demand draft) at less than its par value and before its maturity date. Example for discounting of bill – A person has a demand draft of Rs 1000 that can be deposited (or cashed) in the person’s account after 3 days. If the person needs it today, then the person can borrow cash of Rs 990 against Rs 1000 from the bank and lets the bank keep a discount of Rs. 10. Hence the term discounting of bill, where the bill or demand draft is discounted for Rs 10 by the person to the bank. This also means that the person gets Rs 990 in cash letting the bank have Rs 10.

(B) Secondary Functions

Other than the primary functions like accepting deposits and granting credit, SCBs also offer other financial services that fall into the secondary functions category. These include the following:

(i) Issuing letters of credit[6], travellers cheques[7], circular notes[8], etc

(ii) Providing safe deposit lockers for securing important documents or jewelry and other valuables

(iii) Providing foreign exchange trading facilities like dollar draft (similar to demand draft but in terms of a foreign currency)

(iv) Transfer of money via Internet banking from one bank to another bank

(v) Acting as a standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles, etc.

(vi) Collecting and supplying business information

(vii) Issuing demand drafts and pay orders

(viii)Providing reports on credit worthiness of customers

(ix) Insurance on health, car, travel, etc

(C)Agency Functions

Agency functions include:

  • Collection and payment of cheques and bills on behalf of customers
  • Collection of dividends, interest rent on behalf of customers
  • Purchase and sale of shares and securities through DEMAT account
  • Acting as a trustee
  • Payment of rent, interest, insurance premium, etc

Note: DEMAT or DEMATERIALISED ACCOUNT is an account an individual or an Indian citizen is offered (as a financial service) by a bank to hold or trade shares or securities electronically (via Internet banking) instead of taking physical possession of shares certificates. DEMAT account is offered by Depository Participants (DPs) which are financial intermediaries (select banks or brokering houses) that are registered with SEBI that facilitate trade of shares and securities for every individuals. Some of the characteristics of a DEMAT account are – Account opening fee provided by individuals to DPs, internet password and transaction password provided by DPs to individuals, Annual maintenance fee paid by individuals to DPs, Custodian fee paid by individuals to DPs, Transaction fee for trading shares and securities. Examples of DPs are ICICI bank, Axis bank HDFC bank, Karvy Consultants (brokering house), Bajaj Capital (brokering house), Sharekhan (brokering house), etc. The DPs charge competitive fees to attract individuals to open an DEMAT account. For example, ICICI bank[9] charges a fixed fee to every transaction value of securities, whereas Axis bank[10] and HDFC bank[11] do not charge an account opening fee.

1.2. Cooperative Banks

Cooperative banks are scheduled banks that are registered under the Cooperative Societies Act and are regulated by RBI’s Banking Regulation Act of 1949. These are mostly credit-based institutions in rural and urban areas that mostly cater to different types of businesses and conduct most of the secondary functions of SCBs. Cooperative banks have unique ownership structure which is based on cooperative systems where like-minded individuals or companies representing a particular sector or industry invest their money in a bank for providing credit to small medium or large businesses. For example, Shri Arihant Cooperative Bank Ltd was started by group of individuals representing KDO Jain community to provide credit or loans for housing, transportation and mortgage to businesses who are either members of the community or the bank or both. As members of the bank, the businesses need to have a large amount of deposits with the bank and these members are entitled to acquire loans at interest rates lower than the SCBs. However, non-members can acquire loans or credit at interest rates higher than SCBs. Cooperative banks supply credit to large number of industries or sectors in rural areas such as farming, cattle-rearing, milk production, personal finance, hatchery, etc. They provide credit in urban areas to businesses in various industries for distribution or marketing, housing, warehousing, textiles, dairy, sugar, etc.

2. NON-SCHEDULED BANKS

Non-Scheduled banks are banks not included in the second schedule of RBI act and have paid-up capital and reserves less than Rs 5 lakh. These banks are the opposite of Scheduled Banks and act like private limited companies with limited benefits (or protection) from RBI. Non-scheduled banks comprise Local Area Banks (LABs) that provide credit to individuals or businesses locally. For example, Coastal Area Bank or Coastal bank is a private bank established under the Companies Act and approved by RBI as a LAB, headquartered in Vijaywada, Andhra Pradesh. Coastal Bank claims to be be profitable since its inception in 1999 and all the deposits upto Rs 1 lakh (Rs 0.1 million) are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) – an extended arm of RBI. The financial services offered by Coastal bank include – Deposit accounts such as Savings Account, Current Account, Recurring Deposit, Fixed Deposits, Insurance linked coastal Samvrudhi deposit, Kanakavarsha deposits (Interest re-investment plan) AND Advances’ facility such as Gold / Jewel loan, agricultural crop loans, agriculture term loans, SME loans, Retail loans, personal loans, Loans against consumer goods, loans against deposit, Loans against LIC/KVP/NSC bonds, Warehouse receipt loans, Coastal Pragati loans (Self-help groups, Microfinance), Coastal Small credit, housing loans, Education loans, loans for allied activities like poultry, dairy, sheep rearing, etc. The bank mostly caters to locally present individuals and small businesses. Interest rates on savings account are mostly at par with SCBs and cooperative banks but interest rates on loans are comparatively higher than SCBs.

These banks offer various financial services to different types of customers that are summarized in the following table (Refer to Table 2.):

Table 2 – Summary of Banks in India[1]

 


[2] Modern Banking: Theory and Practice By Muralidharan

[3] Paid-up Capital refers to portion of authorized stock that a bank has issued and received payment for

[4] Reserves are funds set aside for emergencies or other future needs.

[6] Letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount

[7]Traveller’s cheques are an internally redeemable draft purchased in various foreign currencies from a bank and payable only upon the traveller (or purchaser) endorses against the original signature on the draft

[8] Circular note is a document request by a bank to its foreign correspondents to pay a specified sum of money to a concerned person

[9] www.icicibank.com

[10] www.axisbank.com

[11] www.hdfcbank.com