Different Kinds of Banking

Banks in India are classified based on function, ownership, schedule status, and area of operation. The Reserve Bank of India maintains the Second Schedule under the RBI Act, 1934, listing scheduled banks (those meeting prescribed capital and reserve conditions).

Legal Framework

Classification of Banks

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    A(["fa:fa-building Reserve Bank of India"]):::start --> B["fa:fa-users Scheduled Banks"]
    A --> C["fa:fa-users Non-Scheduled Banks"]
    B --> D["fa:fa-building Commercial Banks"]
    B --> E["fa:fa-users Cooperative Banks"]
    D --> F["Public Sector Banks"]
    D --> G["Private Sector Banks"]
    D --> H["Foreign Banks"]
    D --> I["Regional Rural Banks"]
    D --> J["Small Finance Banks"]
    D --> K["Payments Banks"]
    E --> L["State Cooperative Banks"]
    E --> M["Urban Cooperative Banks"]
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Types of Banks

1. Commercial Banks

Why: The classification exists because different segments of the economy require different banking models. Commercial banks serve general needs; RRBs serve rural areas; cooperative banks serve agricultural and small communities; payments banks serve financial inclusion without credit risk.

2. Cooperative Banks

Why: The 2020 Amendment brought cooperative banks under full RBI supervisory power (including board supersession) after the PMC Bank crisis (2019) exposed regulatory gaps in cooperative bank governance.

3. Development Banks (Specialised Institutions)

Development banks provide long-term finance; they do not typically accept demand deposits from the general public.

Scheduled vs. Non-Scheduled Banks

Illustrations

1. Scheduled vs Non-Scheduled (why it matters for your money): You have two options: deposit Rs.10 lakh in "Mega Cooperative Bank" (non-scheduled, not in Second Schedule) or in SBI (scheduled). If both banks fail tomorrow, your SBI deposit is insured by DICGC up to Rs.5 lakh, and SBI has access to RBI emergency lending. Mega Cooperative? No DICGC, no RBI refinance, no clearing house membership. Being "scheduled" is like being on RBI's VIP list you get safety nets that non-scheduled banks don't.

2. Payments Bank (what it CAN'T do): Airtel Payments Bank can: hold your deposits (up to Rs.2 lakh), let you pay bills, transfer money via UPI, sell insurance (as distributor). Airtel Payments Bank CANNOT: give you a home loan, issue a credit card, lend money to anyone. It's a bank that can only HOLD and MOVE money, never LEND it. Why? The licence was designed for financial inclusion bring unbanked people into the system without exposing them to credit risk. No lending = no NPA = no bank failure risk.

3. Cooperative bank vs Commercial bank (PMC Bank lesson): PMC Bank (cooperative) hid Rs.6,226 crore in bad loans to HDIL group by creating fictitious accounts. When exposed in 2019, depositors couldn't withdraw more than Rs.1,000/day.

Why did this happen? Dual regulation gap: RBI could inspect (S.35 via S.56) but couldn't supersede the board (S.36AAA didn't apply to cooperatives pre-2020). The state Registrar could supersede but had no banking expertise. Result: nobody acted. The 2020 Amendment fixed this RBI now has FULL commercial-bank-level powers over cooperatives.

4. Regional Rural Bank (the sponsored model): Andhra Pradesh Grameena Vikas Bank is "sponsored" by State Bank of India. What does sponsoring mean? SBI provides: 35% of share capital, training for staff, technical systems, and management expertise. The Central Government contributes 50%, State Government 15%. The RRB operates in rural areas that commercial banks won't serve (too far, too small, too unprofitable). It's like SBI opening a village branch without actually using SBI's expensive infrastructure.

Recall Check

1. What distinguishes a scheduled bank from a non-scheduled bank?
2. Why were payments banks prohibited from engaging in lending activities?
3. What triggered the 2020 Amendment bringing cooperative banks under full RBI supervision?

Key Cases

Rustom Cavasjee Cooper v. Union of India (1970) Rustom-Cavasjee-Cooper-v-Union-of-India-1970 Issue: Whether bank nationalisation violated fundamental rights under Articles 14, 19, and 31. Rule: Nationalisation must provide adequate compensation; the Banking Companies (Acquisition) Act, 1969 was tested on this ground. Held: The 1969 nationalisation Act struck down for inadequate compensation and hostile discrimination. Fresh legislation (1970) enacted curing the defects; nationalisation itself held valid as public purpose.

Greater Bombay Cooperative Bank v. United Yarn Tex (2007) Greater-Bombay-Cooperative-Bank-v-United-Yarn-Tex-2007 Issue: Whether cooperative banks are "banks" for purposes of the Recovery of Debts Due to Banks Act, 1993. Rule: The definition of "bank" in a statute must be construed in context; cooperative banks registered under state Acts have distinct legal identity. Held: Cooperative banks are not "banks" under the RDDB Act, 1993 and cannot invoke Debt Recovery Tribunal jurisdiction (subsequently addressed by legislative amendment).

Distinctions

Flashcards

Q: What is a scheduled bank? A: A bank included in the Second Schedule of the RBI Act, 1934, having paid-up capital and reserves of not less than Rs.5 lakh and satisfying RBI that its affairs are conducted in a manner not detrimental to depositor interests.

Q: What types of banks fall under "commercial banks" in India? A: Public sector banks, private sector banks, foreign banks, regional rural banks, small finance banks, and payments banks.

Q: What is the key limitation of a payments bank? A: Cannot grant loans or issue credit cards; can only accept deposits (up to Rs.2 lakh per customer) and provide payment/remittance services.

Q: Which Act governs Regional Rural Banks? A: Regional Rural Banks Act, 1976.

Q: What was the PMC Bank crisis and its legislative consequence? A: Punjab and Maharashtra Cooperative Bank collapsed in 2019 due to concealed NPAs and governance failure; led to Banking Regulation (Amendment) Act, 2020 giving RBI power to supersede cooperative bank boards.

Q: What principle distinguishes cooperative bank governance from commercial bank governance? A: One member, one vote (democratic control) vs. voting proportional to shareholding.

Q: What is NABARD's role in the banking structure? A: Apex development bank for agriculture and rural development; refinances state cooperative banks and RRBs.

Exam Scenario

A State Cooperative Bank fails to maintain the prescribed CRR and its board refuses to comply with RBI directions issued under S.35A. Can RBI supersede the board? Discuss the legal position before and after the 2020 Amendment.

Before the Banking Regulation (Amendment) Act, 2020, cooperative banks registered under state Acts had dual regulation. RBI could issue directions under S.35A (applicable to cooperative banks via S.56), but board supersession powers under S.36AAA were not available for cooperative banks. Only the State Registrar of Cooperative Societies could supersede the board under state cooperative law, creating a regulatory gap.

After the 2020 Amendment, S.36AAA was extended to cooperative banks. RBI can now supersede the board of a cooperative bank and appoint an administrator. The Amendment also brought cooperative banks at par with commercial banks for reconstruction, amalgamation, and moratorium powers. Therefore, post-2020, RBI can supersede the board for failure to comply with S.35A directions or for CRR default, subject to conditions prescribed.