Types of Commercial Banks

Commercial banks in India can be classified in several ways — by ownership, by area of operation, and by whether they are included in the second schedule of the country's central banking law. A student should be able to describe the main types and give an example of each kind (in general terms, without naming a particular institution).

1. On the basis of ownership

• Public sector banks — banks in which the government holds a majority of the share capital and therefore controls management. They form the largest part of the Indian banking system and carry a strong social-banking mandate.
• Private sector banks — banks owned and managed by private individuals and companies, run primarily for profit though still bound by the central bank's regulations.
• Foreign banks — banks incorporated abroad but operating branches within India; they specialise in financing foreign trade and in serving large corporate customers.

2. On the basis of the schedule under the central banking law

• Scheduled banks — banks included in the second schedule of the Reserve Bank of India Act because they satisfy the conditions of minimum paid-up capital and reserves and conduct their affairs in a way that does not harm depositors. They enjoy certain privileges, such as borrowing from the Reserve Bank of India, but must in return keep the required reserves with it.
• Non-scheduled banks — banks not included in that schedule; they do not enjoy the same privileges and are relatively few and small.

3. On the basis of area and purpose of operation

• Regional rural banks — banks set up to serve mainly the rural population, providing credit to small and marginal farmers, agricultural labourers and rural artisans within a defined region.
• Cooperative banks — banks organised on cooperative principles, owned by their members, that provide credit chiefly to agriculture and to small borrowers in rural and semi-urban areas. (They are governed partly by cooperative law and partly by banking law.)

The table below summarises the classification by ownership, which is the one most frequently asked in examinations: